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Banking & Credit

The Perils of Skipping Loan Payments This Holiday Season

by sshrx_ns3li1
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The holidays are fast approaching and that means there are presents to buy, trees to trim and merriment to be made, all of which will cost you money. Fortunately, your credit union, bank or credit card issuer may be willing to let you skip your monthly payment in December or January.“Skip-a-pay [programs] are a popular way for banks to add quick fee revenue while giving their clients some extra cash in their pockets,” says John Oxford, a spokesman for Renasant Corporation, which operates 171 banking, investing and wealth management offices in the South. While Renasant Bank previously offered a skip-a-payment program, it does not currently have one.At other institutions, these programs allow customers to skip their monthly payment in exchange for a small fee. Some lenders may even donate a portion of the fee to a local charity so it seems like a win-win for all involved.Not so fast, say some financial experts. Skipping one payment might not seem like a big deal, but it can have a negative impact on your finances.5 Reasons to Skip the Skip-a-Payment OptionRich Hyde, the COO of Prestige Financial Services in Salt Lake City, works with clients trying to raise their credit score and finds some use skip-a-payment programs to stretch their money through the holidays to buy gifts for friends and family. Although skipping a payment may be preferable to racking up debt on a high-interest credit card, it doesn’t come without drawbacks.You lengthen the term of your loan. You may be skipping a payment, but you’ll still need to eventually make it. “They are essentially letting you take the payment from December or January and adding it to the life of the loan,” says Kelsa Dickey, owner of Fiscal Fitness Phoenix. Skipping a payment every year means you could be paying an auto loan for five to six months longer than originally planned.You add to the interest you pay. Not only will the term of the loan be longer, but you’ll pay more interest as well. A $5,000 credit card balance at a 24.99 percent APR accrues roughly $100 in interest each month. As a result, skipping a payment means you’ll end up owing more the next month even if you haven’t used your card.You might forget to make the following payment. Hyde is concerned skipping one payment might snowball into several payments. “Customer behavior can be impacted [by skipping a payment],” he says. “Anything that gets people out of the habit of paying is a bad idea.” You could ding your credit score. If you do happen to forget the next month’s payment, than you could see a drop in your credit score. Plus, you’ll likely get hit with a late fee which typically runs around $35. Dickey adds that some people might be tempted to skip payments even if their lender doesn’t offer a skip-a-payment program. However, doing so could negatively impact your credit score and damage your relationship with the lender, making it difficult to receive loans or lines of credit in the future.You are reinforcing poor money habits. While all the above reasons are enough to say “no thank you” to skipping a payment, Dickey says there is one more to consider. “By skipping a payment, you’re saying Christmas gifts are more important than something like a car that gets you to and from work,” she says. “There’s a much deeper rooted problem of putting things that are not essentials in front of things that are essentials.” Declining to skip a payment is one step toward creating healthy money habits and smart spending priorities.When Skipping a Payment Might Make SenseWhile experts say skipping a payment to buy gifts doesn’t make much sense financially, there may be a time and place for skip-a-payment programs.“If a consumer wants to free up cash for the holidays and doesn’t mind a minimal fee and an added month on their loan, it can be a beneficial short-term move,” Oxford says, “but it should not be used to avoid a payment just because the offer is there.” To minimize the impact of skipping a payment, he recommends people use a portion of their tax refund, if possible, to make an extra payment later in the year. For people who are in a bind and considering a payday loan or going into debt to pay the bills, Hyde says skipping a payment would be the lesser of two evils. Meanwhile, Dickey believes using a skip-a-payment program is understandable in cases of unemployment. “If it comes down to putting food on the table, yes [skip a payment],” she says.Skipping a payment may also be a good strategy if you are planning to use the money from that payment to wipe out a high-interest debt. Installment loans, such as those for cars, typically have a much lower interest rate than what might apply to a credit card. Financially, it might make sense to skip an auto loan payment for one month, and send that money to pay off a credit card account.However, Dickey says most people don’t skip payments for strategic reasons. Instead, they do so to spend more on gifts or holiday deals. She asks, “If your parents knew you were skipping a payment or going into debt to give them a gift, would they want it?” She’s betting the answer is probably no. .

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Banking & Credit

Goodbye FICO, Hello VantageScore?

by sshrx_ns3li1
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For more than 25 years, credit scores have been practically synonymous with FICO, the shortened name of the Fair Isaac Corporation. However, a new company, VantageScore Solutions, has emerged in recent years and is chipping away at FICO’s dominance in the credit score business. “VantageScore Solutions is an effort to provide more choice in the marketplace,” says Ezra Becker, vice president of research and consulting for the credit bureau TransUnion. The credit scoring company is the result of a combined effort of all three major credit bureaus: Experian, Equifax and TransUnion.The company was founded in 2006 and has gained traction. From 2014 to 2015, VantageScore credit scores were used more than 6 billion times, double the amount used from 2013 to 2014. Just as with FICO scores, VantageScore credit scores are used to determine the likelihood someone will pay back a debt. “Credit scores are a scaled representation of the probability of default,” Becker explains. Last December, House Resolution 4211 was introduced in Congress to allow Fannie Mae and Freddie Mac to use alternate credit scoring methods when making mortgage decisions. Jill Gonzalez, analyst for WalletHub.com, says if the bill is passed, it might result in the programs adopting VantageScore, a move that could be a major coup for the company.“What Fannie and Freddie do now is use outdated models,” Gonzalez says. A switch to VantageScore would change the way applications are evaluated and make it easier for borrowers who have low credit scores under the FICO model to purchase a home. Plus, it could further dent FICO’s hold on the credit score industry. Navigating the Sea of Credit ScoresBecker is quick to note Americans use the word FICO to describe credit scores in the same way they may use the word Kleenex to describe facial tissue. The word has turned into a generic term for how lenders evaluate creditworthiness, but Becker says there is actually a variety of credit scores that can be used.Each of the major credit bureaus has, at one time, created its own score. Other companies, like CreditXpert, are in the business as well. Even within FICO, there are numerous scores. While FICO Score 8 may be most widely used for credit card applications, student loans and other credit decisions, there are FICO Auto Scores, FICO Bankcard Scores and older versions of FICO’s main scoring model that may be used for mortgages.VantageScore seems to be making in-roads in the industry, in part, because it offers a simplified scoring method. “VantageScore has three scoring models,” says Bethy Hardeman, chief consumer advocate at Credit Karma. “For comparison, FICO has over 50 different scoring models.” While each credit bureau may use a different version of the FICO score for various lending scenarios – for example, for mortgage lending, Experian uses FICO Score 2, while Equifax uses FICO Score 5 – VantageScore is uniform across all three companies. The only reason a VantageScore could vary from one bureau to another is if a lender chooses not to report an account to all three companies, according to Becker.What It Means for YouA move to VantageScore could be good news for consumers, particularly those with a weak credit history. VantageScore 3.0 is the most current version and looks back 24 months at a person’s credit history, a feature that allows it to score more people who have little or no recent credit history. “[The company’s] latest scoring model can score up to 35 million more consumers compared to other models due to its broader consideration of credit data,” says Hardeman, adding that the free scores offered on Credit Karma come from VantageScore. The wider consumer net is also because the model can score people with as little as one month of credit history compared to six months for FICO scores, Gonzalez explains. Score models are created using anonymous sample consumer demographics and credit data. While VantageScore 3.0 is a relatively new model, older FICO scores may be based on decades old data. “A score created in 2002 may not be appropriate for the lending environment and consumers today,” Becker points out.The bottom line for borrowers is that VantageScore may make it easier for some people to get access to credit, but it won’t wipe away all financial sins. “If someone is undeserving of credit due to a history of not paying [bills], that won’t change [with VantageScore],” Gonzalez says.Rather than hope a change in score will make credit available, consumers should stick with the tried-and-true methods of paying on time and limiting the debt they carry. .

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Banking & Credit

6 Credit Card Blunders to Avoid This Holiday Season

by sshrx_ns3li1
written by sshrx_ns3li1

If you've just finished paying off your credit card debt from last year's holiday shopping, you know that gift buying and paying with plastic can be a dangerous combination.There are so many things that can go wrong (and right) that it would take forever to list every possible way you could spend yourself into the poor house. But whether you're someone who always pays off credit card debt every month or you're still working on paying off debt from Christmas 2009, be sure to at least avoid these credit card blunders.[See: Best Credit Cards: Find the Right Card for You.]Falling for store credit card deferred interest deals. Planning on buying someone a big, expensive gift, or maybe getting something monumental for yourself? Wondering if you should really splurge? That's where deferred interest often lures consumers in. The store will promise that you won't pay interest if you pay off the entire purchase by the end of the advertised period."Every holiday season, many store chains that sell large and expensive items like furniture or appliances start advertising deferred interest offers on their store-branded credit cards," says Alex Gerard, CEO of CardsMix.com, a credit card comparison site. "These offers seem attractive, but they can be dangerous for your pocket if you have little discipline, like the majority of us."If you do have discipline, deferred interest deals can be swell. But it can be devastating if something goes wrong."If you don't pay off the entire purchase and owe even a penny at the end of the advertised period, you will be charged the interest for the whole introductory period," Gerard says.[See: Spend a Windfall Wisely.]Forgetting to track your spending. "The holiday spirit blinds you to how much you're really spending – until the bill comes due in January," says Howard Dvorkin, a certified public accountant and chairman of Debt.com. "So my suggestion is to keep a running list of all your holiday expenses and post them on the refrigerator or somewhere prominent in your home. Once you hit a dollar figure you agreed to stay below – whether it's $300 or $500 or even $1,000 – you and your family agrees to stop spending for the holidays."And if you still have some important gifts you really want to buy? "Everyone agrees to cut from somewhere else in the non-holiday part of the family budget," Dvorkin says.Carrying revolving debt from the holidays. Consumers plan on spending an average of $1,159 on their holiday purchases this year, according to a just-released annual survey of 2,006 consumers (between Oct. 5-9, 2016) from the credit card Discover.You know revolving debt is important to avoid, but you may want to do some math before you whip out your credit card, so you can see what you're getting into. If you were to spend $1,159 on holiday gifts this year, and you had a credit card with an average interest of 15.18 percent (the national average at the time of this writing, according to CreditCards.com), and you planned to take six months to pay it off, you would pay $201.81 each month, spending a total of $1,210.86.That arguably isn't too expensive, spending $51.86 to float $1,159 in gifts in exchange for making your family or friends happy. But, of course, the question becomes – do you only carry that revolving debt for those six months? If you're likely to buy more with your credit card and not pay it off right away, then suddenly that $201.81 payment is going to balloon and will likely become a weight around your neck. For all you know, next holiday season, maybe you'll still be paying off that $1,159 in gifts.Thus, it's vital you pay off that holiday credit card debt as soon as possible.[See: 10 Easy Ways to Pay Off Debt.]Failing to remember that the holidays are ideal for scam artists. It's smart to be something of a Grinch, assuming the world isn't full of good people when you're shopping at your computer or at the mall. From pickpockets to scammers with sophisticated equipment hoping to steal your credit card information when you shop at a public place with unprotected Wi-Fi, some people are out to get you.In Calgary, Canada, for instance, police recently alerted the media that they've seen an escalation in text messages asking consumers if they want to be secret shoppers, and while that might sound plausible, no, these text messages aren't legitimate. And throughout North America, there have been reports of fraudulent online stores and fake shopping apps being created, just waiting for people to find them and type in their credit card information.Be careful about applying for store credit cards. Like deferred interest deals, you'll get a lot of sales employees asking if you'd like to apply for a store credit card. Unless you shop there all the time, and you have a great track record of repaying your credit card debt, your answer should be: no, thanks."It's during the holidays that consumers, revolvers especially, are most susceptible to credit card debt," says Kerri Moriarty, CEO of Cinch Financial, a website that makes customized suggestions to people on what types of financial products they should get.She admits that it might seem "like a no-brainer," to open a store credit card to get a 20 percent discount, "but when you do the math on what it takes to really benefit from the action as a year-round decision and not just a Christmas Eve one, you might be surprised to realize how little of a deal there is – and even more so if you'll carry a balance on that card," she says.Forgetting about rewards on credit cards – or focusing too much on them. According to the aforementioned Discover survey, 46 percent of shoppers said their main reason for using credit cards for holiday shopping was to earn rewards. This is great, if you're racking up rewards and paying off your cards every month. But every credit card and personal finance expert who ever lived will tell you to not overspend just to get a bunch of rewards. Drowning in credit card debt isn't much of a reward.10 Tips for a Budget-Friendly Cyber Monday.

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Banking & Credit

Rising Credit Score but Rotten Credit Report?

by sshrx_ns3li1
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If you have a dismal credit score, and you plan to apply for loan for a new house or car, you probably are doing whatever you can to bring your numbers up. You're paying your bills on time. You've been studying your credit reports and contacting the bureaus if you find any incorrect information. Maybe you've even taken out another small loan, just to show lenders that, yes, you've got this.But you may not have this. Not yet, anyway. A high credit score doesn't guarantee a loan. If you are planning on applying for a loan, keep the following in mind.[See: 12 Simple Ways to Raise Your Credit Score.]Your credit history has more to do with getting a loan than your credit score. According to Fair Isaac Corporation, which created the credit scoring algorithm that most lenders use when making lending decisions, excellent credit is when your score is 720 or more. Good credit would be 690 to 719. Fair credit is 630 to 689. Bad credit generally includes scores from 300 to 629.Credit scores and reports do tend to go hand in hand. If you have a high credit score, you probably have a positive credit report. But not always. You may have been a financial disaster up until a few years ago when you completely turned things around, and ever since, have watched your credit score climb.And while a few years of good financial behavior may be enough to get you a loan, lenders may nevertheless be scared by your past.[See: 10 Easy Ways to Pay Off Debt.]"Ultimately, the approval process is different for each applicant and lender," says Carla Blair-Gamblian, a consultant at Veterans United Home Loans, a mortgage brokerage in Columbia, Missouri.And whoever is looking over your loan may not be really looking at your credit history; instead he or she may be using a software program to make the decision."Many lenders use an automated system from Fannie Mae or Freddie Mac to get an approval status, so even if you have a great credit score but had really poor credit in the past, you may not still be able to get a mortgage loan," says Jeremy David Schachter, a mortgage advisor at Pinnacle Capital Mortgage Corporation in Phoenix, Arizona.If you do get approved for a loan, it's then that the credit score kicks in and becomes relevant, according to Schachter."Whatever your credit score is at the time of the application is what's determined for the interest rates," he says.Some items look bad on a credit report; others, don't look as bad. This won't shock you, but the longer you take to make a payment, the worse your credit report looks in the eyes of a lender. If your debt winds up in court, or you have a bankruptcy in your past, or a lien on your home, that could definitely derail your attempt to get a loan.But if you have a lot of late bills in your past, but you always managed to get them paid within 90 days, a lender typically won't be too horrified by that.David Hosterman, a branch manager with Castle & Cooke Mortgage LLC in Greenwood Village, Colorado, says many financing companies have specific guidelines when it comes to "derogatory credit items," and often the guidelines are tied to a specific time."For instance when it comes to home loans, in regards to an FHA loan, [lenders] typically require that a customer is two years discharged from a bankruptcy before obtaining new credit," Hosterman says. "For conventional loans – Fannie Mae and Freddie Mac – they typically require a four-year waiting period."Hosterman adds that these are just guidelines, and if a customer can prove that a bankruptcy was due to extenuating circumstances, like being laid off from work, you might have a better shot of getting a loan with some lenders.[See: How to Live on $13,000 a Year.]Other factors can come into play when it comes to your loan's terms. If you get an approval, and you have that high credit score, you're almost certainly going to get a loan with good terms. But you may not get the best terms possible.When it comes to a mortgage, "interest rates are based on many different factors," says Schachter, adding that several of those factors include your credit score, what kind of property you're buying and how much your down payment will be.If you are denied a loan. You can always apply for another loan with someone else. You have probably heard that applying for multiple loans can make a credit score drop, just what you don't need, but according to MyFico.com, Fair Isaac Corporation's website, if you apply for multiple mortgage, auto or student loans within a 30-day period, your score won't be affected. The company recognizes that you're shopping for a loan, and that it isn't as if you're going to wind up with three car loans and two mortgages. If you apply for multiple credit cards, however, that could drop your score.If you keep getting turned down, however, then at some point you'll need to bow to reality and put off applying for a loan. Fortunately, time heals all financial wounds – eventually. For instance, a bankruptcy will be removed from your credit report, typically after seven years, if it's a Chapter 13 bankruptcy. A Chapter 7 bankruptcy will be removed after 10 years.So you may have to bide your time while you wait for another year or two to go by, and your credit report and its history becomes less worrisome to lenders. The good news is that as long as you keep doing what you're supposed to be doing, and paying off your debts and staying on top of your finances, your credit score will likely keep going up. When you are eventually approved for a loan, the terms you get will probably be even better than they would have been had you received your money today.12 Habits to Help You Take Control of Your Credit.

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Banking & Credit

5 Clues That You're Dealing With a Predatory Lender

by sshrx_ns3li1
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Consumers are often told to stay away from predatory lenders, but the problem with that advice is a predatory lender doesn't advertise itself as such.Fortunately, if you're on guard, you should be able to spot the signs that will let you know a loan is bad news. If you're afraid you're about to sign your life away on a dotted line, watch for these clues first.You're being offered credit, even though your credit score and history are terrible. This is probably the biggest red flag there is, according to John Breyault, the vice president for public policy, telecommunications and fraud at the National Consumers League, a private nonprofit advocacy group in the District of Columbia."A lender is in business because they think they're going to get paid back," Breyault says. "So if they aren't checking to see if you have the ability to pay them back, by doing a credit check, then they're planning on getting their bank through a different way, like offering a high fee for the loan and setting it up in a way that locks you into a cycle of debt that is very difficult to get out of."[See: 25 Fast Financial Fixes.]But, of course, as big of a clue as this is to stay away, it can be hard to listen to your inner voice of reason. After all, if nowhere else will give you a loan, you may decide to work with the predatory lender anyway. That's why many industry experts feel that even if a bad loan is transparent about how bad it is, it probably shouldn't exist. After all, only consumers who are desperate for cash are likely to take a gamble that they can pay back a loan with 200 percent interest – and get through it unscathed.Your loan has an insanely high interest rate. Most states have usury laws preventing interest rates from going into that 200 APR territory, but the laws are generally weak, industry experts say, and lenders get around them all the time. So you can't assume an interest rate that seems really high is considered normal or even within the parameters of the law. After all, attorney generals successfully sue payday loan services and other lending companies fairly frequently. For instance, in January of this year, it was announced that after the District of Columbia attorney general sued the lending company CashCall, they settled for millions of dollars. According to media reports, CashCall was accused of offering loans with interest rates around 300 percent annually.[See: 11 Money Tips for Women.]The lender is making promises that seem too good to be true. If you're asking questions and getting answers that are making you sigh with relief, that could be a problem.Nobody's suggesting you be a cynic and assume everybody's out to get you, but you should scrutinize your paperwork, says David Reiss, a professor of law at Brooklyn Law School in New York."Often predators will make all sorts of oral promises, but when it comes time to sign on the dotted line, their documents don't match the promises," Reiss says.And if they aren't in sync, assume the documentation is correct. Do not go with what the lender told you."Courts will, in all likelihood, hold you to the promises you made in the signed documents, and your testimony about oral promises probably won't hold that much water," Reiss says. " Read what you are signing and make sure it matches up with your understanding of the transaction."You're dealing with pushy sales people. Maybe you went into an office of your own power and free will but suddenly you're feeling as if you won't be able to leave the premises without taking out a loan?That is a very bad sign. Get out.John Henson, a vice president at LendingTree.com, says one red flag is "overly aggressive sales tactics, including using language which obfuscates the actual terms of the mortgage."He also says you could be in trouble if a lender can't explain some of the vocabulary associated with the loan, especially around fees, or if you're having trouble getting the loan terms from the salesperson right away, such as the interest rate, payment amount or number of payments.[See: 10 Ways to Feel Better About Your Money.]The loan is really easy to get. Borrowing money, especially a lot of it, should be difficult. After all, if you're going to borrow tens or hundreds of thousands of dollars for a car or house, a lender would be crazy to not vet you thoroughly and take a look at your credit score and report and make sure you can pay. Not doing that, of course, is partially how the country got into a recession about 10 years ago. Mortgage companies weren't doing enough to learn if consumers could afford to pay back what they were borrowing.So if you're in the process of getting a loan, especially a big one, and you're thinking, "Wow, this is easy, almost too easy," you're probably right. Breyault says you should be especially wary when you're on a car lot, and you're seeing signs like, "Guaranteed loan," and "No credit needed." Those dealerships are notorious for having predatory lending practices."The point of those car lots is as much to sell you on a high interest loan as it is to sell you a car," Breyault says.And if that's the case, it raises another question: If you're paying a fortune on a loan with crummy terms, how much confidence can you have that the same company is selling you a quality product?Dear Younger Me: 12 Financial Truths We Wish We Knew Earlier.

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Banking & Credit

What Happens if Trump Dismantles the Financial Regulations of the Great Recession?

by sshrx_ns3li1
written by sshrx_ns3li1

On Feb. 3, 2017, President Donald Trump signed two executive orders that will affect the financial sector. That change will come to consumers is undeniable. But exactly what change is coming is, naturally, up for debate.One of the orders requires the Treasury secretary to review the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in 2010 and designed to address some of the shortcomings in the financial system that led to the Great Recession. The other executive action mandates that the Labor Department review its Department of Labor Fiduciary Rule and look at its probable economic impact. As it stands now, the fiduciary rule is supposed to be phased in from April 10, 2017 to Jan. 1, 2018. The rule requires financial professionals who work with retirement plans or provide retirement planning advice to act in a way that's only based on the client's best interests.[See: 13 Money Hacks to Turbocharge Your Investments.]What do these executive orders portend for consumers? Nobody knows, but what follows are some educated guesses – with best-case and worst-case outcomes.How the housing market might be affected. There's potential good news and bad news here, according to Francesco D'Acunto, a finance assistant professor at the University of Maryland. In a study performed by D'Acunto and faculty colleague Alberto Rossi, in the wake of Dodd-Frank, banks decreased mortgage lending to middle class families by about 15 percent in 2014."Title XIV, which regulates the mortgage market, could be in for a full-scale renovation that might ultimately improve the fortunes of potential homebuyers from the middle class," D'Acunto says.So if you've been having trouble getting a mortgage for a house, you may have less trouble – provided you find a reputable lender. Because the downside, according to D'Acunto, is that "such a move risks bringing a return of predatory behavior in lending and mortgage cross-selling, especially by large banks and by non-bank mortgage originators."To avoid that, D'Acunto hopes that Congress intervenes "surgically on Title XIV" and only reduces the regulatory costs imposed by the new Qualified Mortgage classification. Created by the Consumer Financial Protection Bureau, the Qualified Mortgage category of loans includes features designed to make it more likely that a consumer will be able to pay it back.But if they don't intervene with the careful attention to detail D'Acunto advises, then expect "big changes, most of them negative," says David Reiss, a Brooklyn Law School professor whose specialty is in real estate finance.Potential best-case scenario: After being denied a mortgage for some time, you finally get your house.Potential worst-case scenario: Because you were steered to a high-interest loan you can't afford, you lose your house.[See: 10 Ways to Feel Better About Your Money.]How credit cards, auto loans and student loans might be affected. There has been a lot of talk that the CFPB could be a casualty in the executive order that asks the Treasury secretary to review Dodd-Frank. But will it be ripped to shreds or have its power diminished?The latter seems to already be happening. For instance, lawmakers, led by Sen. David Perdue (R-Ga.), are in the midst of trying to repeal a rule that is scheduled to go into effect this fall. The rule, among other things, would mandate prepaid-card companies to disclose detailed information about their fees, make it easier to access account information and would curb a consumer's losses if the cards are lost or stolen.A little weakening might not be so bad, Reiss says. He thinks the CFPB has tightened "the credit box too much, meaning that some people who could manage more credit are not getting access to it."But he also thinks if the CFPB were dismantled, the negatives would far outweigh the positives.Potential best-case scenario: Easier access to loans and more choices. And for some consumers who can now get that car or credit card, their quality of life improves.Potential worst-case scenario: Thanks to that easier access, some consumers end up stuck with high-interest loans with a lot of hidden fees and rue the day they applied for them.[See: 11 Money Moves to Make Before You Turn 40.]How working with your financial advisor might be affected. If the fiduciary rule is shelved, you may want to monitor your financial advisor a little more than you do now."The fiduciary standard requires advisors to act in their client's best interest – advisors are obligated to identify options that are best for their clients, regardless of how that affects the advisor's income from fees and commissions," says Peter Summers, assistant professor of economics at High Point University in High Point, North Carolina.Before that, Summers notes, financial advisors followed the suitability standard."They could recommend options that weren't necessarily the best for their clients, as long as those options were not actually harmful," he says.Summers offers up an example of how these two standards compare."Suppose there are two mutual funds I can recommend to my client," he says. "Both have the same long-run performance, say 10 percent per year. Fund A is one that is actively managed and generates fees of 2 percent per year. That is, 2 percent of my client's account balance for my firm. Fund B is passively managed, and generates much smaller fees, say 0.25 percent – one-quarter of a percentage point. Under the suitability standard, I can recommend fund A to my client without informing her that Fund B is an option. Under the fiduciary standard, I'm obligated to point out that Fund B is her best option." The result of all of this? "The Obama administration estimated that switching to the fiduciary standard would save [U.S. consumers] about $17 billion per year. Of course, that savings for individuals means lower incomes for financial advisors," Summers says.Potential best-case scenario: It's obviously better for you as an investor if financial advisors advise what's best for you and not themselves. And many investment management firms have promised to implement at least some aspects of the fiduciary standard, whether it becomes law or not. For instance, on Jan. 26, Morgan Stanley, one of the biggest American brokerages, announced just that. The way things are going, the market has spoken, and it doesn't seem likely that companies following the fiduciary standard will diminish.Potential worst-case scenario: Some investment firms surely won't follow the fiduciary standard. If you aren't on the ball and don't recognize that your advisor is actually following the suitability standard, you could wind up lining your advisor's pockets – instead of your own.8 Ways to Profit From Donald Trump's Infrastructure Plans.

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Banking & Credit

What You Need to Know About Taking Out Any Cash Advance

by sshrx_ns3li1
written by sshrx_ns3li1

Sometimes we hear advice so often – don't do this, don't do that – that we simply know something is a bad idea and forget why it's a bad idea.Taking out a cash advance is a bad idea. If you're ever in the position in which you feel as if you have to take a cash advance, you'd do well to learn what they are, and what taking one entails.[See: 13 Money Tips for Married Couples.]Understand what a cash advance is. Generally, when anyone refers to a cash advance, they're talking about using their credit card to get cash. Instead of, say, paying for groceries or a book with your credit card and later paying back your credit card, you're borrowing cash from your credit card and later paying it back.But, really, cash advances are also payday loans – you're getting a cash advance that you'll need to pay back. They're also the same thing as getting a refund anticipation loan, when a tax preparer gives you money that you expect to get back from the Internal Revenue Service. You could argue that if you go into overdraft with your bank account, you're getting a cash advance. Your bank paid something for you, and you'll have to pay them back.In any case, all cash advances involve money being advanced to you that you will have to pay back, probably fairly quickly – usually with a fee or interest and sometimes both.[See: 8 Financial Steps to Take After Paying Off a Debt.]Know they're expensive. That's the main drawback with cash advances. You're borrowing money and paying a hefty amount of money to do so.There are three main reasons cash advances are considered very expensive loans:Hefty fees. Often when you take out a cash advance with your credit card, you'll pay either 5 percent of the money you're borrowing or $10. And you'll pay whatever's greater. So usually if you borrow anything up to $100, you will always pay $10.High interest rates. You'll get this with credit cards and certainly with payday loans. Currently, the average credit card cash advance annual percentage rate is 22.11 percent, according to LowCards.com. And with few exceptions, it's more expensive to borrow actual cash from a credit card than to use your credit card to pay for merchandise and services. So if your APR is 22 percent when you use your credit card at the grocery store, a cash advance will likely have a considerably higher APR.The average APR for a payday loan is almost 400 percent, according to the Consumer Financial Protection Bureau. That, of course, makes it sound as if a credit card cash advance is a bargain, but they're both pretty bad deals.If you borrow $100 from a typical credit card, you'll pay back $22.11, plus $10, and so you're paying almost one-third of $100 to borrow $100. If you borrow $100 from a payday loan store, you'll typically be charged $15. That doesn't mean a payday loan store is better due to the …Short grace periods. Being charged $15 for a $100 payday loan doesn't sound bad, but you'll have less time (two weeks) to pay the money back than you would with a credit card (a month), and the real problems come if you decide you need to borrow more than $100 from a payday lender. For instance, if you borrow $400, you're probably paying back your lender $460 – in two weeks. And if your next paycheck is, say, $1,000, half of that paycheck will go back to the lender, and you'll have to try and make do until the next paycheck.And even though you should have 30 days to pay back your credit card cash advance before it's considered late, the interest begins accruing immediately.These are simply very expensive loans, according to Alexander Stern, a consumer attorney who has his own practice, Stern Legal Services, in Berkeley, California."A $1,000 loan can balloon into three times that amount given enough time and interest," he says.Look at the fine print. There's very likely something written in the legal jargon that you won't like. You just have to find it."It's extremely important to go over the terms and conditions of any short-term loan with a fine-tooth comb," Stern says. "Advertisements highlight the best parts of a product and rarely discuss the worst aspects. Salespeople are similarly focused on the sale rather than what is necessarily best for a given consumer. That's why it is important that you be proactive in reading any contracts carefully before signing."And because you'll never be able to carefully read a contract with a salesperson waiting at his or her desk or looking over your shoulder, you might want to consider taking the paperwork home and coming back the next day – or at least in an hour or two, giving yourself some time to read through everything and think about what you're doing.[See: 8 Ways to Maximize Your Credit Card Rewards.]Be aware of financial traps. The reality is, if your finances are shaky enough, you may feel you have no choice but to take out a cash advance. Just try to not be lulled into the idea that the financial institution lending you cash wants to help you. It wants to make money.Chrystine Julian, an artist and poet in Redlands, California, doesn't mince words. Due to a heart attack, surgery and other health issues, she recently needed a payday loan."My financial life is in the toilet," she says.She only borrowed $150 from an online payday lender and was able to pay it back for less than $20 over her original loan amount. By doing so, she avoided overdrafting her bank account and being charged a $35 fee. The cash advance, she says, worked out well for her.But Julian says that she had to borrow another $150 shortly thereafter and logged onto the website and discovered that she was set up for a $2,500 loan. If she had taken the $2,500, she would have had several years to pay it back, at a cost of over $12,000. She instead called up the website and got them to change the setting, so she could only borrow $150.But she marvels at the mess she might be in now, if she hadn't been strong. "I could have done that with one click," Julian says, of borrowing $2,500."Never forget these are predatory lenders."25 Ways to Fix Your Finances Fast.

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Financial Advisors

Which Universities Burden Parents With the Most Federal Debt?

by sshrx_ns3li1
written by sshrx_ns3li1

Compare the average Parent PLUS loan received in the 2015-2016 award year, the percentage of parents who borrowed and other important financial data on a school-by-school basis in this table, based on New America's Education Policy Program analysis of data from the Department of Education. Institutions with fewer than 100 Parent PLUS loan borrowers in the 2015-2016 school year are not included. Click the headers to sort the data or type a college's name into the Search bar to see how it measures up. Click the links to learn more about schools ranked by U.S. News & World Report.Note: N/A means Not Available. Graduation rates reflect those graduating within 150 percent of the normal time, typically six years. Data were gathered from the Integrated Postsecondary Education Data System, the Federal Student Aid Data Center and the College Scorecard. Some university main and branch campuses may be aggregated into a single data point, depending on how they report loan data to the Federal Student Aid Data Center..

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Financial Advisors

By the Time Parents Find Out How Much College Costs, It's Already Too Late

by sshrx_ns3li1
written by sshrx_ns3li1

A common criticism of the Parent PLUS program is that it desensitizes parents to the actual cost of college. Financial aid offices have an incentive to push parent loans, encouraging Mom and Pop to delay the reality of paying for college by borrowing with wild abandon.That can make pricey private universities – and even some less-expensive public institutions – appear far more affordable than they truly are for low-income or cash-strapped families. Some critics also believe the government-funded loans enable schools to keep tuition and other costs high, because they fill the gap between what the colleges themselves are willing to offer in student aid and the posted "sticker price" of attending the school. Without the loans, schools might have to fund more scholarships and grants out of their endowments or cut prices to a more affordable level. Compounding the problem, parents often don't know what share of college costs they'll be expected to pick up when school applications are due. By the time they find out – when the financial aid letters roll in – it's too late. "I find this really troubling – how it shifts all of the responsibility onto the student and family and away from the school," says Ben Miller, senior director for postsecondary education at the District of Columbia-based Center for American Progress.[See: 10 Easy Ways to Pay Off Debt.]It's also virtually impossible for parents to figure out which universities are most likely to load them up with debt. While prospective students can easily compare publicly available data on undergraduate borrowing levels and default rates at different schools through Department of Education tools like the College Scorecard and College Navigator, those consumer-friendly tools don't log parental borrowing rates. So how can families determine if the school their child wants to attend is working to keep parent borrowing in check and give their child a realistic, affordable financial aid package? To calculate how much debt parents at individual schools are being saddled with, U.S. News partnered with New America to compare the average amount borrowed by recipients of Parent PLUS loans at private and public institutions across the country. The measure, which isn't simple for the average parent to find, provides a rough gauge of how heavy the cost burden is at individual schools. [See: Should You Invest or Pay Off Debt?]Parents who send their kids to private universities – both nonprofits and for-profits – tend to borrow the highest amount in Parent PLUS loans on a per-recipient basis. Many are arts or music schools located in pricey metropolises, such as Berklee College of Music in Boston. The private arts institution topped the list, with the highest average Parent PLUS loan totals. Parents of Berklee students borrowed $35,388, on average, for the 2015-2016 school year. In other words, by graduation, the average Berklee parent borrower could take on more than $140,000 to fund their child's undergraduate degree. And that would be on top of any debt their child had taken out on his or her own. That was the experience for Lynn, a Berklee parent who asked not to reveal her last name, who borrowed more than $100,000 in PLUS loans during the three years her son studied saxophone at the music college. She had originally intended to tap home equity, but her house lost half its value during the most recent financial crisis. "I haven't begun to pay back the student loans," she says. "But it's coming, and I'm terrified of it." Lynn, who is recently retired and takes half her husband's Social Security, anticipates her payments reaching $1,500 to $1,700 per month over a 10-year repayment plan, more than twice her monthly income. Even if she began receiving her own Social Security payments, they would be eaten up by her parent loan bills, she says. "As an adult, I know that loans have to be paid back, but I was in my 60s when they allowed me to take these loans, and things have changed again for me. I was sick last year, and I stopped working."She says that she regrets sending her son to Berklee, but it was his dream to study there. "When your child is like, 'I want to go there, I've been wanting to go there since I was in third grade,' how do you say no?"Berklee declined to speak on the record to U.S. News. Other private universities on the list include New York Film Academy, a for-profit arts school with campuses in New York, Los Angeles and South Beach, Florida, Dartmouth College and New York University. The list, which didn't count schools with fewer than 100 parent borrowers, had 12 schools that posted an average Parent PLUS borrowing amount of more than $30,000 for a single year.It's not only pricey private universities that encourage parents to take on outsized debt. At the University of Alabama, the average parent loan recipient took on more than $24,000 for a single year. At Auburn University and the University of Colorado–Boulder, the average Parent PLUS loan came to nearly $23,000.At these public institutions, parents may take on high average debt for different reasons. Representatives of a number of public universities with relatively heavy parental borrowing say that it's largely due to out-of-state enrollment. The University of Oregon, for one, has battled increasing state disinvestment in higher education by encouraging nonresidents from states like California to enroll and pay higher tuition."The states have gotten out of the business of funding public universities and shifted the burden to parents and families, which has ultimately led to more loan borrowing," says Roger Thompson, vice president for student services and enrollment management at the University of Oregon, where parents borrowed $22,178, on average, to pay tuition, living expenses and other costs that totaled around $47,000 for out-of-staters in 2015-2016. Indeed, there's a stark difference between out-of-state and in-state parental borrowing at the University of Colorado–Boulder, which breaks down PLUS loans by resident status. Parents of out-of-state undergraduates from the class of 2016 who borrowed took on an average of nearly $93,000 over four years, or more than $23,000 annually, according to the school's data. Parents of in-state students who borrowed took on a more modest $41,100, or about $10,000 in each of four years.Covering college costs at a four-year university such as the University of Colorado–Boulder without parental help is nearly impossible these days, says Ofelia Morales, the university's director of financial aid. "Just student loans might be enough to cover community college, but if you're wanting to go to university, the federal lending side has just not kept up with what it actually costs to go to school now," she says. Dependent college students can typically only borrow up to between $5,500 and $7,500, depending on their grade level. For many schools, that's simply not enough to cover the cost of attendance, even after accounting for additional scholarships or work-study aid. While not all parent loan borrowing is ill-advised, problems arise when families without the means to repay these loans are encouraged to take on outsized debt, experts say. "We've kind of 'back-doored' this way into being able to finance education, especially for low-income folks, and it does put them in a very hard spot," says Persis Yu, a Boston-based staff attorney and director of the Student Loan Borrower Assistance Project at the National Consumer Law Center. Parents must choose between "making it possible for your kids to go to school and have a future or, you know, preserving your own financial future – being able to retire," she adds.[See: 8 Financial Steps to Take After Paying Off a Debt.] Financial aid officers and other university representatives reject the criticism that they benefit at the expense of their students' families. They say it isn't their job – or within their capabilities – to discourage parental borrowing. Parent PLUS loans are federal products, they point out, maintained and administered by the Department of Education; schools don't have the systems in place to evaluate an individual parent's borrowing risk, like a bank or a lender would. And they can't forbid a parent from taking a loan that the government has approved. “Like most of our peer institutions, Georgetown [University] analyzes what portion of their child's education a parent has the ability to pay, and it is up to individual families to determine if they will pay out of current earnings and assets or finance this portion,” says a spokesperson for Georgetown University, where parents who borrowed took on an average $30,789 in the 2015-2016 award year. Some counseling for parents is available, including credit counseling required for parents initially denied a PLUS loan and schools' own financial aid services. "Financial aid administrators have a responsibility to make sure they work with borrowers and answer questions and help them understand how the PLUS loan fits into the broader package," says Megan McClean Coval, vice president of public policy and federal relations for the National Association of Student Financial Aid Administrators, a nonprofit membership organization representing financial aid professionals.But she notes that the loan is ultimately a federal product that parents can take if they meet the criteria, including having no adverse credit history and meeting the enrollment requirements, no matter what a financial aid officer recommends in a counseling session. "It's not like this is a loan coming from the school," Coval adds. "It's a resource that's offered at a federal level, so if we're really going to be critical of it, we need to take a look at the programs from a federal policy perspective." Editor’s Note: This story was produced in partnership with the McGraw Center for Business Journalism at the City University of New York Graduate School of Journalism. It is the second in a series of stories exploring the high cost and financial impact of federal student loan borrowing among the parents of college undergraduates..

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