How Credit Counseling Can Help When You are in a Financial Crisis

June 4, 2020CreditBy toptierfinancial

A personal financial crisis can take different forms. Losing a job, having your work hours or income reduced, facing a huge medical expense, and having your identity stolen are just a few examples. Many times, these situations can lead to larger problems, especially mounting credit card debt. If you find yourself in a financial crisis, you should know that credit counseling is an available resource, and it could be the perfect solution to help you recover. Let’s take a closer look at exactly how credit counseling can help.

Talking to Someone

We know that financial stress can impact your mental health, and many people find comfort and relief by talking about their concerns with someone else. Credit counseling pairs you with someone who is willing to listen and ready to help you move toward your goals. No, a credit counselor isn’t a therapist, but credit counselors are known for providing comfort in difficult times. Your credit counselor will approach your situation with understanding and empathy, and give you space to voice your financial regrets, concerns, and goals.

Trusting an Expert

A credit counselor isn’t just confidant; he or she is an expert trained in helping consumers overcome financial difficulty and make a plan for their future. There is great peace of mind that comes with working alongside such an expert. When you are in “crisis mode,” you may not have the time or mental energy to get bogged down in the details or pull yourself by the bootstraps to achieve financial recovery. The great thing about credit counseling is that you don’t have to. You get to put your financial situation in the hands of an expert and educator who can guide you toward your desired outcome, help you create a structured plan, and teach you new financial strategies and behaviors along the way.

Reviewing Your Credit Report

Your credit report is an extremely important financial indicator, because the information it contains affects your credit score. Unfortunately, mistakes are far too common in credit reports and many go unnoticed. If you are going through a financial crisis, you will want to keep a close eye on your credit report to make sure it does not have errors holding back your score. You will also want to watch the data on the report over time as a sign of your progress paying down debt.

Walking through each line item of your credit report with a credit counselor can reveal errors, highlight areas to work on, and give you the opportunity to ask questions and learn more about how credit reports and scores work.

Exploring Numerous Solutions

Sometimes you have a general problem and aren’t sure what the best solution is. Money inherently works this way. For example, if you are having a hard time paying rent, credit card debt might actually be the bigger underlying problem. If you could free up some cash away from your credit card bills, rent would be easier to make. That’s just one example. The good news is that credit counseling helps identify the major issues and identify your best solutions.

For some, housing really is the main issue. In that case, a credit counselor can point you to a housing counselor to explore options for how to keep your home. Alternatively, maybe your credit card debt makes you a good candidate to consider a Debt Management Plan. Or, maybe your financial strain is best addressed by some minor tweaks to your monthly budget. Your counselor can explore all of these solutions with you and even connect you to local resources in your community in cases where doing so would be helpful.

Simplify Your Month-to-Month Routine

If you opt for a Debt Management Plan, you will receive numerous benefits. One benefit that is particularly helpful is that your month-to-month routine will become much simpler. By making one monthly payment to cover all of your credit card debt, you don’t have to worry about the hassle of keeping track of multiple bills. Simply make one payment to the credit counseling agency, and you’re covered for the month. Not only that, but the DMP will put an end to those pesky creditor and collection calls, which are the last thing you need when you are in an already stressful situation.

Getting Started is Easy

If you are in a crisis, you may not have much time and energy left in the tank. Thankfully, it is very easy to get started with credit counseling. Sessions can be held online or via telephone (or in-person if you prefer). All you need to do to prepare is gather your basic financial information, including a list of your expenses, recent paystubs, and your credit card statements. You can read more about what to expect, or get started here.

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The State of Americans’ Financial Health Prior to COVID-19

May 19, 2020CreditBy toptierfinancial

The events of recent weeks have brought to light new economic data about how the COVID-19 pandemic is affecting Americans financially. There has been some good news—many are saving at record levels, and credit card debt declined significantly in March. Not all segments are strong, though. With record unemployment and salary reductions, many people are struggling to save and pay debts. As the future unfolds, and hopefully the pandemic subsides, many Americans will work to rebuild their finances. To help in this effort, it is important to understand the state of Americans’ financial health prior to COVID-19. This context of “the calm before the storm” helps reveal the challenges many people were already facing so that they can be addressed along with new challenges created by the pandemic.

Survey Overview

In early March, just as the pandemic broke out in America, the NFCC and Discover Financial Services worked with the Harris Poll to conduct the 2020 Financial Literacy Survey. The survey asked respondents about their financial habits, goals, and concerns.

Debt and General Financial Concerns

The survey revealed that 62 percent of U.S. adults have carried credit card debt in the last 12 months, and 27 percent reported not paying all their bills on time. This alarmingly high figure of 27 percent is the highest since the 2012 Financial Literacy Survey. Further, 58 percent reported that they struggle to minimize their debt. Importantly, one of the top reasons respondents struggle to repay debt is “unexpected financial emergencies.” 19 percent of respondents reported this reason.

Despite these challenges, many Americans are saving. 70 percent reported having set aside non-retirement savings, and 70 percent reported saving at least some of their household income for retirement. Some of these savers are putting aside a significant amount, with 11 percent of respondents saving more than 20 percent of their income for retirement.

These savings habits take place against the backdrop of a few major concerns. When asked about their top financial concern, 13 percent of American adults reported worrying about retiring without enough money set aside. 12 percent reported concerns that they do not have sufficient emergency savings. The reporting of these concerns may seem pretty grim. After all, COVID-19 is an emergency, so those who were worried about emergency savings are seeing their fears become reality. It may also be more difficult for consumers to save for retirement when their wages or jobs are cut, and when they may need to increase spending on additional budget categories to make it through the pandemic.

However, the news is not all bad. In the 2017 Financial Literacy Survey, 18 percent reported insufficient retirement savings as their top concern, and 16 percent reported insufficient emergency savings. Therefore, some consumers may be much better prepared to weather this financial storm than they were just three years ago.

Home Ownership

Questions about home ownership make up a particularly interesting category of the survey. Considering the housing market at the time of the survey, 57 percent of respondents reported that they thought buying a home was more affordable than renting, 25 percent thought renting was more affordable, and 18 percent of respondents were unsure. However, many barriers can keep people from buying homes even when they hope to do so. 56 percent of respondents who have tried to buy a home faced barriers. The top barriers reported were rising home prices (19 percent), existing debt (13 percent), and the lack of funding for upfront costs (13 percent).

It is unclear at this point what affect COVID-19 will have on the housing market, particularly in terms of prices. Even experts disagree, with some predicting a drop in sales prices and others expecting stabilization or even an increase in some markets, based on low supply. This will be an important area to watch in the future.

Seeking Help

Many survey respondents feel confident in their knowledge of personal finance, with 57 percent giving themselves a grade of A or B. However, respondents acknowledge they could still benefit from more financial information. More than three-fourths (78 percent) of respondents agreed that they could benefit from financial advice and answers to everyday financial questions. On top of that, 81 percent reported that they would reach out for help if they were having issues with their debt. Many would turn to friends and family first, before potentially turning to a professional.

Recap

The 2020 Financial Literacy Survey provides a rare glimpse into Americans’ personal finances just before the COVID-19 pandemic spread throughout the country. It revealed important weaknesses—specifically concerns about financial emergencies—that are relevant in the wake of the pandemic. It also magnified important questions about managing debt loads, retirement savings, and housing affordability that will be critically important in a post-COVID world. If you would like to learn more, you may review the key findings or download the full survey data.

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The Mental Impact of Financial Stress and Tips for Dealing with COVID-19 Impacts

May 16, 2020CreditBy toptierfinancial

A recent poll from the National Endowment for Financial Education shows that 88 percent of Americans are experiencing financial stress as a result of COVID-19. That does not come as much of a surprise, given the way in which the pandemic has created widespread uncertainty and significant economic fallout in such a short time. Financial stress revolves around money, but it is a form of stress and therefore both a personal finance and mental health issue. If you are experiencing stress and anxiety about your finances and are concerned about the future and making ends meet, consider the following tips and resources to preserve a positive outlook.

Establish a Routine and Consistent Self-Care

Most of our routines have been upended in recent months, which can certainly contribute to stress. However, many have referred to life after COVID-19 as the “new normal,” which means that it provides an opportunity to create a new routine. As the National Alliance on Mental Illness explains, “daily habits and routines can help you feel more in control of your own well-being.” To feel most in control, try to preserve as much of your pre-COVID routine as possible. This means trying to find time for the activities you used to do and trying to keep as much consistency in the timing of those activities as possible.

Make sure that your routine includes time to exercise, ways to eat healthy (i.e. adequate time to plan for grocery shopping and cooking), and a healthy sleep schedule. A routine that includes each of these should help you retain a sense of normalcy and limit stress. In addition to these basic elements of a routine, consider building in time for relaxing activities. These could include yoga and meditation, stretching, extra time with pets or kids, or even just a personal hobby that you enjoy. If you have the capacity and desire to take on a new challenge, consider learning a new skill through one of the many online educational platforms. That, too, could be a positive distraction and provide a benefit to your resume.

Your routine should absolutely include a budget, too. Having a plan for where your money is going can ease your anxiety and provide some sense of predictability. As you plan a daily routine, consult the COVID-19 guide from the National Alliance on Mental Illness, which provides in-depth tips and considerations for handling this difficult time.

Access Available Resources

One of the silver linings of this pandemic has been the rapid response by many individuals, organizations, and governments to provide assistance to others. Make sure that you are aware of these resources and take action when needed, because they may provide the help you need. If you feel overwhelmed by looking for or applying for resources, consider asking a friend, family member, or even a credit counselor for help.

Online Therapy

Talking about your financial stress can make it better, give you peace, and help you develop a plan for moving forward. You can speak with a qualified professional from the comfort of your own home. There are many therapists who offer this service. Consider contacting local professionals in your area. They may be able to work remotely with you now, and then hold face-to-face sessions when restrictions related to COVID-19 are lifted. Alternatively, there are remote-only services available, like Talkspace.

If you are not interested in one-on-one therapy sessions, you might consider joining a group online for people who want to share their experiences of dealing with COVID-19. Talkspace has a free Facebook group; NAMI also has free online community discussion groups. The NAMI Guide also provides a list of several other online communities that may be worth considering.

Lastly, for a completely go-at-your-own-pace option, there is an app called COVID Coach. Though it is being marketed by the Department of Veterans Affairs, it is available to and designed for everyone. The app is a self-care tool designed to provide coping mechanisms during COVID-19, and to allow users to track their progress.

Government Programs

Make sure that you are aware of government programs passed in response to COVID-19. These include the economic impact payments and expanded unemployment benefits. If you need to take action to access these benefits, make a plan to do so. You do not want to miss an opportunity for help when it is available. These programs can also be sources of stress if you are confused about how to apply or if there are delays in processing. Find a friend or family member to help you navigate the programs and to be a sounding board for any questions or frustrations.

Friends, Family, and Community Groups

Connections with friends and family matter now more than ever. Just because you cannot be physically together does not mean you cannot have meaningful conversation and connection virtually. Call, text, or email friends and family to see how they are doing regularly. They will appreciate you thinking about them, and you will get peace of mind and comfort from knowing how they are doing. Now that video calling technology is so easy to use, you can even Zoom, Skype, or FaceTime together, not just to talk but to do a variety of activities (eating dinner, watching a favorite TV show, etc.). In addition to friends and family, be sure to maintain connections with community groups. These could include your church, an organization where you volunteer, or something else. Find ways to stay involved and in conversation with the people at these places. It will help preserve a sense of consistency.

More Help

If COVID-19 has impacted you and caused increased financial stress, know that you are not alone. In fact, you are in the large majority. There is absolutely no shame in asking for help. A few important resources that you might like to have handy are the NAMI Covid-19 Guide, tips from the CDC on Stress and Coping, and a dedicated page on COVID-19 issues from the American Psychological Association. Each of these provides important tips for creating healthy routines and seeking help from professionals if needed. Of course, if you also want specific help with your financial situation, including a plan to manage high-interest debt, we invite you to contact a credit counselor for a one-on-one counseling session.

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What Renters Can Do in Response to Financial Uncertainty

May 12, 2020CreditBy toptierfinancial

Nearly one-third of Americans were unable to pay their rent during the first week of April. The most likely culprit — the coronavirus. As the pandemic swept the nation, many businesses were forced to close their doors, leaving millions unemployed. With no income, many found they were unable to make their rent payments. This month, some renters may be facing the same predicament again. 

If you find yourself in a similar situation and are struggling with financial uncertainty, there are a few things you can do to help make ends meet until stay-at-home orders lift. 

1. Talk to Your Landlord

Many renters are panicked about making rent payments in April and the coming months. If you find yourself in a similar situation, talk to your landlord about it. Most property owners will be willing to work out a payment plan with you as long as you approach them with honesty and urgency. If you wait until the day before rent is due to speak with them, they may not be so willing to work with you. 

If your landlord is unwilling to compromise or consider a payment plan, try to pay as much of your rent as possible. Plus, your landlord might waive late fees if you pay a partial amount. While skipping one payment may not result in eviction, missing several could eventually trigger action, even in states that temporarily halted the process in March. 

2. Reach Out to Utility Companies 

Many utility companies may also be willing to cut renters some slack during the pandemic. While some are waiving late fees, others are easing shutoffs to accommodate those who don’t have money to pay their bills right now. However, you must call them first with a request. Otherwise, they’ll expect you to pay in full by the due date. 

Additionally, some companies are offering free services to those struggling to pay their utilities. This way, people still have internet access, running water, gas and electricity even if their providers shut off services. Comcast, AT&T, Pacific Gas and Electric Company, and Georgia Power are just a few companies giving renters a break in some form or another. 

3. Cut Nonessential Costs

As you take stock of bills you must pay and others that may be able to wait, examine your budget as a whole. Are there any costs that you could cut temporarily? Doing so may make it easier to buy groceries and pay essential bills. 

Review your recent credit card statements to see how much you actually spend throughout the month. Odds are you could cut ordering out, an online subscription or two, or a membership you’re not using at the moment. Considering your spending habits will help you save so you can pay your bills. 

4. Use Emergency Savings 

If you’ve exhausted the above options and still cannot find the money to pay bills or buy essentials, you may have to dip into your emergency savings. While using your savings to survive a pandemic may not be how you envisioned spending your money, this is an emergency, after all.

Financial advisors often recommend you have enough money in your emergency fund to pay for six months of living expenses. However, this isn’t an option for everyone. Therefore, it’s best to assess your budget, costs and savings and create a plan that works for you. Even a few hundred dollars may be enough to keep you on your feet until this blows over and people can return to work. 

5. Seek Financial Assistance 

More than 26 million Americans have filed for unemployment over the last few months. By now, you may have done the same if you are currently unemployed due to the pandemic. In most cases, you can receive unemployment benefits up to half of your wages. However, each state sets its own criteria and benefit levels.

If you aren’t eligible for unemployment and are still struggling financially, you might seek assistance from friends and family or from a personal loan. This may help you pay for essentials or keep your housing and utilities running during the crisis. However, it’s recommended you speak with a certified counselor to sort through your options and make guided financial decisions that won’t hurt you in the long run.

Plan Ahead for Financial Uncertainty

Unexpected emergencies like this are why it’s so important to plan ahead and save. As you recover, be sure to create an emergency fund or build yours back up so you’re ready if disaster strikes again.

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The Importance of Checking Your Credit Report During the COVID-19 Pandemic

May 6, 2020CreditBy toptierfinancial

The COVID-19 crisis has forced many of us to shift priorities. People are focused on taking care of their families, following social distancing measures, and making ends meet. That said, it is important to keep track on your financial situation, too. We have already discussed how to budget during COVID-19, but there’s another basic financial indicator you should be monitoring: your credit report. During a situation like the current national crisis it is easy to overlook your credit, and it is also a prime opportunity for scammers and identity thieves to prey on unsuspecting victims. You might not think you need great credit right now if you’re hunkering down and not making a big purchase like a house or car. But, you don’t want a small mistake now to haunt you later. Here is a closer look at how COVID-19 can impact your credit, and what you can do about it.

Why Your Credit Matters     

As a quick refresher, your credit report matters for a number of reasons. The most important reason is that your credit score is based on the data contained in your credit report. Therefore, keeping a good and accurate credit report will lead to a higher credit score than a credit report containing negative or inaccurate information.

A related reason for why you should check your credit report frequently is that many credit reports contain errors. An error could be minor, or it could affect your credit score. In a major 2012 study, the FTC determined that one in four consumers found errors in their reports that could affect their credit scores. In addition to finding simple errors, checking the report may reveal unauthorized credit use by someone pretending to be you. Therefore, checking your report could provide the opportunity to locate incorrect information and potentially increase your score—and it can even be a way to catch or prevent identity theft.

Checking the report can also be a way of tracking when certain negative marks will fall off the report, and ensuring that they fall off on time. This can be helpful when you are planning ahead for credit applications, such as before you buy a house. A periodic check of your credit is simply a smart financial move that will give you a better understanding of your financial situation.

How COVID-19 Can Affect Your Credit

Some commentators have compared COVID-19 to a natural disaster, and it poses similar threats to your credit. Just like if you were recovering from a major storm or were forced to relocate from a natural disaster, COVID-19 has probably forced you to shift priorities. Essentially, you’re focused on the things that matter most, like keeping your family safe. At best, this scenario makes it easy to let your guard down and become a little less organized. This could cause you to miss a payment to creditors, which could damage your score. Or, maybe you’ve been hit even harder by COVID-19, and have lost a job or experienced reduced hours and income at work. If so, you are not just facing a shift in priorities, but a shift in your ability to pay creditors. Again, this could impact your credit score.

If you have opted for a forbearance or deferment program, whether it is on student loans, rent or mortgage payments, or directly through another creditor, you need to check your credit report to make sure the agreement is properly reported. If a creditor reports a late payment in the midst of an agreed upon deferment, that would be a red flag and an error to dispute immediately. You will want to watch all accounts, but keep a particularly close eye on any accounts that you have made special arrangements for during COVID-19. Also, familiarize yourself with this guidance from the CFPB about how these accommodations are supposed to be reported by creditors.

Also, fraudsters are taking advantage of COVID-19. There has been an increase in scams, including fake websites, communications disguised as being from government agencies (especially related to “stimulus checks”), and fake job postings. You should be vigilant and take precautions not to fall for these tricks. One of your best defenses is to keep track of your credit report to ensure you catch any unauthorized activity right away.

Where to Check Your Report

One of the best places to get a free credit report has long been annualcreditreport.com. Normally, consumers have been able to access one free report from each major reporting agency—Equifax, Experian, and TransUnion—every 12 months. However, the reporting agencies are now offering free weekly credit reports online through April 2021. This impressive benefit makes it easy to check where you stand and get updates quickly. So, be sure to keep a close eye on your reports moving forward, especially if you have entered into any alternative payment arrangements.

If you would like further help understanding your credit report or making a plan for your debt during COVID-19, contact a credit counselor.

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10 Smart Ways to Reduce Expenses and Tighten your Budget to Make your Stimulus Check Last

May 2, 2020CreditBy toptierfinancial

Have you received your economic impact payment, also known as a stimulus check? If so, you are probably thinking about the best way to use it. People who have been severely affected by COVID-19 will likely need to use it right away. The funds could cover food, housing payments, and other emergency expenses. On the other hand, those who have not felt an impact may invest or donate the funds. But many people are in the middle. They have felt the financial pinch from COVID-19, but are not in dire straits. For this group, the funds can serve as an important backstop, cushioning their savings and providing a reserve to dip into in the coming weeks and months. If that sounds like you, here are 10 tips for how to make that money last as long as possible.

Shift Your Mentality

First of all, you will want to maintain the right perspective. Even as the pandemic eases in the coming months, remember that the Unites States economy is in uncharted territory. Prepare for the unexpected, and think of your budget as being an emergency budget. Even if the situation gets better and the economy holds steady, there is nothing wrong with being over-prepared, and you will be thankful that you took precautions either way.

Have a Starting Point

Make sure you have a written budget. This monthly expense planning tool can help you get started. You will want to think about how much of your monthly income is going toward each major spending category. For example, experts usually recommend that no more than 25 percent of your budget goes toward housing, and that food and utilities not count for more than an additional 25 percent. You might even try the simple 50/30/20 approach. Whatever you pick, try to make a plan that is even more conservative than the recommendations. If you have already been budgeting then look at how much you have been spending in each category, and try to reduce the amounts significantly.  For example, if fifteen percent of your monthly income has been going toward food, you might try to bring that down to ten percent or less.

Avoid or Minimize Meals Out

Speaking of food, it is a large portion of everyone’s budget. However, it is also one of the easiest expenses to cut back. Eating out costs significantly more than making meals at home. Yes, eating out can be a way to contribute to the small businesses in your community. But if you are trying to keep your own finances afloat, you shouldn’t overdo it. Try to limit how much you spend at restaurants.

Clean out Your Pantry

Going to the grocery store is a challenging process during the COVID-19 era, and the expenses add up. But you may have a freezer or pantry full of food. This could be the perfect time to use that food strategically instead of buying more. Maybe there are a few ingredients you need to pick up every few weeks (like milk). But try to stay home and prepare the food you already have. You can even make this a fun challenge to see how close you can come to emptying your pantry entirely.

Cut other Grocery Luxuries

While you are limiting trips to the grocery store, try to eliminate any luxury items. This might mean skipping the name brand items and only buying generic products, giving up certain cuts of meat, and taking a break from alcohol. These can be some of the most expensive items on your grocery list, and cutting them for a while will make a noticeable difference.

Reduce Utilities

Utilities are another huge expense. Heading into May, we are almost to the time of year that many people run their air conditioning all day long. Try to avoid this to save on your electric bill. Open windows, wear lighter clothing, or run fans. Taking these measures might be a little less comfortable, but could reduce your bill.

Also, now is a good time to reassess your home Internet and television subscriptions. If you subscribe to multiple streaming services, consider reducing it to one.  You might also reduce your Internet package by selecting a slower connection speed. These changes will add up and save you a good chunk of change.

Cut back on entertainment

COVID-19 brought many forms of entertainment to a halt. No more trips to theaters, or concerts, or skating rinks, and so forth. However, it is still easy to get caught up in entertainment expenses at home. You might want to order new video games, or pay to stream a newly released movie. You may want to purchase items on Amazon to entertain yourself or your kids. Instead, try focusing on the things you already have. What do you already own or already pay for that can provide entertainment for free?

Here’s one simple list for free family entertainment ideas at home.

Cut Personal Spending

Like with entertainment, a lot of personal spending has already been cut, given that salons and similar businesses have been closed in most locations. Many of us aren’t used to going this long without a haircut, and have experimented with different forms of quarantine hair. Even once restrictions are lifted, you don’t have to rush back to the barbershop, nail salon, masseuse, or similar service. Instead, experiment with what you can do at home. See what new habits and methods you can find for self-care that are affordable and easy to do. Reducing these monthly, or even weekly, expenses can create huge savings moving forward.

Consider Stopping or Reducing your Giving

Donating money is a very personal decision. It is also incredibly important in times such as these, when many businesses and individuals are struggling financially and physically. Many nonprofit organizations are on the frontlines of helping people recover. If you can continue your normal level of giving, that is wonderful. Or if you can make a one-time gift to a charity, that is also fantastic.

In fact, thanks to the CARES Act you’ll receive up to a $300 tax deduction for cash donations to charity if you take the standard deduction. But, be honest with yourself about your situation. Consider if money is too tight to give right now. If so, you might reevaluate later in the year and make a gift then instead, once you know you can do so without jeopardizing your own financial health.

Manage Monthly Debt Payments and Interest

If a significant portion of your monthly income goes toward debt payments, you might want to reduce them. Or, you may be able to delay them, especially for student loans or mortgage payments. For credit card debt, it might make sense to reduce the payments along with the interest and fees. This could potentially free up more money for the rest of your budget, and give you more cushion each month. One great way do this is through a Debt Management Program.

Moving Forward

These tips should help you tighten your budget and stretch your income quite a bit further. Even if you just implement some of them, you should feel the difference at the end of the month, and your stimulus funds should last a little longer. Remember that the total impact of the COVID-19 pandemic and its effects on the economy are still uncertain. So, try to create lasting habits and changes to your budget that you can use not just in the weeks to come, but in the months and years to come.

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Should You Access Your Retirement Funds Early Due to COVID-19?

April 30, 2020CreditBy toptierfinancial

One of the long-standing rules of personal finance has been that you should not take funds out of your retirement account early except as a last resort. The question now is whether the COVID-19 crisis has created a “last resort.” In other words, does it make sense to dip into retirement savings now? The CARES Act has temporarily changed the rules about accessing these funds, making it more favorable to do so before you are of retirement age. Let’s take a closer look at the changes and the considerations that should go into any decision about accessing retirement funds early.

Normal Rules for Distributions and Loans

There are generally two ways to access retirements funds early. You can take the money out of the account (a distribution) or you can borrow money from your account (a loan). Normally, if you take a distribution from a retirement account before you are 59 ½, then you will pay income tax on the distribution and be subject to a 10 percent penalty (or a 25 percent penalty in the case of distributions from a SIMPLE IRA within the first two years of participation). However, note that there are exceptions to this rule.

Distributions are available from any retirement account. However, loans are more limited. Loans are not available on any IRAs or IRA-based accounts. The IRS explains that loans are only available on “profit-sharing, money purchase, 401(k), 403(b) and 457(b) plans,” though not all plan administrators offer loans. Borrowing from a 401(k) or similar account is normally limited to $10,000 or 50% of the vested account balance, whichever is greater, with a cap of $50,000. You pay interest on a 401(k) loan, but the interest returns to your account. The biggest cons to using a 401(k) loan are that you may miss out on investment growth due to taking your money out of the market, and you may default on the loan, which could lead to the loan being treated as a distribution. For a good primer on these loans, read this article from Credit Karma.

Loans and distributions can both be disastrous to your retirement savings by triggering severe consequences in the form missed portfolio growth, increased tax liability, and penalties. That is why most financial experts warn against tapping into these funds early if you can help it.

Important Changes Under the CARES Act

These are not normal times. Anticipating that many Americans will be strapped for cash, the government changed the rules for early retirement distributions and 401(k) loans under the CARES Act. Here are some additional important details and further explanations about the law to keep in mind.

Early Distributions

Which retirement accounts are covered?

The option to take a distribution without paying a penalty applies to all retirement accounts.

Who can take a penalty-free distribution?

To avoid penalty, the distribution must be taken by a qualified individual. This covers someone who has tested positive for COVID-19 or who has a spouse or dependent who tested positive. It also covers someone “who experiences adverse financial consequences as a result of being quarantined, being furloughed or laid off or having work hours reduced due to such virus or disease, being unable to work due to lack of child care due to such virus or disease, closing or reducing hours of a business owned or operated by the individual due to such virus or disease, or other factors as determined by the Secretary of the Treasury (or the Secretary’s delegate).”

How big can the distribution be?

The limit for penalty-free distributions is $100,000 per individual across accounts.

What time period is covered?

To avoid penalty, the distribution must be taken between March 27, 2020 and December 31, 2020.

How much will you pay in tax? How can you limit your tax liability?

This will depend on your tax bracket. However, the act allows you to spread the tax payment over three years. It also allows you to repay the money to an eligible retirement plan to avoid the tax liability.

 

401(k) Loans*

How much can you borrow?

The CARES Act increases the cap from $50,000 to $100,000.

What time period is covered?

The increase in how much you can borrow is in effect until September 23, 2020.

How much tax or penalty will you pay on the loan?

There are no taxes or penalties on the loan, but you will pay interest, which is returned to your account.

Does the law change payment obligations?

The law allows affected individuals to delay repayments for up to one year.

*Be sure to consult with your plan administrator to understand fully the terms of a potential loan and the impact of the CARES Act on such a loan.

Should you take a distribution or loan?

The CARES Act provides a unique opportunity to access your retirement funds with less financial penalty than usual. However, these new rules do not address the other main disadvantage of early withdrawals: limiting your investment growth over time. Timing the market, or predicting when investments will hit their peaks or bottoms, is practically impossible. The initial market response to the COVID-19 crisis has been negative, and markets may still be in the midst of a downturn. This means that your portfolio may be quite a bit lower today than it was even just a month ago. Cashing out of your retirement now may mean you take a loss or miss out on upcoming market rebounds. It would strip your funds of their growth potential

Withdrawing or borrowing from your accounts is still a last resort. Do not borrow from your retirement just because you think it is a rare opportunity to do so. You should only take money out of your accounts if you need the money for a financial emergency. Even then, consider the following funding sources instead, and then only return to the idea of taking your retirement money if the other options are not feasible.

Alternatives

Stimulus Money and Tax Refund

Make sure you have taken the necessary action to get your stimulus check. That money may help you meet your goals and eliminate the need to borrow from your retirement. The same is true for a tax refund if you have not yet received yours.

Emergency Fund

You have this fund for a reason. Consider using it now if you are in a bind. Consider growing it too. Now is the time to cut extra expenses and put more toward your savings for future uncertainties.

Personal Loans

Personal loans often provide better terms and interest rates than credit cards, especially to people with good credit. If a small personal loan can hold you over in a pinch, it may be a better alternative.

Of course if you are struggling and are unsure where to start, a certified nonprofit credit counselor can help you sort through your options and provide financial guidance that can set you up for success, now and in the long-term.

 

The post Should You Access Your Retirement Funds Early Due to COVID-19? appeared first on NFCC.

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FAQ: Student Loans and COVID

April 23, 2020CreditBy toptierfinancial

The COVID stimulus package (CARES Act) has several new actions to offer relief for student loan borrowers. For most federal student loan borrowers, principal and interest payments on federally-held student loans have been suspended through September 30, 2020. During this time, interest will not accrue.  Here’s what you need to know.

Do I need to formally apply to get the remission?

There is no action required from your end. Your federal student loan will automatically be suspended for all interest and monthly payments due between March 13 and September 30, 2020. You will receive a written notification to the effect from your federal loan servicer around mid-April. Please ensure that your contact information is current with your servicer.

What happens if I continue to make my payments towards student loan during the suspension period?

If your financial situation allows you to continue making payments, any payment you make during the suspension period (March 13 – 30 September, 2020) will be applied to the principal. This will help repay the loan faster since the interest rates for the remission period are set to zero for all federal student loans.

Is interest and payments suspended on all student loans or does the remission rule only apply for certain selective type of student loans?

The suspension of payments applies to most of the student loans that are held by the federal government. It is estimated that about 92% of the total student loans are owned by the U.S. Department of Education. The benefits authorized by the CARES Act do not apply to

Federal student loans under the Federal Family Education Loan (FFEL) Program provided by commercial lenders
Perkins Loans held by the institution or school
Private (non-federal) student loans owned by banks, credit unions, or other private entities.

However, creditors of many non-eligible student loans under the CARES ACT are offering extended forbearance options. You’ll need to contact your loan servicer for details. If you are not sure who is your loan servicer, you may find out by using the tools provided at Federal Student Aid website. If you have a private loan you may check your credit report for the loan servicer details.

I have heard of student debt relief scams, what should I be wary about?

If you ever get a call asking for a fee to help you get remission on your student loan, be aware that this is a scam. The federal government does not ask for any fee for forbearance under the COVID stimulus package.

If my loan does not apply under the stimulus package relief what should I do?

For loans held by commercial banks, schools, or private creditors, please contact them directly and explore if they have any interest and(or) payment suspension options available.

Despite the support allowed under the stimulus package, given my current income the student loan debt will remain unmanageable moving forward beyond the stimulus package suspension period. What should I do?

If you have a federally owned student loan, the Income Driven Repayment (IDR) plans can help reduce your monthly payment amount. One of the following income-driven plans may be right for you:

Revised Pay As You Earn Repayment Plan (REPAYE)
Pay As You Earn Repayment Plan (PAYE)
Income-Based Repayment Plan (IBR)
Income-Contingent Repayment Plan (ICR Plan)

If you are facing hardship and are unable to meet your student loan repayment commitments, you should contact your loan servicer and ask if you are eligible for a 90-day forbearance for borrowers facing financial difficulties due to the pandemic. This will not affect your credit score. For Perkin loan borrowers, the schools can provide forbearance for up to 90 days. In addition, some of the private borrowers are waiving late fees and reduced payment options which are worth exploring.

Will I be eligible for Public Service Loan Forgiveness?

The PSLF Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer. The qualifying employers are Government organizations at any level (U.S. federal, state, local, or tribal) and Not-for-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code. You also have the option for loan consolidation of all your federal owned loans under PSLF. Check your eligibility here.

I am in default on my federal student loan, am I eligible for remission under the stimulus package?  

CARES Act has suspended all interest on student loans including those in default through September 30, 2020. Also, the collection of defaulted student loan payments has been ceased.  These provisions kick in automatically for federal loans. For private defaulted loans contact your loan servicer for options. You may also consider loan rehabilitation or loan consolidation for your federally held student loan. Learn more about these options here.

When do I need to contact a nonprofit financial counselor?

If you are having issues paying your student loan, the NFCC and its agencies can help you. You may speak to a nonprofit NFCC® Certified Student Loan Counselor about your options. You get a one-on-one, comprehensive review of your finances and a repayment plan that works best for your situation, especially while COVID-19 brings in additional uncertainties and the traditional approaches do not work.  Contact a student loan counselor now.

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Eviction and Foreclosure Suspension for Homeowners Facing Difficulties Making Mortgage Payments

April 8, 2020CreditBy toptierfinancial

The fight against the Covid-19 pandemic will require sacrifices but losing the roof over your head should not be one of them.   The Department of Housing and Urban Development (HUD) through the Mortgage Letter 2020-04  dated 18 March 2020, announced a freeze on evictions and foreclosures.  This will protect more than 30 million Americans who would now be at risk of losing their homes as the corona virus outbreak ravages the economy and causes a reduction in hours or even job loss for millions of American workers.

Here’s what you should know:

The HUD order will apply to homeowners with single family mortgages backed by Fannie Mae, Freddie Mac or the FHA.  A single-family mortgage is for a home that is usually occupied by the owners of that property and their family members. Multi-family properties are typically investment properties and do not fall under this new order in place. Also, bank and private investor-owned loans are not within the limits of the HUD guidance.

In line with the HUD announcement Fannie Mae , Freddie Mac  and FHFA propose the following relief options

Providing mortgage forbearance for up to 12 months,
Waiving assessments of penalties and late fees,
Foreclosure sales and evictions of borrowers are suspended for 60 days( till May 17, 2020),
Suspending reporting to credit bureaus of delinquency related to forbearance,
Offering loan modification options that lower payments or keep payments the same after the forbearance period.

To find out if your mortgage is owned by either Freddie of Fannie, you may search by inputting you address at their respective loan lookup tools.

Many states have also announced similar programs. For instance, in California four of the major national banks, state –charter banks and credit unions have agreed to a 90-day forbearance on mortgage payments for those affected by COVID-19. New York has banned evictions outright until further notice and Maryland has followed suit.

How do I access mortgage relief?

Borrowers are recommended to apply through their mortgage servicer. The servicer will decide whether the borrower qualifies for the assistance and how they would repay the missed payments. In many cases, the missed payments are moved to the end of a mortgage, so it could extend the payoff date. Alternatively, servicers sometimes ask for a lump-sum payment.

In this fast-changing landscape, it is best to get professional advice to help manage your mortgage payments during this Covid-19 downturn. Although, these new federal measures will help many, they do not apply to the more than 80 million renters across the nation. If you have questions about how to manage your finances and make ends meet during this time, contact a nonprofit credit counselor today!

 

 

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