Can Refinancing to a Higher Mortgage Rate Actually Lower Your Debts?

Are you handling your debt the smartest way possible?

Your ability to save money can become compromised by the financial obligations you are paying in your life. If you have a mortgage and other consumer debts, it’s easy to stay the course, pay your monthly bills and rely on credit cards for emergencies. But taking action — namely, refinancing your mortgage —  could actually help you get better control of your cash flow. Allow me to explain.

The nuts and bolts of a good financial plan includes having “preferred debt,” which includes debt that is tax-deductible (a mortgage) and has no consumer obligations that are non-preferred (i.e. credit cards, student loans, car payments, etc.). Non-preferred obligations will compromise your ability to save money.

Consider the following scenario:

John Borrower has a mortgage of $300,000 with an interest rate of 3.875%. His mortgage is a 30-year fixed rate loan and his monthly payments are $1,410.71. John also has a car loan of $10,000 with an interest rate of 6% and a monthly payment of $500. His credit cards total $8,000 with an average interest rate of 16% on which he has to pay $400 per month, for a total of $2,310.71.

John Borrower has a great credit score because he always carried a small balance on his credit cards, has never missed a payment, and his credit history is squeaky clean. However, John’s car just broke down and he needs a new transmission that will cost him $3,500. Unfortunately, John’s mortgage payment and other obligations take up a majority of his income and now he has very little money saved up.

What does John do? He turns to his credit cards and goes further into debt. He is reluctant to make any changes to his financial burden. He has a great interest rate on his mortgage, but is he really getting ahead financially?

A Better Approach to Debt

There is a more proactive approach John can take that will be more consistent with having a strong financial foundation that will not only make him more creditworthy, but will also give him the ability to save and plan for the future.

The first thing to look at is all of John’s interest rates. True, his mortgage rate is low but the weighted average of his interest rates on all obligations is quite high. His interest payments alone take up a lot of extra money. Let’s look at the math:

Debt Balance Interest Rate Monthly Interest Payment
Bank of Bank Mortgage $300,000.00 3.875% $968.75
Car Lots Mega Car Loans $10,000.00 6.000% $50.00
Credit Cards (BULK) $11,500.00 16.000% $153.33

The total amount John owes in debts is $321,500, which includes his new credit card debt of $3,500 from the new transmission. If you multiply John’s amount owed by each individual interest rate and add it together, John is paying a total of $14,065.00 in interest alone each year.

Broken down: ($300,000 x 3.875%) + ($10,000 x 6%) + ($11,500 x 16%) = $14,065.00

Dividing the yearly interest paid by the total amount owed ($14,065 / $321,500) results in John paying an annual average interest rate of 4.375%.

If John were to refinance his current mortgage at that average 4.375% interest rate, something really interesting would happen to his payments. John is currently paying $2,310.71 each month in debt payments while interest is being accrued on his debts. By combining his debts under one mortgage at the higher 4.375% interest rate over a 30-year fixed-rate term, his monthly payments, interest included, would drop his payments from $2,310.71 to $1,605.20 each month.

Say what?

If John refinances his mortgage for the purpose of debt consolidation, his average interest rate does not change AND his monthly payments are lowered. Of course, because John is already cash poor, he’ll want to roll his closing costs into his mortgage refinance to keep his out-of-pocket expenses down. Suddenly, John Borrower is saving $705.51 each month. John can take that money and invest it or start a vacation fund. He can also put it to the side in case something else on his car breaks down. Regardless of his plans for the savings, the fact is that he is saving money and gaining control of his cash flow.

Having low rates and high rates on multiple forms of debts probably means you are going to be paying a higher rate of blended debt on all of your preferred and non-preferred obligations over time. The reality is that you can save through consolidation and fixing on one lower rate. It might be higher than your current lowest rate, but as John discovered, he could save money by increasing his lowest rate and combining his debts.

What’s Your Ideal Scenario?

The ideal financial scenario for any borrower is to have a single mortgage payment with no debt obligations and to have at least 6 to 12 months of savings (“reserves”) to be used as “back up.” This financial platform increases your borrowing power and is optimal for having a choice and control over your funds. (You can find more tips on how to determine how much home you can afford here.)

If you are thinking about taking out a mortgage or making some financial adjustments in your life, it’s a good idea to first check your credit scores to see where you stand (you can get your two free credit scores, updated every 14 days, on Credit.com.) Next, work with a mortgage lender who has the skill set and ability to really investigate your debts and can show you the real breakdown of your debts and what you are paying over time. You might end up realizing how much control you are missing out on by having payment obligations in an ongoing debt cycle. The numbers might astonish you.

Looking to a new abode? Be sure to avoid these mistakes first-time homebuyers make.

Images: andresr

 

The post Can Refinancing to a Higher Mortgage Rate Actually Lower Your Debts? appeared first on Credit.com.

4 True Tales of Maxing Out Credit Cards

maxed-out-credit-card

Some people like to joke about taking things to the limit, but when it comes to your credit, maxing out a credit card is no laughing matter.

Maxing out a credit card means swiping until you reach the card’s credit limit, or the total amount of credit extended to you. And that’s bad news for your credit scores because your debt utilization ratio (e.g., how much debt you have versus your total available credit) is one of the key factors credit agencies use to determine your score. Bump up against that limit, and your score will take a hit.

Debt levels are another factor that go into your score. Carry too much, and you’ll send a red flag to lenders that you’re in over your head; slack off on a few bills, and they’ll begin to think you can’t manage your payments responsibly.

We spoke with a few Credit.com readers who learned the hard way about the dangers of maxing out credit cards. While they aren’t proud of what they did, they came out stronger for their experience and took steps necessary to get their finances back in order. (Note: At their request, some names and locations have been withheld to protect readers’ privacy.)

‘I Maxed Out Seven Cards’  

Between 2006 and 2008, Steven M. Hughes was saddled with a lot of debt. “I maxed out seven cards in my freshman year alone,” he said via email, “two more as a young professional.” The problem was he didn’t understand how to use them. “My parents always told me to stay away from them and didn’t teach me how to manage them properly,” he said.

“I had one credit card for emergencies that I maxed out on car repairs for a car at the time. I had department store cards that I maxed out on clothes for school and work because I worked while I was in college. I had a card I maxed out going to a family member’s wedding in New York City. I started assigning jobs to each card, but I didn’t have the income to pay them off, and paying the minimum balance wasn’t cutting it. All but one card was charged off. I managed to pay the lone card off and start a new account with the creditor.”

Today, the Columbia, South Carolina, resident teaches millennials how to manage their money through his nonprofit, Know Money, Inc. “After making all the financial mistakes, I started to learn as much as possible about personal finance,” he said.

‘I Was Into Wearing Ralph Lauren’ 

Deborah Sawyerr, a fashion and lifestyle blogger based in London, was about 32 when she visited Woodbury Common Premium Outlet, in Central Valley, New York, during a family holiday in 2005. “We bought clothes, shoes, suits, my daughter some bits, belts, jackets and some gifts,” she recalled via email. “At the time, I was into wearing Ralph Lauren clothing, so most of my spend went on this particular brand.”

Her credit card balance at the time was pretty low, but she admits she went a bit overboard that trip, racking up roughly $5,000. “As luck would have it, at the same time, my employer had just paid me in excess of £5,000, or thereabouts, as a redundancy package,” she said. “I basically — and perhaps I wasn’t so naïve — used the entire redundancy package to clear the debt in one go.” Humbled by the experience, Sawyerr said hasn’t maxed out a credit card since.

‘I Knew Very Little About Money’ 

In 1997, John Schmoll, Jr. was an undergrad with four maxed out credit cards totaling a whopping debt of $25,000. “When I went to college, I knew very little about money and was enticed to sign up for credit cards out of the promise of some sort of free swag — T-shirt, Frisbee, you name it,” he wrote in an email. “I ended up signing up for four credit cards this way, and used them to finance a lifestyle that I wanted but could not afford.”

Teetering on the verge of bankruptcy, at a roommate’s urging Schmoll decided to meet with a debt counselor, who helped him lower the rates on his cards. From there, he set up a budget, which enabled him to pay the cards off five years later. “That changed my life forever and put me on the path I am today, working toward financial independence,” he said. Today, the Omaha-based father and finance industry veteran blogs at Frugal Rates about what he’s learned.

‘0% Offers Were Appealing’ 

Years ago, Lisa, a marketing strategist, found that the 0% promotional APR offers from credit card issuers “were appealing.”

“I had six credit cards, all with a little over $3,000 on them,” Lisa said in an email. “I consolidated them into one account, maxing out that card, and I paid it off in about two years.”

So what got her there in the first place? Overspending. “I was floored to find out how liberal I’d been with spending — luxury items, travel to the Maui Writer’s Conference, etc.,” she said. “I behave very differently now.”

For starters, she said she doesn’t keep a revolving balance, and diligently pays her balances off every month. “That way, there’s no surprise debt, no interest charges, no late fees, etc.,” she said.

If you have reason to believe your spending’s out of control and it’s affecting your credit, you can read up on these tips to build credit the smart way and view your free credit report summary on Credit.com to see where you might want to improve.

Image: m-imagephotography

The post 4 True Tales of Maxing Out Credit Cards appeared first on Credit.com.

Is Your Credit Card Ready for the Holidays?

holiday-credit-card-spending

Ah, September. That magical time of year when boots and open-toed shoes intermingle, mornings get crisper, people start lining up for those infernal pumpkin spice lattes and some retailers start hauling out their holiday cheer.

It seems every year, some store somewhere feels the need to make the holiday shopping season just a tad bit longer. In fact, I wouldn’t be surprised if roadside fireworks stands start selling Christmas trees in late June next year.

There’s one positive to be said about the ever-earlier start of the holiday shopping season, though: preparedness. That’s especially true when it comes to your credit and credit cards.

If you’re like most Americans, you’re carrying some credit card debt. In fact, revolving credit debt, made up mostly of credit cards, climbed 3.45% in July, compared to 11.5% the month prior, the Federal Reserve said last week. In fact, credit card debt is expected to top $1 trillion dollars this year, closing in on the all-time high of $1.02 trillion set in July 2008, just before the Great Recession.

If you’re worried what your holiday gift-giving, party going and other festivities might do to your credit card debt, now’s the time to make a plan.

1. Start by Checking Your Credit Scores

Whether your holiday spending plans involve opening up a new credit card or taking measures to protect your credit, the first thing you’ll want to do is see where your credit scores stand. You can get two free credit scores, updated every 14 days, on Credit.com, and, in your credit report summary, you’ll see what areas of your credit are helping (or hurting) them. For example, 30% of your score is based on the amount of debt you’re currently carrying in relation to your credit limits. This credit utilization ratio can bring your scores down quickly if you’re carrying a lot of credit card debt.

2. Ask for a Credit Limit Increase … No, Not So You Can Spend More

Another way to improve your credit utilization is to ask for a limit increase. To be clear, just because people tend to charge more during the holidays doesn’t mean it’s a good reason to spend more than you can afford. Given the high interest rates on credit cards, a little overspending can take months to repay and cost you hundreds — potentially thousands — of dollars in interest.

That being said, if you’ve budgeted for the increase in spending and plan to put it on credit cards, it’s important to be careful about how high you push your credit card balances. To keep your credit scores in good shape, many experts recommend using less than 10% of your available credit.

3. Pay Down Your Debt

Once you know where your credit stands and how your current debt is affecting it, it’s a good idea to put together a plan pay it off. If your credit card interest rates are high, you could benefit from taking a personal loan at a lower interest rate and using that money to pay off your credit card debt. That also can potentially help your credit scores in the long-term, since the mix of credit accounts you have (mortgage, auto loan, personal loan, credit cards, for example) also affects your credit scores. You can see how long it will take you to pay off your debt using this credit card payoff calculator.

4. Make a Holiday Spending Budget

Yes, part of the joy of the holidays is gift-giving; seeing that look of excitement on your loved one’s face is priceless —until you look at your credit card statement the following month. Ouch. It’s a good idea to set a budget for what you’ll spend on presents, parties, outings and even decorations. The important thing with any budget is to be realistic, so if you know you’re going to end up buying that iPhone 7 Plus for your girlfriend, just put it in your budget and figure out how you can save in other areas (like eating peanut butter for dinner for the next three months, or buying your dad a tie).

Just remember, the holidays will be more fun if you plan ahead a little and aren’t stressed about how much you’ve spent and how much extra you might end up paying in interest. ‘Tis the season to be jolly, after all, but seriously, stay away from the pumpkin spice lattes.

Image: Joan Vicent Canto Roig

The post Is Your Credit Card Ready for the Holidays? appeared first on Credit.com.

My Spouse Went on a Spending Spree With Our Credit Cards. What Can I Do?

It can be difficult for married couples to manage their money together, especially if they are not always on the same page. In particular, credit cards can make it easy for one person to overspend using money that the household might not have in its budget. If you’ve had a situation where your spouse has spent too much on your credit cards, what can you do?

Talking About It

Having discovered that your spouse has been spending heavily on your credit cards, the first thing that you will want to consider is talking about it. It’s a good idea to start by giving your spouse the benefit of the doubt, simply asking for more information about the charges.

For example, a credit card statement might offer vague or misleading information about the name of the merchant, so it can be very easy to confuse a large charge that you were expecting with one that you weren’t. In addition, it’s always possible that what appears to be a spending spree might actually be the result of fraudulent charges, which you can dispute with your card issuer.

Thankfully, federal law protects credit card users from paying more than $50 in the event of a fraudulent charge, and all major card issuers will waive this amount by offering zero-liability policies. By sitting down together and going over each charge, couples can ensure that they understand exactly what was purchased and what wasn’t.

If you’ve determined the charges are legitimate, you’ll want to consider going over your total financial picture to see how these charges will affect you. And if you’re unable to pay your entire statement balance by the due date, you should also try to calculate the cost of interest charges.

Taking Steps to Minimize the Impact

Once you have talked it over, it may become apparent to both of you that your spouse overspent. The most effective way to minimize these expenses is to look into returning some unnecessary purchases. In fact, many credit cards come with a return protection policy that can offer you a refund on eligible purchases, even when the retailer won’t accept a return.

After you’ve returned everything you can, your next step will be to minimize any interest charges. You can avoid all interest charges by paying your balance in full, but if that’s not possible, then there are other steps that you can take. For example, you can pay as much as possible, as soon as possible, in order to reduce your average daily balance, which determines how much interest you are charged. You can even save money on interest charges by making multiple payments each month, as money becomes available. You also can cut back on other spending as you apply more of your monthly budget to paying off the debt.

Another strategy to minimize your credit card interest is to open a new account that offers 0% APR promotional financing on balances transfers. These offers allow you to avoid interest charges by transferring balances from your existing cards to a new credit card that offers interest-free financing. These promotional financing offers last from as little as six months to as long as a year or more, however, nearly all of these offers require payment of a balance transfer fee of 3 to 5%, which gets added to your new balance.

Preventing It From Happening Again

Once you’ve tried to manage your existing charges, you can take steps to ensure neither of you overspend with credit cards in the future. For example, some couples agree to notify each other before making any charges above a certain amount, such as $100. In many cases, you can manage your credit card accounts online and create automated alerts that send both of you an email or a text message when any charge above a certain amount is made, or when your balance crosses a predetermined threshold.

Finally, some couples may choose to separate their finances rather than manage their accounts jointly. This allows you to avoid financial problems caused by your spouse’s overspending, but it can also make it more difficult to work together to budget your money and control overspending.

It’s often said that communication is the key to any successful relationship, and this advice is especially true when it comes to married couples managing their finances together. By talking about your credit card use, and taking steps to mitigate and prevent overspending, couples can work to manage their credit card accounts responsibly.

Remember, carrying high credit card balances can have a negative effect on your credit scores. You can see how your credit card spending is impacting your credit by checking your two free credit scores, updated monthly, on Credit.com.

Image: Drazen Lovric

The post My Spouse Went on a Spending Spree With Our Credit Cards. What Can I Do? appeared first on Credit.com.

This Woman Only Dates Men With Good Credit Scores

credit_score_dating

“I need a man who has his life together and can pay his bills.”

That’s not a jaded divorcée talking. It’s 22-year-old Martina Paillant of Brooklyn, New York.

In a recent interview with The New York Post, Paillant said she was raised in a family of professionals who took handling their money very seriously. “I have no student loans, and I can already take care of myself financially,” said the graduate school student who splits her time between Miami and Brooklyn. “I need a man who can take care of himself, too.”

With 71% of college graduates leaving school with an average of $35,051 in debt, it’s easy to see why Paillant is drawing the line at dating men with bad credit. Though a partner’s or spouse’s student loan debt (or other debt, or even bad credit) wouldn’t affect her credit report, she probably knows she would be on the hook for any debt taken out while married or loans that she co-signs.

Paillant is also likely aware of other collateral damage she may incur. If she and her partner decided to apply for a mortgage together, for instance, lenders would look at both of their credit scores during the application process. Her partner’s not-so-hot credit would result in less favorable terms and conditions, making it harder to finance a home.

Any joint account, too, would appear on Paillant’s credit reports, meaning both would share responsibility.

Building Better Credit 

Though some may bristle at Paillant’s statements, talking with potential spouses about their credit score is a really good idea. After all, positive credit has nothing to do with income but with fiscal responsibility and managing obligations. Going into a relationship without having the “money talk” can lead to problems down the road.

That’s not to say you have to follow suit and swear off potential mates with bad credit, but it’s a good idea for significant others to discuss:

  • What your credit reports say
  • What your respective credit scores are
  • How much debt each of you carry
  • What your combined debts look like
  • Whether you are both spenders or savers

The sooner both of you discuss your personal financial preferences, credit standings, individual spending habits and joint future goals, the sooner you can identify and hopefully avoid major problems.

And, if a partner is intent on building good credit, their standing could certainly improve over time. Using a joint account responsibly, for example, is a great way to beef up credit history — that is, as long as you pay bills on time.

As we’ve written before, good communication is key to any long-term relationship. And when it comes to money, honesty is the best policy if you want to avoid financial infidelity. When taking on debt, it helps to be clear about pros and cons, and how you’ll tackle the problem together.

You can keep an eye on your credit — and any joint accounts — by pulling your credit reports for free each year on AnnualCreditReport.com and viewing your credit scores, updated monthly, for free on Credit.com.

Image: Ridofranz

The post This Woman Only Dates Men With Good Credit Scores appeared first on Credit.com.

Can a Debt Management Plan Hurt My Credit?

debt-management-plan

It’s pretty rare that anyone gets excited about receiving their monthly credit card statements. But if opening yours fills you with more dread than going on a questionable Tinder date, it may be a problem. Perhaps it’s time you consider a helpful solution, like a debt management plan (and swiping left).

What Is a Debt Management Plan?

A debt management plan (DMP) is a monthly payment plan that you work out with creditors to help you pay off your debt. This can simplify your situation because it means you’re only making one monthly payment instead of trying to pay multiple credit accounts or anything else.

“While it does consolidate the monthly payments and lowers the interest rates and (usually) lowers the total payments, a DMP is not a consolidation loan or debt settlement,” Thomas Nitzsche, media relations manager for ClearPoint Credit Counseling Solutions, said in an email.

While this may be a viable option to help you pay off your debt, it’s important to consider the effects it can have before you go down the DMP road.

How a DMP Affects Your Credit

You probably know that having missed payments or even maxed-out credit cards can be damaging to your credit, but a DMP also can cause your credit to take a hit.

“Debt management plans will initially ding your score slightly if the included accounts are not already closed,” Nitzsche said. “When you join a DMP, the accounts are automatically closed, which has the same effect as if you closed the accounts yourself.”

When you close accounts, your debt usage ratio may increase. Your debt utilization is the amount of your outstanding balances versus your available credit limits, and 30% of your credit score is based on the amount of debt you’re currently carrying. (You can see how your debt and payment habits are affecting your credit by pulling your reports for free each year at AnnualCreditReport.com and viewing two of your credit scores, updated monthly, for free on Credit.com.)

And unlike debt settlement, a DMP doesn’t require that your accounts be delinquent, so even with the debt ratio ding you might see, you’ll likely experience less of a negative affect than if you were to wait until you’re behind on payments to take action. Nitzsche said the damage DMP might cause is also much less than what you’d see for filing bankruptcy.

If you need a little extra motivation, consider using this lifetime cost of debt calculator, which can give you insight into how your credit score can affect the debt you’ll pay during your lifetime.

Essential Things to Know Before You Enroll in a DMP

“DMP’s work with unsecured debt, primarily credit cards,” Nitzsche said, adding that it’s important to remember that a DMP is most effective when your debt is still with the original creditor and not in collections.

Beyond that, he adds, “good payment habits and good communication with the counselor will be essential, or you could lose the benefits of the DMP.”

Image: franckreporter

The post Can a Debt Management Plan Hurt My Credit? appeared first on Credit.com.

6 Student Loan Mistakes to Avoid at All Costs

avoid_student_loan_mistakes

Every time I read the news, I hear how America’s problems with student loan debt have gotten worse.

For example, I learned recently that collective student loan debt surged to over $1.4 trillion nationally. And in an article in the Wall Street Journal, I learned that more than 7 million student borrowers were at least one year behind on their payments.

Also, average student loan debt is up to over $37,000 this year, leaving many young adults questioning their future prospects. With so much debt at a young age, more young people are putting off marriage and parenthood than ever before.

So, what should people do?

No matter where you are with your loans, you can make your situation better (or worse) depending on what you do from here on out.

To learn about some of the mistakes students, borrowers and even co-signers should avoid, I reached out to several financial planners who have experience in this space. When it comes to student loans, they say to avoid these six mistakes at all costs.

1. Choosing a Four-Year School Without Researching Other Options

According to wealth adviser Joseph Carbone of Focus Planning Group in Bayport, New York, too many young people assume they need a four-year degree without thinking it through. And once they get into their four-year degree program, they start racking up more debt than they need. A lot of times, at least some of these students would be better off pursuing a two-year program first.

As Carbone notes, this is especially true in the state of New York, where kids can attend a two-year SUNY program at a considerable discount.

“If you start with a good SUNY two-year program, and then transfer to the school of your choice, you could save tens of thousands of dollars,” he says.

If you already graduated, this tip can’t help you now. But if you’re gearing up for school, it can pay to explore some of the degree options two-year schools offer. A lot of times, you can begin lucrative careers with a two-year degree or even an apprenticeship.

“Parents and students have to accept the idea [that] there is a flood of college graduates with limited job prospects,” says financial planner Tom Diem of Diem Wealth Management. Meanwhile, there are also many unfilled, high paying jobs in technical fields.

Because of this, says Diem, you need to think about long-term value when choosing a program.

And remember, like Carbone says, you can always start with a two-year degree, then transition to a four-year program later.

2. Living Off Your Student Loans

Depending on the student loans you choose, you may be able to borrow more than the cost of your tuition and books. When that’s the case, it’s tempting to spend the “overage” on a lifestyle you couldn’t afford otherwise.

But, just because you can use student loans for a Spring Break trip to Mexico doesn’t mean you should. Remember, you have to pay back every cent you borrow – plus interest.

Kansas City financial planner Clint Haynes says he has seen this situation play out time and again, with disastrous results.

“Student loans should only be used [for] education expenses, not going out to the bar with your friends,” says Haynes.

Yes, you may need to get a part-time job or be more frugal with the money you saved from your summer job. However, you will be so grateful you did after you graduate and start paying your bills.

“The goal is to get your degree with as little debt as possible,” he says.

Once you graduate and start earning a real income, then you can go to Cancun.

3. Dismiss Working During School

Sure, you can borrow enough to cover your tuition and your living expenses, but should you? According to financial planner Josh Brein of Brein Wealth Management in Bellevue, Washington, you can make your life easier by working during school and borrowing less.

“I’m a huge advocate of working while you’re learning, because it teaches us that money doesn’t grow on trees,” says Brein. Plus, you can use some of your earnings to pay for school along the way. You don’t have to prepay all of your tuition, of course, but any amount you can pay will help.

4. Co-Signing Without Understanding the Potential Consequences

This tip is for parents and guardians that might co-sign on a student loan. A CBS News Money Watch article from August 2014 stated that nearly 156,000 older Americans saw their Social Security checks dinged the previous year for delinquent student loan payments.

Because student loan delinquencies are on the rise, you should think long and hard before attaching your name to a brand new loan.

“Parents and grandparents co-sign with the best of intentions but often without thinking about the financial ramifications if the student doesn’t pay,” says Charles C. Scott, a financial adviser in Scottsdale, Arizona. “Be aware and be careful,” he says. If the person you co-signed for quits paying, you’ll be on the hook.

5. Refinancing Without Running the Numbers

Oftentimes, new graduates assume refinancing is a good deal without ever running the numbers or considering what they’ll lose.

“Don’t make this mistake,” says Portland, Oregon-based financial planner Grant Bledsoe. “Private lenders do offer competitive rates when refinancing, but by leaving the federal system, you forfeit many of the associated benefits.”

Any time you refinance a federal student loan with a private lender, you miss out on certain protections like income-driven repayment plans, deferment and forbearance. So even if you get a lower interest rate by refinancing, you’re barring yourself from choosing these options down the line.

Refinancing is the best option in some circumstances, but be wary of what you’re giving up,” says Bledsoe.

6. Paying Off Student Loans Instead of Other High-Interest Debts

While it’s reasonable to see your student loan debt as an emergency, paying off other debts first — while making your minimum monthly student loan payments — might leave you better off.

“If you have other loans with high interest rates, make sure to prioritize those for repayment first,” says financial advisor Billy Xiao of Mobius Wealth, in Vancouver.

If you have high interest credit card debt or personal loans, for example, you can easily save more on interest by making extra payments on those first. And since you might be able to deduct the interest you pay on student loans on your taxes, there are additional financial considerations to ponder as well.

To reiterate, that does not, of course, mean skipping student loan repayments so you can make the other payments with higher interest rates. Skipping repayments and possibly going into default can have very serious consequences for your credit scores. (You can see where your credit currently stands by viewing two of your credit scores, updated each month, for free on Credit.com.) The bottom line: Make sure to take a holistic look at your finances before paying extra toward your student loans. Sometimes, other debts should take precedence.

While a college degree can certainly pay off, borrowing unlimited amounts of money can make your post-college life harder than it has to be. Before you sign on that dotted line, make sure you know exactly what you’re getting into. With a few smart moves and some self-restraint, you can borrow less, pay down debt faster and avoid many of the pitfalls that befall too many college graduates with debt.

Image: DragonImages

The post 6 Student Loan Mistakes to Avoid at All Costs appeared first on Credit.com.

Starbucks Is Raising Its Prices Today

starbucks_price_increase

You could pay more for your morning latte starting today. Or you could not. Thing is, if you get your morning caffeine fix at Starbucks, you won’t actually know if you’re paying more until you buy it.

The coffee purveyor is “planning a small price increase on select beverages” starting July 12, but the company isn’t saying exactly which beverages will cost more. A statement issued by the company on July 1 said some drinks will increase by 30 cents per beverage.

Some customers got an early taste of the price increase, according to a statement on the corporate website: “The price adjustment was prematurely entered into the point of sale systems in our U.S. company-operated stores. As a result, some customers were charged incorrectly. The maximum any customer could have been overcharged is 30 cents per beverage.”

(The company encouraged customers who believe they were overcharged to contact customer service at 1-800-782-7282.)

Of course, you can skip the price increase altogether by making your coffee at home. But, if you’re a member of the Starbucks rewards program, the price increase can mean more rewards. Earlier this year, Starbucks overhauled its popular rewards program so customers receive two reward stars per dollar spent in lieu of one star per transaction. The coffee company also started offering a prepaid rewards card along with Chase Bank. (You can check out our roundup of the best rewards credit cards here.)

While rewards programs can offer great perks for being a loyal customer, they can also entice people to overspend, consciously or not. Just remember, overspending and getting yourself into debt can have a significant impact on your credit scores. You can see how your debt is impacting your credit scores for free on Credit.com. You can also use this tool to calculate your lifetime cost of debt.

More Money-Saving Reads:

Image: Joel Carillet

The post Starbucks Is Raising Its Prices Today appeared first on Credit.com.

This Bank Is Raffling Off a Year of Loan Payments

suntrust_sweepstakes_2016

Struggling to make your loan payments? SunTrust Banks has a new offer designed to give a few lucky borrowers some breathing room.

As part of its Year onUp Sweepstakes, the Atlanta-based bank will award 25 people “the amount of their monthly mortgage, auto loan or student loan payments for an entire year, up to a certain value,” according to a press release.

The top five winners will receive the amount of their monthly mortgage payment for one year (capped at $1,500 per month), 10 winners will receive the amount of their monthly auto loan payment for one year (capped at $500 per month) and 10 winners will receive the amount of their monthly student loan payment for one year (capped at $500 per month).

The contest can be entered at on the bank’s Year onUp Sweepstakes website. and is open to customers and non-customers alike. No purchase is necessary to enter or win, per the terms and conditions on the site. Entry must be received by noon, Aug. 31, 2016, and winners will be chosen on or about Sept. 1, 2016.

To enter, you must fill out the online registration form by providing your complete name, date of birth, email address and your Twitter and/or Instagram handle.

The contest comes at a time when many Americans are carrying heavy debt loads. Total outstanding student loan debt now dwarfs total credit card debt. Even outstanding car loans have increased from $905 billion last year to more than $1 trillion in the first quarter of 2016. And 24% of home loans approved by six of the largest U.S. banks in 2015 were jumbo, up from 21% the year prior, according to The Wall Street Journal.

Of course, it’s a not a good idea to simply hope that winning a raffle will help you pay back what you owe.(And you may want to read the terms and conditions of any contest you are considering carefully to be sure it’s a fit for you.)

If you’re carrying a significant debt load, consider making a game plan to pay it off quickly. Making on-time payments on any debt is a great asset to have on a credit report, since payment history is one of the key criteria credit agencies use to determine your credit score(s). Your credit utilization, or the amount of debt you owe versus your combined credit limits, also counts heavily toward your credit scores (30%), so keeping your account balances, particularly on credit cards, low or paying them off entirely can help your credit scores immensely.

You can read our primer on getting out of debt here and see where your credit scores currently stand by viewing two of your free credit scores, updated each month, for free on Credit.com.

Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.

More Money-Saving Reads:

Image: dmbaker

The post This Bank Is Raffling Off a Year of Loan Payments appeared first on Credit.com.

Yes, You Can Get Rid of Your Student Loans Through Bankruptcy. Here’s How

student_loans_bankruptcy_discharge

The belief that student loans are never dischargeable in bankruptcy is, simply put, not true. Student loans can be discharged in some limited cases. In fact, according to a study published in 2011 by Jason Iuliano, a student at the Woodrow Wilson School of Public and International Affairs at Princeton University, at least 40% of borrowers who include their student loans in their bankruptcy filing end up with some or all of their student debt discharged.

The problem, as Iuliano points out, is that only about 0.1% of consumers with student loans actually try to include them in their bankruptcy proceedings.

While we’re not advocating for shirking your legal responsibility to repay money you’ve borrowed, bankruptcy is sometimes a necessary part of our financial lives. If that’s the case for you, you could be eligible to include any outstanding student loan debt within your bankruptcy filing. Here’s how.

Is Bankruptcy Your Best Option?

Bankruptcy is an available option for a reason, so if you find yourself at the end of your financial rope, don’t be afraid to consider it. A consumer bankruptcy attorney can help you understand how filing for bankruptcy may help you. You may also want to talk with a credit counseling agency to ensure you’ve exhausted your other options, because bankruptcy can have a devastating impact on your credit scores that will take years to improve.

Do You Pass the Brunner Test?

Bankruptcy law currently exempts education loans and from discharge unless not doing so would cause the consumer undue hardship. But undue hardship is not defined, so individual courts are left to decide what that entails.

Most courts (but not all) use the Brunner test to determine undue hardship, using three criteria to do so. First, can the borrower sustain a minimum standard of living while continuing to pay the loan? Second, will the borrower’s financial situation improve in the future? And third, has the borrower made a good-faith effort to pay his or her loans?

If you can answer no to all three of these questions, you may wish to discuss with your bankruptcy attorney whether you should file an adversary proceeding, which is basically a lawsuit within the bankruptcy case itself. And remember, even if you don’t meet the Brunner test criteria, it might be possible to discharge your other debts, which can free you up to pay your student loans.

Review Other Discharge Strategies

If it’s your student loans that are causing you the most concern, you might want to first consider some of the available student loan forgiveness programs available. Loan forgiveness programs are offered to everyone from Peace Corps and AmeriCorps volunteers to teachers, nurses, doctors and other young professionals serving communities in need. Professionals choosing to work such jobs may take home lower-paying salaries, but they’ll also get some serious help with their student loans.

There are also many ways to get federal student loans forgiven. In fact, the Consumer Financial Protection Bureau released a report in 2013 estimating that more than one-quarter of working Americans are eligible for the Public Service Loan Forgiveness Program, but only a small percentage are actually using it.

Know the Impact On Your Credit

Whatever option you choose to rectify your financial situation, it’s important to know how your choice will impact your credit. If you choose bankruptcy, there are steps you can take to avoid a long-term worst-case scenario, including:

  1. Make sure the bankruptcy is reported correctly. In order for the healing process to begin, make sure all the accounts included in your bankruptcy are marked as discharged and labeled with a zero balance on all of your credit reports. You can check your credit reports for free by pulling them at AnnualCreditReport.com.
  2. Start establishing a positive payment history. Payment history is generally the most important factor among credit scoring models, so it’s imperative you demonstrate an ability to repay loans as agreed. One possible approach to re-establishing credit is to apply for a secured credit card and continually make all of your payments on time. You can also monitor your progress as you try to fix your credit by viewing your two free credit scores, updated each month, on Credit.com.
  3. Get the bankruptcy removed from your credit reports as soon as it’s eligible for deletion. If your bankruptcy is appearing on your report after that 10-year mark, you can dispute its inclusion with the credit bureaus. You can go here to find out more about getting errors off of your credit reports.

[Offer: Your credit score may be low due to credit errors. If that’s the case, you can tackle your credit reports to improve your credit score with help from Lexington Law. Learn more about them here or call them at (844) 346-3296 for a free consultation.]

More on Managing Debt:

Image: Mike Cherim

The post Yes, You Can Get Rid of Your Student Loans Through Bankruptcy. Here’s How appeared first on Credit.com.