Jackson, Miss.-based St. Dominic Hospital has sued thousands of patients over unpaid medical debt in recent years, many of whom work in low-wage industries or at the hospital itself, according to an investigation conducted by the Mississippi Center for Investigative … Continue reading →
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The NFCC often receives readers questions asking us what they should do in their money situation. We pick some to share that others could be asking themselves and hope to help many in sharing these answers. If you have a question, please submit it on our Ask an Expert page here.
This week’s question: I have been working on improving my credit score the past two years. I currently have a car loan at 16% interest, which I have paid on time (except for two instances), and the balance on the loan is approximately $12K at this point. This vehicle will be driven by my teenager in a few months, and I need to purchase or lease a new one for myself. Would paying off my current car loan in full before I finance or lease a new car improve my chances of getting a lower interest rate on my new vehicle? Or should I continue to make monthly payments?
It shows that you’ve been working on rebuilding your credit score when you are carefully planning your next big purchase. Paying off a car is one of those financial decisions that may be right in some cases but not in others. It all depends on your current credit history and overall financial situation. However, in your case, it may be convenient to pay off the car early if you have the money to do so.
Financing Two Vehicles Can Be Difficult
Although it’s possible to finance two vehicles simultaneously, it can be challenging to meet the lender’s criteria if you don’t have stellar credit and enough income to afford both cars. Without too many details about your current financial situation, you have to determine on your own if it’s even an option for you to inquire about financing a second vehicle at this point. But, if you pay off your car, you don’t have to worry about that since you will increase your buying power and show lenders that you have more disposable income to pay for the new car.
Car Loans, Interest Rates and Credit Scores
Like many of us dealing with this pandemic, car dealers have adapted. Nationally, the average interest rate for new cars is around 7%, and some car dealers are even offering 0% financing to qualified buyers. So, if you have been working to rebuild your score and have a good score (670 to 739) or better, you should be able to qualify for a loan with a decent interest rate.
Paying off a car loan early does not offer a significant increase in a credit score. If anything, for consumers who have lower scores, relatively new credit histories, or don’t have a variety of credit accounts, it may have the opposite effect. The main benefit a car loan brings to consumers’ credit is to build a positive credit history with their timely monthly payments. If the loan is paid off, the account will remain on the consumers’ report for seven years, but its positive impact on the score will be less.
Pros and Cons of Paying Your Car Loan Early
If you pay off your car early, you may be improving your ability to qualify for a new car loan at a possibly much lower rate than the 16% interest you currently have. Paying off this high-interest loan can help you increase your cash flow to pay for your new car and to offset the cost of adding your teenage daughter to your insurance policy. Also, since you will own your car, you can adjust your insurance policy to meet your needs.
A downside of paying your car early is paying fees (if your lender has a prepayment penalty) and not making the most of your money. If you have other high-interest debt, it can make more sense to use some of that money to pay it off to maximize your savings on interest. Also, you may need those funds to start an emergency fund if you don’t have one. It all depends on your unique situation.
You are in a particular situation with a well-defined goal in mind. It looks like paying off your car could help your chances of financing a new car more comfortably. When you are ready, compare rates between lenders and look for a loan that’s right for you and your budget. Good luck!
The post Should I Pay Off My Car to Buy a New One? appeared first on NFCC.
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Freddie Mac is committed to addressing disparities and removing homeownership barriers for Black Americans by providing resources to learn more about refinance options. Refinancing can help you save on the cost of homeownership, but knowing when, how and at what cost is essential to lowering your monthly mortgage payments and better position yourself financially.
Did You Know?
Reducing your rate from 3.75% to 2.75% on a $250,000 mortgage could save you $250 each month.*
Refinancing Benefits for Homeowners
Refinancing can:
Lower your interest rate.
Free up money to pay off debt.
Reduce your monthly mortgage payments to help build savings.
Shorten your loan term to pay it off faster.
Change an adjustable-rate mortgage to a fixed-rate mortgage.
Combine both a primary and second mortgage into one new loan.
Build equity faster allowing you to own your home sooner and pay less in total interest.
Allow you to borrow additional money for home renovations and energy efficiency improvements that can lead to added cost savings.
What to Know: Refinance Options to Suit Any Need
Once you’ve identified your refinance goals, you’re a step closer to deciding on an ideal option to meet your needs. There are three primary options for refinancing a mortgage:
No Cash-Out Refinance
The most common option and may make sense if you’re looking to:
Lower your mortgage rate.
Move from one mortgage product to another (30 year to a 15 year fixed).
Build equity faster.
Cash-Out Refinance
You might consider this option if you’ve built up significant equity through your monthly payments and your home’s appreciation. It can be used to:
Free up cash for a passion project.
Consolidate debt.
Improve your general financial situation or your home’s value.
Freddie Mac Relief RefinanceSM Mortgage
This option might work for you if your loan-to-value ratio (how much you owe on your mortgage compared to the home’s appraised value) exceeds the maximum allowed for a standard no cash-out refinance product.
Use our Loan Look Up Tool to find out if Freddie Mac owns your current loan. You must meet certain criteria for this option.
If you’re considering refinancing speak with your lender or a HUD-certified housing counselor to understand your options. For additional information on the benefits of refinancing visit Freddie Mac’s resource page.
*themortgagereports.com/51755/should-i-refinance-for-quarter-percent-lower-refinance-rates
About the Author: Thomas Dombrowski is a Housing Outreach Manager with Freddie Mac Single-Family.
The post Increasing Generational Wealth Building for Black Americans appeared first on NFCC.
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<!– Credit card providers are failing to meet the needs of many of their customers in the wake of the Covid-19 pandemic, according to new research. Consumer research company JD Power’s 2021 US Credit Card Satisfaction Study found that midsize … Continue reading →
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On August 12, the Georgia Attorney General announced that it entered an assurance of voluntary compliance with a debt collection company resolving allegations that the company committed multiple violations of the FDCPA and the Georgia Fair Business Practices Act. According … Continue reading →
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The Federal Housing Finance Agency (FHFA) proposed housing goals for Fannie Mae and Freddie Mac for 2022 to 2024. According to the organization, these goals will help ensure that Fannie and Freddie responsibly promote equitable access to affordable housing that reaches … Continue reading →
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If you wondered why the Federal Housing Finance Authority this week proposed requiring Fannie Mae & Freddie Mac to significantly increase goals for homeownership among minorities and low-income families, a new report from the Consumer Financial Protection Bureau (CFPB) offers … Continue reading →
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In credit reporting, negative information can only stay on your credit report for a maximum of 10 years for a Chapter 7 bankruptcy and seven years for everything else—right?
The Fair Credit Reporting Act (FCRA) does mandate that the credit bureaus remove negative information from consumers’ credit reports within 7-10 years depending on the type of information.
While this is true most of the time, there are three exceptions to this rule, meaning that certain negative items could potentially stay on your credit report permanently.
1. If the consumer is applying for a job with a salary of $75,000 or greater.
If a consumer is going to apply for a job that pays $75,000 or more, and the employer uses a credit report as part of the employment screening process, the credit bureaus are allowed to include information on this report about derogatory events that occurred more than 7-10 years ago, such as an old bankruptcy or old collection accounts.
2. If the consumer is applying for a life insurance policy with a value of $150,000 or higher.
If a consumer applies for a life insurance policy with a value of $150,000 or higher, then the credit reporting agencies are technically allowed to include negative information that is more than 7-10 years old on the person’s credit reports.
3. If the consumer is applying for $150,000 or more in credit.
If the consumer applies for credit in the amount of $150,000 or more, this also qualifies as a case where the credit bureaus could include old negative information that normally would not be listed on the consumer’s credit report.
The interesting thing about this exception is that it includes most mortgages, meaning that if you apply for a mortgage today, there is a good chance that you could fall into this category of exceptions to the FCRA regulations regarding negative information.
Applying for $150,000 in credit qualifies as an exception to the 7-10 year rule, which means most mortgages could be included.
Should You Be Worried About Negative Items Staying on Your Credit Report Forever?
By now, you may be concerned that derogatory credit items that you thought were ancient history could haunt you in the future, in the event that you apply for a high-paying job, purchase life insurance, or apply for a mortgage.
However, there is no need to panic. While the credit bureaus are theoretically allowed to do this under the FCRA, that doesn’t mean that they choose to do so—and fortunately, they don’t.
Rather than maintaining old information to be used in specific situations, they simply default to applying the same 7-10 year policy across the board.
So if you do apply for a job that pays $75,000 or more, a $150,000 life insurance policy, or $150,000 in credit, you don’t have to worry about old negative items being revealed on your credit report.
Check out credit expert John Ulzheimer’s explanation in the video below. Visit our YouTube channel to see more educational videos on tradelines and credit!
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As the 2021 tax filing season wraps up, now seems to be as good of a time as any to take a look at a commonly asked question: Should you pay taxes with a credit card?
We will discuss some of the nuances in this post, but for now let’s cut to the chase. For many people, the answer is “no.” Credit card debt is a major financial hurdle for millions of people. Why take it on if it’s avoidable?
When it comes to your income taxes, credit card debt is usually avoidable, and you’ll be better off paying interest and fees to the IRS than paying interest to a credit card company.
However, there are some scenarios in which it might make sense to use a credit card. Again, those are the exceptions to the rule.
In General, Skip the Credit Card
If you have tax liability (meaning you owe money rather than being owed a refund when you submit your return), then ideally you would make the payment required to cover the full tax liability. However, sometimes that is not possible. If you can’t pay the balance you owe, first make sure you still file your return. The IRS has separate penalties for failure to file and failure to pay. By filing, you avoid late filing penalties. Yes, you will be subject to late payment fees and interest, but at least you can avoid some penalties by filing.
Second, you could consider an IRS Payment Plan (also known as Installment Agreements in the case of long-term repayment plans). A Repayment Plan or Installment Agreement helps provide a formal repayment program. It can also save a small amount of money.
In general, when you do not pay your taxes on time you are subject to two additional costs: a failure to pay penalty, and interest. The default penalty is 0.5% for each month you are late, up to 25%. On top of this penalty, you will also be charged interest at a percentage set by the IRS (right now three percent).
If you are on a repayment plan, the penalty drops 0.25%. That may not be a huge savings, but it is better than nothing. Most importantly, whether you are on a formal repayment plan or not, you will likely spend much less in fees or interest when dealing directly with the IRS than you would with a credit card company. If you paid with a credit card, you would be subject to a processing fee (more on that below) and interest rates above 15 percent, and maybe even above 20 percent, depending on your card.
When does it make sense to use a credit card?
There are a few scenarios in which using a credit card for taxes may make sense. Again, these are not common, and we would encourage anyone to think carefully before choosing one of these options.
First: be aware of the fees! At the outset, you should know that paying taxes with a credit card will incur fees. The IRS does not accept credit cards directly, but instead you would make the payment through a third-party processor. The lowest processing fee currently is 1.96%. You can see the processors and their fees here. This is important, because to the extent that you use a credit card to avoid fees or penalties, you will need to remember that this particular cost is unavoidable should you use a credit card. That said, here are some situations in which you may decide to use a card anyway.
When you cannot pay your taxes but know you can soon
If you’re in a pinch and can’t pay your taxes as soon as they are due, but you know you can pay them in a short time (say just a few weeks), then putting the balance on a credit card and paying it off in full within a few weeks (i.e. before interest accrues) may make sense.
“Balance transfer” or Zero-Percent Promotions
If you are struggling to pay your tax bill and have good enough credit to qualify for a zero-interest credit card (promotion), then this could be a viable option. This method may allow you to pay less in overall fees and interest by taking advantage of favorable, short-term credit terms instead of paying the IRS fees and penalties. Keep in mind, all the usual disadvantages and caveats of debt consolidation apply if you go this route.
When you can earn rewards greater than the fees
If you can make your tax payment but would like to earn credit card rewards, you might be able to do so by paying taxes with a credit card. The trick here will be to ensure that the rewards you earn outweigh the fees you will pay to use a credit card.
Bottom Line
We think that for most people, it does not make sense to use a credit card for taxes. If you can pay what you owe, it is very simple to pay the IRS directly and avoid any hassle by using a credit card and paying fees. If you are having difficulty making the payment, then the IRS offers quite reasonable repayment terms. If you skip the IRS’ terms and opt for a credit card instead, you may end up paying much more in interest and fees and may create a long-term debt problem that could have been avoided.
If you have more questions about tax debt, other debt, or your financial plan in general, connect with an NFCC counselor for a free counseling session today.
The post When Does It Make Sense To Pay Taxes With a Credit Card? appeared first on NFCC.
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The debt estimate, from a study in JAMA, was up from $81 billion in 2016. Other reports look at the cost of prescription medicine and contraception. Axios: Americans’ Medical Debt Reached About $140 Billion In 2020 Americans’ medical debt added … Continue reading →
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