Risks to Consider Before Co-signing Your Kid’s Mortgage

Homeownership is a cornerstone of the American Dream for most, but many millennials are finding it difficult to afford to buy in.

Overall, millennials are still far behind in homeownership compared to previous generations were at their age. Only 39.1% of millennials lived in a home they owned in 2016 compared with 63.2% of Gen Xers, according to an analysis by Trulia Economist Felipe Chacón.

Student debt and stagnant incomes could share some of the blame. Millennials earn 78.2 cents for every dollar a Gen Xer earned at their age, Chacón found. Nearly half of millennial homebuyers report carrying student loan debt, according to the 2016 National Association of Realtors Home Buyer and Seller Generational Trends survey. They carry a median loan balance of $25,000.

Loan officers have to take a borrower’s total debt picture into account when running their application, and it’s become increasingly hard to qualify for a mortgage with a vast amount of student debt.

When they can’t get approved for a mortgage, it’s common for homebuyers to seek out a co-signer for their loan. Often, that person is a parent.

Co-signing a child’s mortgage loan is a serious decision, and parents should weigh all of the risks before making any promises. We asked financial experts what risks are worth worrying about to help clear out the noise.

  1. You’re on the hook if your kid stops making mortgage payments

When you co-sign a loan, you agree to be responsible for payments if the primary borrower defaults. If you’re expecting to retire during the life of the mortgage loan, co-signing is an even larger risk, as you may be living on fixed income.

Dublin, Ohio-based certified financial planner Mark Beaver says he’d be wary of a parent co-signing a mortgage for their adult child. “If they need a co-signer, it likely means they cannot afford the house, otherwise the bank wouldn’t require the co-signer,” says Beaver.

By co-signing, you effectively take on a risk the bank doesn’t want. And the list of potential scenarios in which your child may no longer be able to afford their house payments can be vast.

“What if your daughter marries a jerk and they get divorced, or he/she starts a business and loses money, or doesn’t pay their taxes. The risk is ‘what can happen that can make this blow up,’” says Troy, Mich.- based lawyer and Certified Financial Planner, Leon LaBrecque.

Bottom line: If you wouldn’t be able to comfortably afford the payments in case that happens, don’t co-sign.

  1. You’re putting your credit at risk

A default isn’t the only event that could negatively affect your finances. The mortgage will show up on your credit report, too, even if you haven’t taken over payments. So, if your child so much as misses one payment, your credit score could take a hit.

This may not be the end of the world for an older parent who doesn’t anticipate needing any new lines of credit in the future, Beaver says, but it’s still wise to be cautious.

You might think your child is ready to become a homeowner, but a closer look at their finances may reveal they aren’t yet that financially mature. Don’t be afraid to ask about their income and spending habits. You should have a good idea of how your child handles their own finances before you agree to help them.

“Sure, we don’t want to meddle and pry into our children’s business; however, you are putting yourself financially on the line. They need to understand that and be open about their own habits,” says Andover, Mass.-based Certified Financial Planner John Barnes.

  1. Your relationship with your child could change

Co-signing you child’s mortgage is bound to change the dynamics of your relationship. Your financial futures will be entangled for 15 to 30 years, depending on how long it takes them to pay off the loan.

Seal Beach, Calif.-based certified financial planner Howard Erman says not to let your feelings get in the way of making the correct decision for your budget. Think of how often you communicate and the depth and strength of your relationship with your child. If saying no might create serious tension in your relationship, you likely dodged a bullet.

“If your child conditions their love on getting money, then the parent has a much bigger problem,” says Erman.

Similarly, you should consider how your relationship would be affected if somehow your child ends up defaulting on the mortgage, leaving you to make payments to the bank.

  1. You might need to let go of future borrowing plans

Co-signing adds the mortgage to the debts on your credit report, making it tougher for you to qualify for additional credit. If you dreamed of one day owning a vacation home, just know that a lender will have to consider your child’s mortgage as part of your overall debt-to-income ratio as well.

Although co-signing a large loan such as a mortgage generally puts a temporary crimp in your ability to borrow, keep in mind you may be affected differently based on the dollar amount of the mortgage loan and your own credit history and financial situation.

How to Say “No” to Co-signing Your Child’s Mortgage

There is a chance you’ll need to deny your child’s request to co-sign the loan. If you feel pressured to say yes, but really want to say no, Barnes suggests you say no and place the blame on a financial adviser.

“Having [someone like] me say no is like a doctor telling a patient he or she can’t run the marathon until that ankle is healed. It is the same principle,” says Barnes.

He advises parents facing the decision to co-sign a loan for a family member to meet with a financial planner to analyze the situation and give a recommendation for action.

If you choose to take the blame yourself, you may want to take the time to explain your reasoning to your child if you feel it’s warranted. If you said no based on something they can change, give them a plan to follow to get a “yes” from you instead.

LaBrecque suggests that parents who want to help out but don’t want to take on the risks of co-signing instead give the child a down payment and treat it as an advance in the estate plan. So if you “gift” your kid $30,000 to make the down payment, you would reduce their inheritance by $30,000.

The “gift the down payment” method grants you some additional benefits too.

“[The] method has a more positive parent/child relationship than the potential awkwardness of Thanksgiving with the kid(s) and late payments on the mortgage. Also, the ‘down payment gift’ is a quick victory. The kid’s now made their bed with the mortgage; let them sleep in it,” says LaBrecque.

Similarly, you could choose to help your child pay down their debts, so they’ll be in a better position to get approved on their own.

If you must say no, try to do so in a way that will motivate them toward the goal rather than deflate them. Erman recommends lovingly explaining to your child how important it is for them to be able to achieve this success on their own.

How to Protect Yourself as Co-signer

The best way to protect yourself against the risks of co-signing is to have a backup plan.

“If a child is responsible with money, then I generally do not see a problem with co-signing a loan, provided insurance is in place to protect the co-signer (the parent),” says Barnes.

He adds parents should make sure the child, the primary borrower, has life insurance and disability insurance in case the widowed son or daughter-in-law still needs to live in the home, or your child becomes disabled and is unable to work.

The insurance payments will also help to protect your own credit history and future borrowing power in case your child dies or becomes disabled. But these protections would be useless in the event your child loses their job.

If that happens, “insurance will not pay your bill unfortunately, so even if you are well insured, budgeting is vitally important,” Beaver says.

If you choose to take on the risk and co-sign, Barnes says to make sure you and your child have a plan in place that details payment, when to sell, and what would happen if your child is unable to make payments for any reason.

Additionally, LaBrecque recommends you get your name on the deed. Don’t forget to address present or future spouses. Ask your lawyer about having both kids sign back a quit-claim deed to the parent. If you get one, he says, you’ll be protected in case the marriage goes south, or payments are made late, because you would be able to remove a potential ex off the note.

The post Risks to Consider Before Co-signing Your Kid’s Mortgage appeared first on MagnifyMoney.

How To Talk To Your Kids About Student Loans

Student loans are much more of a reality for kids today than they were for their parents and other previous generations of college students. The cost of education has risen so quickly that in 2014 almost seven out of 10 students graduating college had loan debt—nearly $29,000 each, on average.

This means discussing student loans needs to be a key part of family discussions on college. The earlier these talks happen, the better. I know this first-hand, as my eldest daughter is a college freshman this year.

Affordability is key

The conversation about how student loans work can include talks about what your family can afford in terms of college. At one end, a family may decide that they will find a way to pay for the best colleges to which their college-bound student is admitted—no holds barred. Even if both parents have to get second jobs, they will pay for their child to attend the most prestigious college to which he or she is accepted.

In our family, the chat was quite different: We told our daughter what we could afford and invited her to apply to colleges that were reasonably within our budget range. There was no sense in having her look for her “College Charming” and then tell her we couldn’t afford it.

We also talked early—during her sophomore and junior years in high school— about student loans and the importance of limiting them as much as possible. Why? Heavy student loan debt can be a tremendous burden on new college graduates. It can limit their choices of jobs because they often must earn enough to pay off their debt, especially if they can’t count on financial help from parents or other family members. In the long run, significant student loan debt, like any other debt, might also delay or limit the borrower’s ability to buy a home, start a business, or even begin a family.

How much is too much?

Syndicated author and radio talk show host Clark Howard suggests students not take out more in student loans (in total over four years of college) than the entry-level salary they can expect to earn their first year after college. If the student expects to earn $30,000 in their first job, that number should be the ideal student loan limit in total. (College students can estimate entry-level wages in their field with online tools such as salary.com.) Of course, seeking advice from financial aid consultants might be helpful (if pricey), and many colleges offer financial aid resources.

Learning about loans

The U.S. Department of Education requires students to enroll in online counseling when they first take out federal student loans. Sitting through it with your student may provide opportunities to help explain the concepts covered, such as accruing interest and repayment rules.

The repayment calculator was a huge eye-opener for my daughter, as she was able to see what her student loans could cost her in actual monthly payments. Making the loans real is a great way to discourage overborrowing.

More things for students to consider

Emphasizing a few key factors may be helpful to your student in understanding the essentials of college loans. For instance:

  • Personal expenses. Loans aren’t intended to cover personal expenses. Your child could cover pocket money by working during college, even if that’s just five to 10 hours per week.
  • Quitting college. If your student leaves school or drops down to less than part-time status, there is only a six-month grace period before your son or daughter must begin paying back federal student loans.
  • Credit score. Paying loans on time and as agreed to helps your student keep his or her credit score healthy, which is important when attempting to rent an apartment, get a car loan and much more. Credit reports are available for free one time each year at annualcreditreport.com.
  • Declaring bankruptcy. It’s very tough to walk away from unpaid student loans. Even if other debts are discharged during a bankruptcy, you will usually remain responsible for any federal student loans. Again, this underscores the importance of not overborrowing.
  • Charging college expenses. Using credit cards is not a good choice for paying for college. A close relative of mine charged his entire senior year of college on credit cards. As you might imagine, the interest rates make paying back the loan amount incredibly challenging.
  • Private student loans. These loans should be considered carefully, and perhaps only as a last resort. According to Howard, private student loan interest rates may be much higher than federal loans, and a student often has little flexibility on repayment plans. Like other school loans, private loans are not usually discharged during a bankruptcy. Students short on money might be better off attending a less expensive community college for their first two years to satisfy many general education requirements. Others might consider working more hours and attending school part-time if necessary. Borrowing from family members such as grandparents might be another option.

 

Post-college plans and opportunities

We emphasized to our daughter that paying off student loans should be her first priority after college. Our family places a high importance on living free of debt, and she’s getting the message that student loans are no exception to this rule. We are encouraging her to plan on “living like a student” for several years after she graduates so that she can put every dollar possible toward paying off her student loans.

Depending on your graduate’s line of work, he or she may also want to look into student loan forgiveness programs. Many teaching and public service jobs offer this as a benefit to encourage college graduates to work in underserved communities.

As Mary Hunt, author of the book Raising Financially Confident Kids, wrote: “It’s not as if student loans and big credit card balances are mandatory graduation requirements. … It is possible to graduate debt-free, but it does take a lot of work. And you’ll have to buck a financial system that encourages students to take the easy way out by diving into a lifetime of debt.”

 

I Don’t Need a Credit Card But Want to Build Credit. What Can I Do?

build_credit_without_credit_card

Good credit is essential if you hope to borrow money one day for things like a new car or home. But good credit can also be important for smaller things like renting an apartment or even landing a new job. And one of the easiest ways to build the credit necessary for these things is by getting a credit card.

If you have no credit, or even bad credit, and you’re averse to getting a secured credit card to help improve your credit, there are other ways to go about establishing and building good credit.

Here are three other options for building credit and improving your credit scores.

1. Get a Credit-Builder Loan

A credit builder loan is a loan with a set amount you pay back over a set period of time (referred to as an installment loan). Most have repayment terms ranging from six months to 18 months, and because these loans are reported to one or more of the three national credit reporting agencies, on-time payments will help build up your credit.

Here’s how it works: A lender places your loan into a savings account, which you can’t touch until you’ve paid it off in full, allowing you to build credit and savings at the same time. And because loan amounts for credit builder loans can be quite small (just $500) it can be much easier to make monthly loan payments.

Credit-builder loans are best for people with no credit or bad credit. But, if you have good credit but don’t have any installment accounts on your credit report, a credit-builder loan could potentially raise your score since account mix is another major credit-scoring factor.

2. Pay Your Rent 

If you’re in the process of moving or need to do so in the near future, it’s a good idea to find a landlord who reports your rent payments to the major credit bureaus. Depending on what credit report or credit score is being used, these on-time monthly rent payments can give you a quick and easy credit reference and help you qualify for a loan (or at least another apartment down the road).

3. Become an Authorized User

Asking your spouse, partner or even your parent to add you onto one of their accounts as an authorized user could give your credit a boost. If the account they put you on has a perfect payment history and low balances, you’ll likely get “credit” when that account starts appearing on your credit reports. You won’t necessarily need to use the card to benefit from this strategy. It is a good idea to have your friend or family member check with their issuer to be sure that it reports authorized users to the three major credit reporting agencies (not all do).

Remember, one of the most important things in building good credit is making timely loan and bill payments. Bills like rent or utilities may not be universally reported to the credit bureaus, but if they go unpaid long enough, they can hurt your credit, especially if they go into collection. (You can see how any collections accounts may be affecting your credit by viewing your two free credit scores, updated each month, on Credit.com.)

If your credit is in rough shape, due to a collection account or other payment history troubles, you may be able to improve your scores by paying delinquent accounts, addressing high credit card balances and disputing any errors that may be weighing them down. And remember, you can build good credit in the long term by keeping debt levels low, making timely payments and adding to the mix of accounts you have as your score and wallet can handle it.

[Offer: If you need help fixing your credit, Lexington Law can help you meet your goals. Learn more about them here or call them at (844) 346-3296 for a free consultation.]

More on Credit Reports & Credit Scores:

Image: Jacob Ammentorp Lund

The post I Don’t Need a Credit Card But Want to Build Credit. What Can I Do? appeared first on Credit.com.

3 Situations in Which a 401k Loan Can Be a Good Idea

Man Paying Bills With Laptop

If you hear the words “401(k) loan” and immediately think to yourself “ooh, that sounds like a bad idea”, good for you! You’re on the right track.

In most cases borrowing from your savings isn’t a smart move, particularly when it’s from an investment account like your 401(k) that’s meant to sit untouched for decades so that it can grow and eventually allow you to retire.

But a 401(k) loan is unique. We covered the ins and outs of how it works in a previous post, but here are the basics:

  • The loan comes directly out of your 401(k) investments.
  • Repayment is made through automatic payroll deductions.
  • Both the principal and interest are paid back into your 401(k), so you truly are borrowing money from yourself.
  • The loan is typically easy and quick to get.

The fact that you pay the interest back to yourself is especially unique and makes 401(k) loans attractive in certain situations.

So while you should proceed with extreme caution when considering a 401(k) loan, and while in most cases there are better options available to you, here are three situations in which a 401(k) loan can be a good idea.

1. Increase Your Investment Return

There are certain situations where you can use a 401(k) loan to increase your overall investment return. Here’s a hypothetical example showing how it can work.

Let’s say that the following things are true:

Given that scenario, here are the steps you could take to increase your expected investment return while only adding a small amount of risk:

  1. Take out a 401(k) loan, borrowing money from the bond portion of your account.
  2. Put the loan proceeds into a taxable investment account and invest it in the exact same bond fund (or something similar).
  3. You will earn the exact same return on the bond fund as you would have in the 401(k), less the cost of taxes you have to pay on any gains.
  4. As you pay back your 401(k) loan, the 4.5% interest is essentially a 4.5% return since it’s going right back into your 401(k).

In other words, you’re getting essentially the same return on your bond fund in the taxable account, minus the tax cost. But you get a higher return in your 401(k) because the interest rate is higher than the expected return on the bond fund.

And since your bond investment is unlikely to fluctuate too much (though it can certainly fluctuate some), in a worst-case scenario where you lose your job and have to pay the loan back in full within 60 days, you will likely to have the money available to do so.

Here are a few things to keep in mind as you consider this approach:

  • The more expensive your 401(k) is, the more likely this is to work out in your favor. That’s because you can choose a lower cost bond fund in your taxable account and save yourself some fees over the life of the loan.
  • The higher your tax bracket, the less advantageous this is since the tax cost in the taxable investment account will be higher.
  • Make sure you’re not sacrificing your ability to contribute to your 401(k), and definitely make sure you’re not missing out on any employer match.

2. Paying off High-Interest Debt

If you have high-interest debt, taking a 401(k) loan to pay it off could be a good idea.

Before you do so, make sure you’ve exhausted all other options. Do you have savings you could use to pay it off? Are there any expenses you could cut back on so you could put that money towards your debt? Are there any creative ways you could make a little extra money on the side?

Any of those options are better than a 401(k) loan simply because they don’t require you to borrow against your retirement and they don’t come with the risks that a 401(k) loan presents.

But if you’ve exhausted those other options, paying off high-interest debt with a 401(k) loan has two big benefits:

  1. Your 401(k) loan interest rate is likely lower than the rate on your other debt.
  2. You pay the 401(k) loan interest to yourself, not someone else.

The big risk you run with this strategy is the possibility of losing your job and having to pay the entire 401(k) loan balance back within 60 days. If that happens and you’re not able to pay it back, the remaining balance will be taxed and subject to a 10% penalty. That outcome is likely much more costly than your high-interest debt.

3. Financial Emergency

If you’re in a situation where you absolutely need money for something and you don’t have the savings to handle it, a 401(k) loan may be your best option.

Here’s why:

  • It’s quick. You can often get the loan with just a few clicks online.
  • There’s no credit check. You’ll be able to get it even if you don’t have a great credit history.
  • It likely has a relatively low interest rate and you pay the interest back to yourself.

In an ideal world this is exactly what your emergency fund would be there for. But of course life happens and a 401(k) loan can be a good backup plan.

Be Careful

A 401(k) loan should almost never be your first choice. Other than situation #1 above, which should only be done very carefully, in most cases there’s another route that would be better.

But in the right situations a 401(k) loan can be helpful and may even lead to better returns. As long as you proceed with caution, it can be a valuable tool in your financial arsenal.

The post 3 Situations in Which a 401k Loan Can Be a Good Idea appeared first on MagnifyMoney.

What is a 401(k) Loan and How Does it Work?

personal loan_lg

If you’re in need of money and your savings account balance is low, you may be tempted to use the handy little loan provision that most 401(k) plans offer. That’s right! You can probably borrow money from your 401(k). Right from your own account! It’s a nifty feature, but is it a good idea?

Today we’re going to start examining that question by diving into what exactly a 401(k) loan is and how it works. The next post in this series will look at a few situations in which borrowing from your 401(k) can work in your favor.

Let’s get into it!

Quick note: Every 401(k) plan has different terms and conditions and some plans don’t allow for loans at all. Consult your Summary Plan Description for specific details about how your plan handles loans.

What Is a 401(k) Loan?

When you borrow from your 401(k) you are actually borrowing money directly from yourself.

The loan is taken directly out of your 401(k) account balance. Then a repayment plan is created based on the amount you borrowed and the interest rate and those payments are made back into your 401(k) account, typically through an automatic payroll deduction.

In other words, you are borrowing from yourself and paying yourself back. Both the principal and the interest on the loan eventually make their way back into your 401(k).

How Much Can You Borrow?

Figuring out how much you can borrow from your 401(k) can be a little tricky, but here’s a quick summary.

If you haven’t had any outstanding 401(k) loan balance within the past 12 months, you are allowed to borrow the lesser of:

  • $50,000, or
  • 50% of your vested 401(k) balance. If that amount is less than $10,000 then you can borrow up to $10,000, but never more than your total account balance.

Sounds simple, right? But wait, there’s more…

If you have had an outstanding 401(k) balance within the past 12 months, the amount you’re allowed to borrow is reduced by the largest balance you had over that period.

Let’s look at a few examples:

  • Example #1: Joe has $25,000 in his 401(k) and has not had a 401(k) loan balance within the past 12 months. He is allowed to borrow up to $12,500.
  • Example #2: Theresa has $15,000 in her 401(k) and has not had a 401(k) loan balance within the past 12 months. She is allowed to borrow up to $10,000.
  • Example #3: Becca has $150,000 in her 401(k) and has not had a 401(k) loan balance within the past 12 months. She is allowed to borrow up to $50,000.
  • Example #4: Steve has $25,000 in his 401(k) and did have a 401(k) loan balance of $5,000 within the past 12 months. He is allowed to borrow up to $7,500.

What Is the Interest Rate?

Each 401(k) plan is allowed to set their own loan interest rate. You should consult your Summary Plan Description or ask your HR rep for details about your specific plan.

However, the most common interest rate is the prime rate plus 1%.

What Can the Money Be Used For?

In many cases there are no restrictions on how you use the money. It can be put to work however you want.

But some plans will only lend money for certain needs, such as education expenses, medical expenses, or a first-time home purchase.

How Long Do You Have to Pay the Loan Back?

Typically, your 401(k) loan must be paid back within 5 years. If the loan is used to help buy a house, the term may be extended up to 10-15 years.

The catch is that if your employment ends for any reason, the entire remaining loan balance is typically due within 60 days. If you aren’t able to pay it back within that time period, the loan defaults.

What Happens If You Default on the Loan?

A 401(k) loan defaults any time you aren’t able to comply with the terms of the loan. That could be failing to make your regular payments or failing to repay the remaining loan balance within 60 days of leaving the company.

When that happens, the remaining loan balance is counted as a distribution from your 401(k). That has two big consequences:

  1. Unless you’re already age 59.5 or meet other special criteria, that money will be taxed and hit with a 10% penalty.
  2. The defaulted amount is not eligible to be rolled over into an IRA or other employer retirement plan. So there’s no way to avoid the taxes and penalty.

The good news is that the default is not reported to the credit bureaus and therefore has no impact on your credit score. Though if you’re applying for a mortgage or other loan, the lenders may ask about any 401(k) loan defaults and factor that into their decision.

How Do You Apply for a 401(k) Loan?

And as long as you have a vested 401(k) balance, the process loan application process is typically pretty simple.

Other than adhering to any specific restrictions your plan may enforce (see above), it’s usually as easy as requesting the loan. That can often be done online or at worst with a little paperwork through your human resources department.

There is no credit check for 401(k) loans, which can make them easier to get than other types of loans. And loans must be available to all employees, so you should be able to get approved no matter what your position is in the company.

Other Considerations

Here are a few other things to consider as you weigh the pros and cons of taking out a 401(k) loan:

  • Other than the possibility of default, the biggest potential cost is the missed investment returns while the money is out of your 401(k). Depending on the size of the loan and the market returns during the life of the loan, that could be significant.
  • Your spouse often has to sign off on the loan.
  • You can have more than one 401(k) loan out at a time, but the total loan balance can’t exceed the limits described above.
  • There may be a fee involved with taking out the loan.
  • Your loan payments do not count as 401(k) contributions, and your employer may or may not allow you to keep contributing to your 401(k) while your loan is outstanding.
  • Because the loan is not reported to credit agencies, a 401(k) loan is not a way to build your credit history or increase your credit score.
  • You typically cannot take a loan from a 401(k) you still have with an old employer.

Is a 401(k) Loan a Good Idea?

Those are the nuts and bolts of 401(k) loans, so is taking out a 401(k) loan a good idea? The answer is a definite maybe. There are times where it can be the best option, times where it’s a bad idea, and times where it can actually increase your overall investment return. Regardless, you should be sure to do a deep analysis and determine if you will definitely be able to pay the loan back in a timely manner before utilizing the 401(k) loan.

The post What is a 401(k) Loan and How Does it Work? appeared first on MagnifyMoney.

Help! My Kid Messed Up My Credit

worried-parent

Whether you handed over your credit card too many times, co-signed a loan or made your child an authorized user on that travel rewards card, there is a chance that your credit took a hit. Your hope was that they’d be responsible, but giving them access to your line of credit can all too often become a free-for-all with serious consequences. If that describes your situation, here’s what you can do.

Co-Signers Must Pay — & Rebuild Their Credit

“If your child fails to repay according to terms, the co-signer will suffer the same consequences as the primary borrower when it comes to their credit rating,” Bruce McClary, vice president of Communications for the National Foundation for Credit Counseling, explained via email. Worse still, “if their child skips town, the lender can pursue the parents for repayment.”

A proactive step may involve refinancing the loan exclusively in the name of your child before the account falls into delinquency. If it’s a student loan in question, you can also refer your child for student loan counseling with a nonprofit agency, McClary said.

If the worst has already happened, however, there’s really not much you can do. (You could take your child to court, McClary said, but you would still be on the hook until the matter is resolved in your favor.) Take a long, hard look at your finances to determine the best way to repay the loan. Then in the meantime, focus on rebuilding your credit, one step at a time. To start, you’ll need to obtain a copy of your credit report — you can view your scores, updated monthly, for free on Credit.com — and check them for accuracy. (You go here to learn how to dispute any errors you might find.) You can also fix your credit in the long-term by keeping debt levels low, making all future loan payments on time and limiting new credit applications while your score rebounds.)

Credit Card Holders May File Charges

As with any balance charged to a credit card, the lender will identify the person responsible for repayment as the one named on the account, McClary said. The same rule applies for authorized users — the cardholder is responsible for charges on the card.

If your child went on a shopping spree without your permission, you may consider seeking legal advice regarding options for filing charges. You can also file a dispute of charges with the issuer and submit a police report to establish the claim of fraudulent activity. Finally, a parent can add a statement explaining the situation to their own credit report.

Remember, when giving your child access to your credit, you’re not just giving them permission to make purchases in your name, you’re putting your own credit on the line. Make sure you’ve gone over the value of having good credit — and how bad credit can hurt you both.

[CREDIT REPAIR HELP: If you need help fixing your credit but don’t want to go it alone, our partner, Lexington Law, can manage the credit repair process for you. Learn more about them here or call them at (844)346-3295 for a free consultation.]

More on Credit Reports & Credit Scores:

Image: NADOFOTOS

The post Help! My Kid Messed Up My Credit appeared first on Credit.com.

Understanding Hard Inquiries on Your Credit Report

HardInquiriesAs we’ve written about previously on the Equifax Finance Blog, some consumers are reluctant to check their credit report because they are concerned that doing so may impact their credit score. While pulling your credit report does result in an inquiry on your credit report, it will not affect your credit score. In fact, checking your credit report may help you get in the habit of monitoring your financial accounts.

One of the best ways of establishing credit smart behavior is to understand how inquiries work and what counts as a hard inquiry on your credit report.

What is a hard inquiry?

When a lender or company makes a request to review your credit report as part of the loan application process, that request is recorded on your credit report as a hard inquiry, and it usually will impact your credit score. This is different from a soft inquiry, which can result when you check your own credit or when a promotional credit card offer is generated. Soft inquiries typically do not impact your credit score.

Hard inquiries serve as a timeline of when you have applied for new credit and may stay on your report for up to 24 month s. Depending on your unique credit history, they could indicate different things to different lenders.

Recent hard inquiries on your credit report tells a lender that you are currently shopping for new credit. This may be meaningful to a potential lender when assessing your creditworthiness.

Exceptions to the impact on your score

If you’re shopping for a new auto loan, mortgage loan, or student loan,the multiple inquiries are generally counted as one inquiry.

The timeframes vary for these exceptions: Hard inquiries may have a limited effect of just a few weeks or potentially up to 45 days, depending on the credit scoring model being used.

This situation does not apply to credit cards or when you apply for several credit cards at once..

Plan before shopping for a loan

Before shopping for a loan, it’s always smart to proactively plan your finances.

First, learn whether the type of credit you’re applying for can have its hard inquiries treated as a single inquiry. If so, determine the applicable timeframe. Then you can plan your shopping period, accordingly.

Second, you may also want to check your credit before getting quotes to understand what information is reported in your credit file. You can obtain a free annual credit report from Equifax, Experian and Transunion each per year here.

If you’re worried about the effect that multiple hard inquiries may have on your credit file, it may be tempting to accept an offer early rather than allow multiple hard inquiries on your credit. However, consider your individual situation carefully before cutting your shopping period short. In many cases, the impact hard inquiries have on your credit score from shopping around will likely be minimal compared to the long term benefits of finding a loan with a low interest rate.

The more informed you are about what happens when you apply for a loan, the better you can prepare for the process. Making a plan for how you will manage hard inquiries now, before you start shopping, may help you prepare for any impact they might have on your credit score.

Making That Last Loan Payment: What You Need to Know

personal_loan

Paying off a loan is one of the best financial feelings there is, and nothing kills that vibe more than finding out you made a mistake in the process. When you should be celebrating, you’re left frustrated and wondering why and how you messed up.

These mistakes could also end up damaging your credit score or leading to other financial consequences if you aren’t careful in planning your loan payoff.

For example, if you think you paid off the loan but a balance remained after what you thought was your final payment, you could incur late fees or a late payment entry on your credit report. Payment history has the most impact on your credit scores, so missing bill due dates can cause serious damage. Sometimes, people don’t realize they messed up their loan payoff until they notice a drop in their credit scores or receive a notice from a debt collector.

You don’t want to learn these things the hard way, so we asked loan experts to tell us about the most common loan payoff mistakes borrowers make. Here’s what they say you need to know.

Ask For the Payoff Amount

An outstanding loan balance will continue to accrue interest until it’s paid in full. If you check your current balance and schedule a payment to cover the whole thing, that balance could grow slightly between the time you entered the payment information and when the payment processes. This is the most common thing people overlook, according to experts in the student loan, auto loan and mortgage industries.

“I think some people may not understand that the payoff amount is different from the amount on their last statement,” said Nikki Lavoie, a spokeswoman for Navient, a major student loan servicer. “Borrowers should really ask their servicer for the payoff quote because it really might be more than you think.”

That scenario most frequently pops up when you’re trying to pay off a loan ahead of schedule (which can help you save a lot of money), but the same issue can arise even if you’re taking the loan to term.

“If a borrower has incurred any additional charges, including late fees, non-sufficient check fees, or other charges that were not included in the original loan amount, those charges may still be owed even after the final installment payment is made,” Rich Hyde, chief operating officer of auto lender Prestige Financial, wrote in an email. “Additionally, if any of the monthly payments have been made a few days late, there could be remaining interest charges.”

Overlooking that extra balance is where things can get really messy. Heather McRae, a senior loan officer at mortgage lender Chicago Financial Services, said people tend to learn the hard way how important it is to confirm your payoff amount.

“What I mean by ‘they found out the hard way’ is they stopped making payments because they thought they paid off the loan and then they begin to receive late notices from the creditor,” McRae wrote in an email. “I have seen this happen and its negative impact on credit.”

Depending on your creditor, you might be able to find out the payoff amount by checking your account online, or you could call and ask for it. Make sure you ask what date that amount is good through and how long it will take for the payment to process once it’s received. Paying through the mail will likely be the slowest option (leaving the most room for error), but even paying online requires careful attention. For example, your payment might post the same day if it’s made before 4 p.m. eastern time, but if you’re making a payment at 5 p.m. Pacific time on a Friday, your payment may not go through till Monday. Yes, it’s a little complicated, so that’s why you want to take the time to ask questions about a payoff quote.

Making the appropriate final payment is the main mistake Lavoie, Hyde and McRae see borrowers make when paying off a loan, but there are a few other things to know.

Keep Good Records

It’s not a bad idea to hold onto proof that you paid off a loan, just in case someone tries to collect on it later. To do that, you’ll need to ask for a notice stating the loan is paid in full, which you may receive automatically, but you may not. Ask your lender when you can expect to receive that notice, and follow up if that date passes and you haven’t gotten anything.

Stop Your Automatic Payment

If you’ve scheduled an automatic transfer from your bank account to your creditor, make sure that payment stops after you’ve made your final payment. Again, this often happens automatically, but you may have to manually stop it.

Watch Your Credit

Following a loan payoff, you’ll want to make sure it’s reported to the major credit reporting agencies. You should regularly review your credit anyway — you can get your free credit reports once a year at AnnualCreditReport.com — but it’s especially important after a major change like a loan payoff.

You may see your credit score change after that loan payoff, as well, so don’t be surprised when you check your credit scores and see some different numbers. How much your score changes will vary by situation and other credit history, but you can get an idea of why your scores changed by reviewing your free monthly credit report summary on Credit.com

More Credit Score Reads:

Image: Wavebreakmedia Ltd

The post Making That Last Loan Payment: What You Need to Know appeared first on Credit.com.