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When and How to Settle Credit Card Debt

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Very Upset Woman Holding Her Many Credit Cards.

Are you drowning in a sea of credit card debt, have collection agencies hounding you, and have no idea what to do because you can’t pay your balance?

There’s a light at the end of the tunnel you’re in, and it’s not declaring bankruptcy. You can settle your credit card debt for much less than what you owe, but it will involve some negotiating and standing your ground.

The advice contained here is for those with credit card debt that is already in collections. In this situation, you’re no longer dealing with your original creditor because they’ve sold your debt off to a collection agency.

This usually happens once you’re 150 days past due on a payment. At this point, you should have received a letter from the collection agency with the details of the debt it’s trying to collect on, or a phone call explaining the situation. If you haven’t received written notice, request it so you’re crystal clear on what the collection agency is asking you for.

Read on to find out how you can handle settling your credit card debt without having to pay more than you can afford.

Figuring Out How Much You Can Pay

You might not want to hear this, but collection agencies aren’t going to stop calling unless you pay something. It doesn’t have to be (and won’t be) for the full amount you owe, but considering the collection agency purchased your debt, it wants to make a profit.

The first step in creating a plan to settle credit card debt is to figure out how much you can afford to pay. If you can’t pay much, save what you can as every bit helps.

Set aside time to review your spending. If you already have a budget, look to see where you can cut expenses to put more money toward savings. Is it possible to earn extra money outside of your day job, or work overtime for the next few months?

Be realistic. If you can only save $150 per month right now, that’s all you can afford to save. You don’t want to make payment promises to a debt collector that you can’t keep. Save as much as you possibly can every month until you have enough to make an offer to the collection agency. We recommend having at least 20% of the balance you owe saved up before doing this. For example, if you owe $10,000, then save up $2,000.

You should also know that collection agencies can come after you if you don’t pay. If you earn a decent income or have significant savings, you’ll want to protect yourself. They can garnish your wages, seize your assets, and in some cases, can go after your retirement accounts. Nolo has more details here, but if your retirement plan is set up under the Employee Retirement Income Security Act (ERISA), then it should be safe.

Making the Offer to the Collection Agency

Here comes the hard part. If you’ve been on the phone with the collection agency previously, they probably told you that you had to pay the full amount of the balance you owe. It’s their job to scare you into thinking this is your only option.

If you haven’t made contact yet, be ready. The important thing is hold your ground. Say you can’t afford to pay the balance in full. The collector will likely come down, asking if you can pay around 80% of the balance you owe.

Your job is to hold steady until you can meet in the middle, at the amount you have saved up. If they ask you what you can pay, don’t name the actual amount you’ve determined you can pay. Go lower. Chances are you’ll have to negotiate up to that amount. You don’t want to settle on an agreement for more money than you have.

You’ll typically have an easier time negotiating if you can pay the balance all at once, but if you can only offer to make monthly payments right now, see if the collector will agree.

If they aren’t willing to accept what you have to offer the first time around, don’t get discouraged. Continue saving what you can, and when they call you back (or you call them), tell them how much more you can pay. Consider asking the person you’re dealing with how long they’ve had your account for – the closer the date, the more flexible they might be. They don’t want to lose your account if you’re willing to pay.

Additionally, don’t let them pressure you into making an upfront payment. It could lessen your negotiating power. You shouldn’t be giving the collection agency a cent until you settle on an agreement and get the agreement in writing.

Do you need help knowing how to word your response to debt collectors? If you think they’re in the wrong (and you don’t owe the debt), or if you want them to contact you in a certain way, the Consumer Finance Protection Bureau offers sample contact letters here.

Get the Offer in Writing

Hopefully you’re able to reach a settlement for the amount you have saved. Once you reach that settlement, you must get it in writing. A verbal agreement means nothing if the collector ever decides to sue you. You need proof, especially if it’s requested by the credit bureaus.

Any time you speak with a collector you should be keeping strict records of everything that was said. You want to be able to document all communication you had with them. It’s not their responsibility to do this. The only thing they care about is getting your money. If it’s legal to record phone calls in your state, you can do that, too.

Once you settle on an agreement, ask the collector if they can provide you with an agreement letter. If they aren’t willing to do that, you should draft your own. There are many helpful examples if you search for them, but this is a good template to follow. In general, you want to make sure the following details are contained in this letter:

  • The date the agreement is valid until (many offers expire after 30 days – you want to make sure you pay before then)
  • The amount you must pay
  • The correct agency name, especially if your debt has been sold multiple times
  • The exact debt(s) your money is going toward (be as specific as possible; include account numbers, dates, and name institutions)
  • Instructions for the agency – if it accepts the payment, that means the balance is paid in full and it can’t contact you about it again or place it on your credit report again
  • Credit history reporting – depending on what the collector agreed upon, this could be deletion of the mark from your credit history (pay for delete) or “paid in full” status

How to Pay

You might think the best way to pay is to fork over the cash, or write a personal check. We wouldn’t recommend either of those options. Cash isn’t traceable, and personal checks give the collection agency your bank and routing number.

Instead, pay by cashier’s check or money order. Keep in mind paying with a money order may make it difficult to prove that you paid.

If it’s not too much of a hassle (and you don’t trust the collection agency), you can open a “throw-away” account that won’t charge overdraft fees like Bluebird and use a check from that account. Close it once the payment goes through. This gives you peace of mind knowing your regular accounts are safe.

When sending the payment, send it via certified mail return receipt requested.

Is Your Debt Expired?

Before you even contact the collection agency, you’ll want to check if your credit card debt is within the statute of limitations for your state. If you make any sort of payment toward an old debt, or acknowledge that you owe it, then that debt becomes active again and you open yourself up to the possibility of a lawsuit.

The statute of limitations on consumer debt varies from state to state and it may be a good idea to speak with an attorney if you can afford to.

Beware of Possible Tax and Credit Implications

When you settle credit card debt for an amount less than what was originally owed, you may have to pay income tax on the difference. This is because the IRS treats the amount that was forgiven as gained income.

It’s best to consult a tax professional and let them know about your situation. According to Nolo, if the amount forgiven was over $600, the debt collector is required to report it to the IRS and send you Form 1099-C so you can report the income. If you don’t receive this form from the collector, that doesn’t excuse you from reporting it. However, there are exceptions, which is why you should let a tax professional help you figure out if you need to take action.

Another factor to consider in the aftermath of your credit card debt being settled is your credit score and history. How will they be affected? Paying a portion back is better than ignoring your debts, but your credit score may still suffer. As we mentioned, you should include specific instructions for your debt collector to list the debt as “paid in full” on your credit report – you don’t want it to say “settled” as that looks worse.

In some cases, the debt collector may not have the authority to make changes to your credit report, especially if you want the account deleted. You may have to contact the original creditor. You can ask the debt collector for that information, and then ask the original creditor if they’ll consider deleting the account from your report. Make sure you have a good explanation – tell them you’re trying to get your finances in order by repaying old debt, and want to start fresh.

Getting Help With Your Debt

Be very wary of accepting help from a debt settlement company. Many are for-profit and unethical, taking fees out of your payments and negotiating with collectors when you can do the same for free. It will likely end up costing you more money to have their assistance.

If you’re having trouble managing any other debt you have, a consumer credit counseling company could be the right move for you. We have a list of the best we recommend that won’t charge you an arm and a leg for their services. They can help you create a budget and a debt repayment plan, as well as advise you on how to improve your credit score.

Alternatively, you can check out our free guide to getting out of debt. We know dealing with collection agencies and old debt isn’t fun, but you’ll feel relieved once this process is over with. The worst thing you can do is completely ignore your debts as the bad marks on your credit won’t fall off your history for another seven years. Most people can’t wait that time out. Good credit is valuable to have, and there’s no better time to start working toward it than right now.

Erin Millard
Erin Millard |

Erin Millard is a writer at MagnifyMoney. You can email Erin at erinm@magnifymoney.com

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The Truth About ‘Obama Student Loan Forgiveness’

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Source: iStock

The average 2016 college graduate carries $37,000 worth of student loan debt today according to an analysis of student loan debt by Mark Kantrowitz, publisher of Cappex.com. Kantrowitz tells MagnifyMoney he expects that number to rise for 2017 graduates.

It’s no wonder that those drowning in debt can get desperate. And scammers have come up with a clever way to dupe these borrowers into spending money on services that promise to erase their debt. One of the most popular student loan scams today involves companies that charge borrowers to sign up for the so-called “Obama Student Loan Forgiveness” program.

The only problem is that there is no such loan forgiveness program.

The truth about “Obama Student Loan Forgiveness”

So-called student “debt relief” companies use “Obama Student Loan Forgiveness” as a blanket term for the various flexible federal student loan repayment programs implemented over the last decade by the Bush and Obama administrations.

What they don’t tell unwitting consumers is that these programs, which include income-driven repayment plans and Public Service Loan Forgiveness, among others, are free to borrowers and do not require paying for any special services in order to enroll.

Promising relief to indebted college graduates, these companies lead people to believe that enrolling in these programs requires special assistance — which they may offer for a sizable upfront fee and/or recurring monthly payments. Rather than getting the help they need, borrowers are duped into paying for something they could easily accomplish for free with a simple phone call to their student loan servicer.

While there are multiple ways you can get scammed by debt relief companies claiming to offer you “Obama Student Loan Forgiveness,” there are some red flags that can help you spot a scam.

6 ways to spot a student debt relief scam

It’s important to note that it’s not illegal for a company to charge a borrower to enroll them in a program that’s free to them. These companies are arguably taking some of the work out of getting enrolled, even if that “work” could easily be accomplished with a phone call to your student loan servicer.

Nonetheless, some debt relief firms take things a bit too far, and it’s important to be aware of scams out there. After all, student loan forgiveness scams are really only one part of a broad range of debt relief scams. Debt relief scams share many of the same qualities and employ similar tactics to mislead consumers into paying for their services.

Here are some red flags to watch out for:

  1. They ask for fees upfront. By law, debt relief services are not allowed to ask for payment until they have performed services for their customer. A legitimate debt relief service may ask for a fee upfront, but they will place that payment in an escrow account, and they will not officially receive the payment until they complete the work.
  2. They charge fees for free government services. This one is a bit tricky. So long as a company makes it clear that it is possible to gain access to a government debt relief program for free, it’s not illegal for them to charge consumers for their help in enrolling in those programs. However, the worst actors out there will keep that information to themselves, leading consumers to believe they need to pay a professional for access.
  3. They claim to be affiliated with the U.S. Department of Education. The Department of Education, which manages the federal student loan system, does not partner with any debt relief services. Any company claiming to be associated with the Department of Education is a scam.
  4. They “guarantee” that your debt will be forgiven. Services will try to entice customers by promising total loan forgiveness or a reduction in their student loan payments. But monthly payments for borrowers enrolled in federal student loan repayment programs are established by law and cannot be negotiated. Also, the legitimate loan forgiveness programs out there usually require making payments for several years, and there is no company that can promise loan forgiveness unless you meet those payment requirements first.
  5. They advertise “pre-approval” for debt relief programs. There is no “pre-approval” for federal income-driven repayment or loan forgiveness programs. They are free for borrowers, and so long as your loans are in good standing, it’s a matter of the types of loans you have when you took them out that qualifies you for the different programs. To see if you qualify for a given program, contact your loan servicer directly.
  6. They offer to make your student loan payments for you. You should be the only person submitting payments to your loan servicer. The Department of Education has contracted these loan servicers to manage federal student loans, and loan payments should be made directly through their websites. Never send your payment to a debt relief firm, even if they promise to pay your loans for you. The exception here is if you’re working with a debt relief firm to settle a debt with a lump-sum payment. In that case, they are legally required to hold your cash in an FDIC-insured account until they officially settle the debt. And if their client decides they no longer want their services, they have to return the funds to them in full.

Do your due diligence before working with any debt relief service, by keeping an eye out for these red flags, as well as checking sites like the Consumer Financial Protection Bureau, the Federal Trade Commission, or the Better Business Bureau for complaints against the company.

What to do if you’ve fallen for a student debt relief scam

If you’ve been scammed by a debt relief company, there are certain steps you need to take to prevent further financial damage. However, know that it is possible you may never get your money back.

Submit a complaint to the Consumer Financial Protection Bureau and the Federal Trade Commission. Reporting scams, can not only help others from losing their money, but if an investigation by the CFPB or FTC results in suit and judgment, then the debt relief company may be required to issue refunds, cease business, and ensure borrowers do not miss out on important repayment benefits.

Track your credit reports with all three credit bureaus to ensure your personal information is not used fraudulently. You can get one free credit report each year at annualcreditreport.com or use these free services to monitor your report for suspicious activity. If you fear a debt relief scammer has your Social Security number and other financial information, you might want to consider a credit freeze. That will stop anyone from being able to open a new line of credit without you knowing.

Contact your loan servicing companies and have any power of attorney authorizations removed. Some companies will ask borrowers to give them power of attorney so they can negotiate directly with their loan servicers. You don’t want to leave any company with this privilege because they will be able to make decisions about your loans without you knowing.

Contact your bank or credit cards to stop payment to the debt relief company and see if they can work with you to try and get your money back. It is common for debt relief services to charge monthly recurring fees for their services.

Change your Federal Student Aid password. Every federal student loan borrower has a unique login for the https://studentloans.gov site, where you can track all of your federal loans. If you gave a company your FSA information, consider that information compromised and change your FSA password immediately.

9 Legitimate Student Loan Forgiveness Programs

While there is no such program called “Obama Student Loan Forgiveness,” there are several legitimate student loan repayment programs that offer student loan forgiveness.

These programs have a wide range of requirements and payment terms, some as short as five years, others as long as 25 years, and can be available based on the types of federal student loans you have as well as your chosen career.

In addition to loan forgiveness programs, there are programs that offer loan repayment assistance or loan discharge. How much can be discharged and the amount of repayment assistance varies greatly depending on the program.

9 examples of legitimate loan forgiveness programs, loan repayment assistance programs, and loan discharge programs

What to do if you can’t afford your student loan payments

If you are struggling to afford your student loan payments, there are some actions you can take to ensure your loans remain in good standing and you avoid a default that could negatively impact your credit score.

Enroll in an income-driven repayment plan

If you are unable to afford your current payment, you can apply to change repayment plans. For example, if you are on a Standard Repayment Plan for your federal student loans, you could request to enroll in an income-driven repayment plan. If you are already on an IDR plan and your income has changed significantly, you can request to have your payment amount recalculated.

Ask for a deferment or forbearance

If you are going through a temporary financial hardship, you can ask your loan servicer to apply a deferment or forbearance, which would not require you to make payments during the deferment or forbearance. While both a deferment and forbearance offer you relief from making payments, with a forbearance you will be required to eventually pay back the interest that accrues during that time. Also, it’s important to note that while you are in deferment or forbearance, you aren’t making payments, which means you might be missing out on forgiveness programs like PSLF if you are working in public service or for a nonprofit.

Consider refinancing or consolidating your loans

Refinancing involves taking out a new loan from a private lender and using that loan to pay off your old loan. The pros of refinancing include a reduced interest rate and the ease of having just one payment. If you refinance a federal student loan, you will lose all of the benefits that federal student loans offer.

Alternatively, you could consolidate your federal loans. A Direct Consolidation Loan combines all your loans using the average weighted interest rate into one loan. So instead of dealing with multiple loan servicers and multiple loan payments each month, you only have one student loan payment to make each month. You can apply for a Direct Consolidation Loan at no cost through the government’s Federal Student Aid website.

Work with your loan servicer

If you have private loans, your lender may not offer as many repayment options as federal loans. Reach out and work with your lender anyway. They may offer a financial hardship program that would lower your payments. Your loan servicer would much rather work with you to ensure they get paid.

Consider bankruptcy if you can pass the “hardship test”

While it is highly unlikely you will be able to discharge your student loans in bankruptcy, it isn’t impossible. You must either show that your loans would impose an undue financial hardship that will not go away or that the loan was not a qualified student loan in that it did not fit the definition or was in an amount that exceeds the school’s cost of attendance. An example of where this argument has been successful would be a private bar loan, a loan taken out to cover the expenses of taking the bar exam.

Liz Stapleton
Liz Stapleton |

Liz Stapleton is a writer at MagnifyMoney. You can email Liz here

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GOP Moves to Block Rule That Allows Consumers to Join Class Action Lawsuits

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

A rule that would make it easier for consumers to join together and sue their banks might be shelved by congressional Republicans or other banking regulators before it takes effect.

Members of the Senate Banking Committee announced Thursday that they will take the unusual step of filing a Congressional Review Act Joint Resolution of Disapproval to stop a new rule announced earlier this month by the Consumer Financial Protection Bureau. Rep. Jeb Hensarling (D-Texas) introduced a companion measure in the House of Representatives.

The CFPB rule, which was published in the Federal Register this week and would take effect in 60 days, bans financial firms from including language in standard form contracts that force consumers to waive their rights to join class action lawsuits.

The congressional challenge is one of three potential roadblocks opponents might throw up to overturn or stall the rule before it takes effect in two months.

So-called mandatory arbitration clauses have long been criticized by consumer groups, who say they make it easier for companies to mistreat consumers. But Senate Republicans, led by banking committee chairman Mike Crapo (R-Idaho), say the rule is “anti-business” and would lead to a flood of class action lawsuits that would harm the economy. They also say the CFPB overstepped its bounds in writing the rule.

“Congress, not King Richard Cordray, writes the laws,” said Sen. Ben Sasse (R-Neb.), referring to the CFPB director. “This resolution is a good place for Congress to start reining in one of Washington’s most powerful bureaucracies.”

Congress’s financial reform bill of 2010, known as Dodd-Frank, directed the CFPB to study arbitration clauses and write a rule about them. The rule permits arbitration clauses for individual disputes, but prevents firms from requiring arbitration when consumers wish to band together in class action cases.

Consumer groups were quick to criticize congressional Republicans.

“Senator Crapo is doing the bidding of Wall Street by jumping to take away our day in court and repeal a common-sense rule years in the making,” said Lauren Saunders, associate director of the National Consumer Law Center. “None of these senators would want to look a Wells Fargo fraud victim in the eye and say, ‘you can’t have your day in court,’ yet they are helping Wells Fargo do just that.”

Meanwhile, the new rule also faces a challenge from the Financial Stability Oversight Council, made up of 10 banking regulators. The council can overturn a CFPB rule with a two-thirds vote if members believe it threatens the safety and soundness of the banking system. A letter from Acting Comptroller of the Currency Keith Noreika, a council member, to the CFPB on Monday asked the bureau for more data on the rule, and raised possible safety and soundness issues. Any council member can ask the Treasury secretary to stay a new rule within 10 days of publication. The council would then have 90 days to veto the rule via a vote. It would be the first such veto.

The CFPB rule also faces potential lawsuits from private parties.

How to be sure you’re protected by the new rule

Barring action by Congress, the CFPB rule is slated to take effect in late September 2017, with covered firms having an additional 6 months to comply, meaning most new contracts signed after that date can’t contain the class-action waiver. Prohibitions in current contracts will remain in effect.

Consumers who want to ensure they enjoy their new rights will have to close current accounts and open new ones after the effective date, the CFPB said.

Bob Sullivan
Bob Sullivan |

Bob Sullivan is a writer at MagnifyMoney. You can email Bob here

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How the “Financial Choice Act” Could Impact Your Wallet

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

 

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A plan to repeal major aspects of Dodd-Frank — legislation enacted to regulate the types of lender behavior that contributed to the 2008 economic crisis — crossed its first major hurdle last week when the U.S. House passed the Financial Choice Act.

The bill still has to pass the U.S. Senate and be signed by the president before becoming a law. However, if it does, significant changes would be made to some regulations that might require consumers to pay more attention to their financial decisions.

“[The Financial Choice Act] stands for economic growth for all, but bank bailouts for none. We will end bank bailouts once and for all. We will replace bailouts with bankruptcy,” Rep. Jeb Hensarling (R-Texas), House Financial Services Committee chairman, said in a press release. “We will replace economic stagnation with a growing, healthy economy.”

What’s at stake with the Financial Choice Act, and how does it impact your finances? We’ll explore these questions in this post.

What did the Dodd-Frank Act do, anyway?

Bailouts: After it was implemented in 2010 by President Barack Obama, one of the law’s main pillars was enacting the “Orderly Liquidation Authority” to use taxpayer dollars to bail out financial institutions that were failing but considered “too big to fail” — meaning their collapse would significantly hurt the economy. In addition, Dodd-Frank created a fund for the FDIC to use instead of taxpayer dollars for any future bailouts.

Consumer watchdog: Dodd-Frank also created the Consumer Financial Protection Bureau, an independent government agency that focuses on protecting “consumers from unfair, deceptive, or abusive practices and take action against companies that break the law.”

In one of its most high profile cases to date, the CFPB in 2016 fined Wells Fargo $100 million for allegedly opening accounts customers did not ask for.

The CFPB’s actions against predatory practices in a number of industries, including payday lending, prepaid debit cards, and mortgage lenders, among others, have won the agency many fans among consumer advocates.

“In fewer than six years, [the CFPB has] returned $12 million to over 29 million Americans, not just harmed by predatory lenders or fly-by-night debt collectors, but some of the biggest banks in the country,” says Ed Mierzwinski, director of the consumer program for the U.S. Public Interest Research Group, a Washington, D.C.-based nonprofit that advocates for consumers.

And how would the Financial Choice Act change Dodd-Frank?

No more bailouts: The Financial Choice Act would replace Dodd-Frank’s Orderly Liquidation Authority with a new bankruptcy code. So financial institutions would have a path to declare bankruptcy in lieu of shutting down completely.

Fewer regulations for banks: The act will provide community banks with “almost two dozen” regulatory relief bills that will lessen the number of rules small banks need to comply with, making it easier for them to operate.

A weaker CFPB: It would convert the CFPB into the Consumer Law Enforcement Agency (CLEA) and make it part of the executive branch. The Financial Choice Act also gives the president the ability to fire the head of the newly created CLEA at any time, for any reason, and gives Congress control over it and its budget. These changes will take away much of the power the CFPB holds to monitor the marketplace and pursue any unfair practices.

“It not only took the bullets out of [the CFPB’s] guns, it took their guns away,” Mierzwinski says.

Specifically, he says the CFPB would no longer be able to go after high-cost, small-dollar credit institutions, such as payday lenders and auto title lenders.

However, some experts see benefits from taking the teeth out of the CFPB.

“I personally think that’s a good thing because I think the way that the CFPB is structured is fundamentally flawed,” says Robert Berger, a retired lawyer who now runs doughroller.net, a personal finance blog. “You basically have one person with very little meaningful oversight that can have a huge impact on the regulations of the financial industry.”

The bill also would roll back the U.S. Department of Labor’s new fiduciary rule, which isn’t part of Dodd-Frank, but requires retirement financial advisers to act in their clients’ best interests. It went into partial effect on June 9.

What does this mean to consumers?

If the Financial Choice Act becomes law, opponents say it could mean that consumers will have to be even more careful with their financial choices and who they trust as a financial adviser because there will be less government oversight.

“If you’re a consumer, you’re going to have to watch your wallet even if you have a zippered pocket with a chain on your wallet,” Mierzwinski says.

If the bill passes the Senate, it could still face some hurdles. Any changes to Dodd-Frank regulations would need to be approved by the heads of the Federal Reserve System and Federal Deposit Insurance Corp. and the Comptroller of the Currency.

Jana Lynn French
Jana Lynn French |

Jana Lynn French is a writer at MagnifyMoney. You can email Jana Lynn here

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What the New DOL Fiduciary Rule Means For You

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Geeting advice on future investments

Seven years in the making, the Department of Labor’s long-awaited Fiduciary Rule finally went into effect June 9.* The full breadth of the rule’s impact won’t officially be felt until January 2018, when advisors must be fully compliant with the rule’s requirements.

The rule survived an upheaval by the Trump administration, which had hinted earlier this year that it might seek to block the rule’s implementation.

Aimed at saving consumers billions of dollars in fees in their retirement accounts, the Department of Labor’s new fiduciary rule will require financial advisers to act in your best interest. However, the final rule includes a number of modifications, including several concessions to the brokerage industry, from the original version proposed six years ago.

Here’s what you need to know about these new rules and how they may affect your money.

*This story has been updated to reflect the rule’s successful release.

What is a Fiduciary?

So what exactly is a fiduciary? According to the Certified Financial Planner (CFP) Board, the fiduciary standard requires that financial advisers act solely in your best interest when offering personalized financial advice. This means advisers can’t put personal profits over your needs.

Currently, most advisers are only held to the U.S. Securities and Exchange Commission’s suitability standard when handling your investments. This looser standard allows advisers to recommend suitable products, based on your personal situation. These suitable products may include funds with higher fees — with revenue sharing and commissions lining their own pockets —  which may not reflect your best possible options.

What is Changing Exactly?

Affecting an estimated $14 trillion in retirement savings, the Department of Labor’s new fiduciary rule is meant to help you receive investment advice that will aid your nest egg’s ability to grow. Many investors have been pushed toward products with high fees that quickly eat away at profits.

All financial professionals providing retirement advice will now be required to act as fiduciaries that must act in your best interest. This applies to all financial products you may find in a tax-advantaged retirement accounts. Because IRAs offer fewer protections than employment-based plans, the Department is concerned about “conflicts of interest” from brokers, insurance agents, registered investment advisers, or other financial advisers you may turn to for advice.

Despite these new protections, the Department of Labor also made some key concessions. Previously, brokers were required to provide explicit disclosures about the costs of products to their clients. This included one, five, and ten year projections. However, this requirement has been eliminated. After heavy pushback from the industry, the Department of Labor also agreed to allow the use of proprietary products.

Additionally, the Department of Labor has pushed the deadline for full implementation of their new rules. Firms must be compliant with several provisions by June and fully compliant by January 1, 2018.

Despite all of these concessions, the Department of Labor’s highest official insists the integrity of their rule is still in place.

Exceptions You Should Know About

Although advisers working with retirement investments will no longer be able to accept compensation or payments that create a conflict of interest, there’s an exception many brokers will likely pursue.

Firms will be allowed to continue their previous compensation arrangements if they commit to a best interest contract (BIC), adopt anti-conflict policies, disclose any conflicts of interest, direct consumers to a website that explains how they make money, and only charge “reasonable compensation.” The best interest contract will soon be easier for firms and advisers to use because it can be presented at the same time as other required paperwork.

How These New Rules Might Affect Your Investment Options

Although these new rules don’t call out specific investment products as bad options, it’s expected advisers may direct you to lower-cost products, like index funds, more regularly. New York Times also predicts the new regulations may also accelerate the movement toward more fee-based relationships. They also suggest complex investments like variable annuities may soon fall out of favor.

What Will the Larger Impact of These Changes Be?

Backed by extensive academic research, the Department of Labor’s analysis suggests IRA holders receiving conflicted investment advice can expect their investments to underperform by an average of one-half to one percentage point per year over the next 20 years. Once their new rules are in place, they are anticipating retirement funds will shift to lower cost investments, savings consumers billions of dollars.

What You Can Do To Protect Yourself

Although these new rules are a positive step for consumers, it’s important to remember there are still a wide variety of financial professionals out there. And the quality of the advice you receive can vary greatly based on their level of education, experience, and credentials. In order to find someone who is equipped to handle your unique financial situation, you will still need to do your homework.

You may want to start by looking for a fee-only financial planner. Due to the nature of how they are compensated, fee-only financial planners operate without an inherent conflict of interest. They are paid a fee for the services they provide and they don’t earn commissions from product sales.

Once you’ve narrowed down your options you’ll want to ask about their credentials, what types of clients they work with, what types of services they offer, while carefully checking their background and references. Like any professional working relationship, you’ll want to feel comfortable with someone you are receiving financial advice from, so it’s important to make sure your personalities and priorities are aligned. Remember, no one cares more about your money than you do. That’s why it’s essential to carefully vet anyone who is working with you to secure a healthier financial future.

Kate Dore
Kate Dore |

Kate Dore is a writer at MagnifyMoney. You can email Kate at kate@magnifymoney.com

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Overdraft ‘Protection’ is a Lie

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Young woman taking money from ATM

You wake up the day before payday to alerts from your mobile banking app saying your account has been overdrafted. How could this be? After all, you had $50 in your account last time you checked. So you start backtracking.

Dinner was only $45, right? You should have $5 to spare. Then you check your account and realize your $30 gym membership conveniently posted to your account this morning. Rather than declining the charge due to insufficient funds, your bank allowed the transaction to post — and charged you $35 for the favor.

This is an example of how banks have turned so-called overdraft protection and insufficient fund fees into a multi-billion-dollar cash cow.

According to a new analysis by Pew Research Center, more than 40% of 50 banks studied order transactions in a way that maximizes overdraft fees. The practice is called “high to low processing,” in which the bank posts transactions from largest to smallest rather than posting them chronologically. This can make customers more susceptible to incurring multiple overdraft fees on the same day.

The fees have effectively allowed banks to profit off of some of their most financially vulnerable consumers: those who keep low account balances and are thus at higher risk of overdrafting. Only 18% of checking account holders are responsible for 91% of overdraft and insufficient funds fee (NSF) fees according to research from the Consumer Financial Protection Bureau.

Pew’s analysis found most heavy overdrafters — those who pay $100 or more in overdraft and NSF fees annually — earn less than $50,000 per year. One-quarter of these account holders pay up to a week’s worth of wages in overdraft fees each year.

In 2015, 628 banks with more than $1 billion in assets reported a total of $11.16 billion — about 8% of total net income — of revenue from consumer overdraft and NSF fees according to the Consumer Financial Protection Bureau. That’s more than two-thirds of all consumer deposit account fee revenues.

figure3

Overdraft Protection: The Ultimate Catch-22

When you are enrolled in overdraft protection, you give the bank authority to approve charges when you don’t have enough to cover the full amount in your account. The bank will approve the transaction, then charge you a predetermined flat rate fee — typically around $32 — for allowing your purchase to go through.

That’s why overdraft protection is something of a catch-22. On the one hand, it saves you from the embarrassment of a declined card at point of sale. On the other, it is one of the most expensive ways to borrow money for what are typically small purchases.

Let’s go back to the payday example from before.

If you had not realized right away you overdrafted your account, you might have thought you still had $5 in the bank, just enough for a cup of coffee. Your debit card would have been approved for the $3 coffee thanks to overdraft protection — and you would have been hit with yet another $35 overdraft fee, twice in the same day. Effectively, you just borrowed $3 for a fee of $35 — an annual percentage rate of over 1,000%.

Here’s how the math works out (in this example, we assume the person banks with Bank of America, which carries an overdraft fee of $35):

Original balance: $50

Dinner: $50 – $45 = $5

Gym fee: $5 – $30 = -$25

Overdraft fee for gym membership: -$25 – $35 = -$60

Coffee: $-60 – $3 = -$63

Overdraft fee for coffee: $-63 – $35 = -$98

At the end of the day, you would be left with a negative balance of -$98.

Some institutions limit the number of times you can be hit with overdraft fees in a single day. Bank of America, for example, limits overdraft fees to four times a day. Some banks will allow you to link your checking account with another account to pull funds from when you overdraft, but will then charge you for an overdraft protection transfer fee, which is typically lower than a full overdraft fee. Even if your bank doesn’t approve the overdraft and your purchase is declined, you could still get charged an insufficient funds fee, which will usually be equal to the overdraft fee.

Overdraft fees can quickly spiral out of control if the person cannot afford to pay back the bank and bring their balance back in the black. If you maintain a negative account balance for about five days, you are charged on average $20 for what’s called an extended overdraft fee. More than half of the banks Pew studied said they charge an extended overdraft fee.

It’s important to make sure to take care of overdrafted accounts. Excessive overdraft fees could lead to a closed account or loss of check-writing privileges. It could also become difficult for you to open accounts with other banks if your bank reports your behavior to ChexSystems. ChexSystems keeps a record of your banking history similarly to how the credit bureaus keep track of your credit history.

In a worst-case scenario, excessive overdraft fees could damage your credit score as well. If your bank decides to write off your unpaid account and send it to collections, it can show up on your credit report. At that point, your accidental overdraft could seriously damage your credit score.

How to Avoid an Overdraft Fee

Don’t “opt in”

You can’t be charged an overdraft fee if you don’t sign up for the program, but beware: your bank can still charge you an insufficient funds fee.

Choose “no” when presented the opportunity to opt in to a debit card-based overdraft protection program. Don’t miss this step as it can be easily overlooked as part of the process. It may be in the form of a question asked by your banker or a pre-checked box when you enroll in online banking.

Link your accounts

If you are worried about getting denied at a point of sale and are okay with a fee to automatically transfer your own money, you can link your debit card checking account to another account for overdraft protection. This lets the bank pull the money from the account that you’re linked to to cover new transactions. Banks typically charge a median $5 fee for this service.

Track your balance

Keep your eye on your balance to avoid overdraft and NSF fees altogether. If your bank offers them, you can set up banking alerts so that you’ll be notified when your account goes into the negatives and balance it out before you’re charged a fee. You can use a budget-tracking app like Mint that sends you overdraft and fee notifications as well, although they may not come in time to help you.

You should also go over any automatic payments that you have set up and record and set reminders for them so that you won’t have any surprise withdrawals from your account.

Call your bank

If you don’t overdraft your bank account often, you have a better chance of getting the fee reversed. Because banks make most of their money from a small percentage of accounts that are regularly overdrafted, bank agents usually have more flexibility to reverse the charge for those who don’t overdraft as much. If you make a mistake, and don’t do it often, it’s worth a call to ask the bank to reverse the charge.

Best Banks with Low Overdraft Fees

There is no bank account that truly offers no overdraft fees. However, you can find a bank that either doesn’t allow you to overdraw your account at all or doesn’t excessively fine you for overdrawing your account.

Ally Bank is one of the better banks when it comes to overdraft penalties. So long as you link a savings account to your checking account, the bank will transfer funds from savings when you make a purchase larger than your available balance. And it doesn’t charge a fee for that transfer.

Bank of Internet’s Rewards Checking account has no overdraft or insufficient funds fee, but they will decline the charge if you don’t have enough to cover it in your account. The bank also gives you the option to link an account for overdraft protection with no fee for the transfer, or create a line of credit that can be used to cover overdrafts. If you decide to use the line of credit you will be charged interest on the overdraft balance until you pay it off, but there is no fixed overdraft fee.

MagnifyMoney has a full list of best account options for overdraft fees. In addition, you can use the checking account comparison tool to rank accounts based on overdraft fees and other options.

At the very least, opt out of overdraft protection to avoid getting hit with fees each time your card is declined.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

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5 Steps to Take When Your Car is Repossessed

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

car_lg

For the most part, you will know ahead of time when a car repossession is on the horizon. But, even when you have an inkling your car is about to get taken away, walking outside to find it missing is upsetting.

A car repo can jeopardize your mobility long-term. And if you don’t have access to public transportation or a friend to give you a lift, having no car to get to and from work could mean you’ll lose your job, which triggers other financial issues. If your car has been repossessed (or it’s a possibility it will happen soon) here’s what you need to know and the options for getting it back.

Step 1: Take a Record of Any Property Damage

There are laws in place to protect you when a repo company comes for the car. They can’t disturb the peace, use excessive force, damage your property or cause you harm in the process.

If you believe the repossession happened aggressively, you may have a case for reimbursement of damage or the return of your car. The repo agency may also get hit with a penalty for their actions. Take photos of the damage as a backup and get a second opinion from an attorney.

You should also have a record of what the car looks like and any damages before it’s repossessed. Otherwise, could turn into a bit of a “he said, she said” debate.

Step 2: Find Out Why Your Car Was Taken

Technically, a car isn’t “yours” until you pay off the car note. If you default, in most states the company financing your car has the right to take it back without warning you. The same applies if you’re leasing a car. Miss a few payments and the lessor can take back the property.

When a repo occurs, contact the creditor as soon as possible. Unlike when a contractor tows your car for minor offenses like unpaid parking tickets, after a repo, your car doesn’t wait patiently on a lot until you bring your bills current. The car can be sold to recover the financial loss.

Fortunately, many states require that you’re notified of the pending auction or sale of your vehicle beforehand, so you have a reasonable time to act. Ahead of the sale, you may be able to reinstate the auto loan, pay off the loan entirely or buy the car back. We’ll talk about each option for reclaiming your car in the next section.

Besides defaulting on a loan, in some states, your car may be repossessed when your insurance lapses. If you’ve stopped paying your car insurance, find out from your creditor or DMV if that’s the reason your car is missing and ask what the penalties are for not keeping insurance.

Step 3: Explore Options to Reclaim the Car

The rules for getting your car back when your payments are in default vary by state and contract, but according to the Federal Trade Commission, there are generally three options to discuss:

Reinstate Your Auto Loan: This will probably be the most affordable and less cumbersome option if it’s available to you. Reinstating the loan is when you pay the amount you’re behind plus all of the fees associated with the repossession including towing and storage to get it back.

Redeem Your Car: Redeeming the car means paying off the entire balance of the loan to get your car back. Going this route may not be feasible or smart if your car is worth less than you owe. Besides the entire loan amount, you’re also on the hook for the repossession fees.

Buy Your Car Back: Again, this option may not be possible if you’re having a hard time just making car payments. When you get the date and time of the auction your car will be in, you can attend and try to buy it back.

Step 4: Decide if You Can Afford to Get the Car Back

After going through each of your options, you may find you’re not financially stable enough to retrieve your car. Even in the best case scenario of reinstating your loan, you’ll need to have the means to make regular payments and maintain the car. If you can’t handle it, you may have to let the car go. There are some financial implications when giving up on the car as well.

When a creditor sells your car, it has to make a reasonable effort to get a fair market price for it. If the fair market price is less than how much you owe, you can be sued for deficiency; the difference between how much you owe and how much the car sells for.

Fortunately, if the car sells for more than what you owe, you also get to pocket the difference. You should get a notification of whatever you owe or if money is owed to you. Follow up on the resale yourself if you don’t. Unpaid deficiency can end up in collections.

Lastly, if you plan to wash your hands of the car loan, you could be in a deep financial hole all the way around and in the process of filing bankruptcy. If so, you may be able to include the car in the agreement and get it back. In this case, contact the attorney handling your bankruptcy right away.

Step 5: Get Your Belongings

Regardless of how you intend to resolve the repossession, you’re entitled to all of your belongings in the car. Whoever has your car should make a reasonable effort to protect your belongings from damage and theft. It’s a good practice to not leave any valuables in the car if you’re on the verge of repossession to avoid theft or damage.

Often, you’ll be contacted with the location where you can pick your stuff up. If you find anything missing or damaged, take notes. You may be able to reduce your deficiency bill with proof that you experienced property loss.

Final Word: Act early

If you know making future car payments is going to be a struggle, you’ll benefit the most from acting early to avoid the costs of repossession. Here are a few steps you may be able to take:

  • Negotiate: If you’re going through a temporary hardship, you may be able to work out a short-term deal of reduced or excused late auto payments. You won’t know unless you ask. Be sure to get any form of agreement in writing.
  • Sell your car: Selling a car with a lien can be difficult, but not impossible. You have the best shot at selling if the car is worth more than you owe. Once sold use public transportation or a carpool for the time being.
  • Refinance the loan: You may be able to refinance to a lesser monthly payment before things go south. Keep in mind, refinancing may come with processing fees and other costs, so you need to factor them into the equation.
  • Surrender the car yourself: If you’re already in default and know the repossession is coming, you can give up the car on your own terms. No dramatic car tow scene necessary and you can clear the car of your belongings. Then if you decide to redeem your car or reinstate the loan, you won’t have to pay some of the repossession fees.

Having your car repossessed is scary, but even when you hit rock bottom, there are solutions. If you put aside the emotions and think logically, you can recover. Your best move is to prevent it and keep the lines of communication open with the company servicing your auto loan.
If it’s too late for that, your main choices (depending on your contract and state) are to bring the loan back current and fork up repossession costs, pay-off the loan, buy the car back or give up the car entirely.

Taylor Gordon
Taylor Gordon |

Taylor Gordon is a writer at MagnifyMoney. You can email Taylor at taylor@magnifymoney.com

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Collection Fees on Student Loans You Never Knew Could Happen

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Debt collections_lg

If you’ve ever been through federal student loan entrance counseling, then you know that failing to make payments on federal student loans can have serious consequences. If you fall behind on your required monthly payments after you graduate, the Department of Education may take steps like garnishing your wages before they ever reach your bank account, withholding your tax refund, or even suing you.

But did you know that failing to pay back your federal student loans could also make you liable for collection fees?

If you have federally-financed student loans that are in default—which in most cases means that you haven’t made payments for 270 days—the federal government may refer your account to a collection agency. What may come as a surprise is that these collection agencies typically charge fees or commissions, and these fees can be added to the balance that you owe.

Though the fees vary depending on the agency and the type of loan you have, they can exceed 15% of your total balance, and can even reach up to 40% of your total balance in the case of Perkins loans. This means that if your current loan balance is $20,000, you could suddenly have between $3,000 and $8,000 in fees added to your account.

Ouch.

So how can I avoid having to deal with a collection agency?

Avoid default: The best way to avoid collection fees is to ensure that your student loan does not go into default. If you are struggling to make your monthly payments, contact the Department of Education right away to explain your situation and figure out a plan. For example, you may be able to reduce your required monthly payment amount through an income-driven repayment plan. You can find more information about how to apply for income-driven repayment here.

Check into deferment or forbearance: Depending on your situation, you may also be eligible for loan deferment or forbearance. You should look into applying for deferment or forbearance if you have returned to school, if you have an illness or financial hardship that affects your ability to make payments, or if you have recently served in the military. More information about loan deferment and forbearance is available here.

Heed warnings: If you do fail to make your required monthly payments, your loans will become delinquent and you will receive warnings from the Department of Education. Do not ignore these warnings. If you ignore them, your loans will go into default after 270 days and may be referred to a collection agency.

Monitor your credit: Additionally, if you have missed any payments on your student loans, be sure to check your credit score and get a credit report. If your credit score has been brought down by one or more missed payments, you can try writing a letter of goodwill to your loan servicer explaining your situation and politely requesting that they remove the missed payment from your credit report. You can find more information on how to write a letter of goodwill here.

But what if my loans have already been sent to a collection agency?

Take action immediately: If you receive a notice from a collection agency, this means your loans have gone into default. It is critical that you respond to the agency immediately to work out a plan for repayment. If you enter into a repayment agreement within 60 days, you will not be charged collection fees.

Try to pay back in full: If you are able to pay the full amount back, pay it immediately. This may not be an option for many people, but it is the fastest way to get your loans out of default.

Set up a rehabilitation plan: If you cannot pay the full amount, work with the collection agency to create a repayment plan—known in this case as a rehabilitation plan—that is manageable based on your current income. If the agency suggests a monthly payment amount that you feel is unmanageable, let them know that you need a lower amount, and send them documentation of your current income as proof.

Don’t miss a payment: Follow through on the rehabilitation plan! If you fail to make the payments you have agreed to, collection fees will be added to your account.

Ensure default status gets removed: After you have made nine on-time monthly payments according to the terms of your rehabilitation plan, your loan will be removed from default status. A loan can only be rehabilitated once.

Resources to help you

  • How to make a payment to a collection agency here.
  • 7 things to know if you have debt in collections here.
  • The Department of Education has a page about student loan default here.
  • The Department of Education’s page about getting out of student loan default is here.
  • The Department of Education provides contact information for the collection agencies it works with here.
Sarah Noelle
Sarah Noelle |

Sarah Noelle is a writer at MagnifyMoney. You can email Sarah at sarah@magnifymoney.com

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Don’t Make Payments via iTunes Gift Cards. It’s a Scam.

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

iTunes Gift Cards

Thanks to the Federal Trade Commission, we’re more aware of money wiring schemes. We know to send emails from long lost relatives requesting a wire transfer directly to spam. And to ignore mail from companies promising us a huge cash prize after we pay a “small fee” through money wire. What they really plan to do is get their hands on that small fee and then disappear.

Unfortunately, whenever we catch on to a scam, career criminals become more resourceful. The newest way to scam people out of cash is through iTunes gift card.

How iTunes Gift Card Scams Work

The reason con artists like to request money wires is it allows you to send money far away. It’s also difficult to recover money once it’s wired. A credit card payment, on the other hand, may be trackable or even reversible.

Sending money through iTunes gift card presents the same opportunity as a wire transfer. It’s difficult to track where the cash goes after the gift card is drained. If you find out later you’ve been scammed for money, the chances that you’ll get the money back that was on the card are slim.

Here’s how the scam works: Someone will ask you to buy an iTunes gift card, then tell you to give them the serial number on the card. Once they have the serial number, they either drain the cash on the card or sell the card online.

A scammer may ask you to use an iTunes gift card to give them money for various reasons, including some of the same reasons that are common with wire transfers, like:

  • Assisting a relative or friend in need
  • Repaying an old debt
  • Pay for an item being sold online
  • Paying a fee to accept a prize
  • Paying back taxes

The Scam to Look Out for Growing in Popularity

At the beginning of this year, the Treasury Inspector General for Tax Administration (TIGTA) reported that since October 2013 over 5,000 people have fallen victim to IRS phone scams and paid out over $26.5 million as a result.

One popular IRS phone scam is when someone impersonating an IRS or Treasury agent threatens arrest, deportation, and other consequences if you don’t pay up.

What’s one way they ask you to pay a phony tax bill? You guessed. iTunes gift card.

Since ignoring a valid tax bill can result in wage garnishment and even jail time, we’re all hyper-vigilant of any correspondence from the IRS. But, if someone calls to demand a tax payment with an iTunes gift card, something is wrong.

When the IRS wants to get your money for real, they will not resort to threatening you over the phone for payment right away. You get an opportunity to appeal. They will never ask you to pay through iTunes gift card. If you’re uncertain of a request for payment, go to the IRS contact website and reach out to the agency directly.

What to Do If You Get a Request for iTunes Gift Card

Crooks are good at what they do. They know the buttons to press to get a victim to fall for the con. If someone’s living paycheck to paycheck, a prize scam is going to look mighty enticing. If someone’s petrified of going to prison, they may be more inclined to pay these “taxes” to avoid the slammer.

Don’t act off impulse when any gift card is in the equation. iTunes gift cards should only be used to make iTunes and App Store purchases. Apple has even addressed this problem on the website.

According to the Apple gift card page:

“iTunes Gift Cards are solely for the purchase of goods and services on the iTunes Store and App Store. Should you receive a request for payment using iTunes Gift Cards outside of iTunes and the App Store, please report it at ftc.gov/complaint.”

4 Safer Ways to Pay or Get Paid

One way to avoid the iTunes gift card scam and any other scam that involves a money transfer is never sending cash to someone you don’t know. When circumstances come up where you need to exchange money for personal or business use, there are better avenues to do so than iTunes gift cards, here are a few:

1.PayPal

Signing up for a PayPal account is free, but there are some fees for certain transactions. Here’s the fee schedule for sending money:

Sending Money Domestically

  • From your PayPal balance or bank account – Free
  • From your debit or credit card – Flat fee of $0.30 plus 2.9%

Sending Money Internationally

  • From your PayPal balance or bank account – 0% to 2%
  • From your debit or credit card – 2.9% to 5.99% plus a fixed fee based on the payment currency

If you sell a product or service through PayPal, there’s a 2.9% + $0.30 fee per transaction for the seller (and an even higher fee for international transactions). Buying from a merchant with PayPal is always free.

2.Venmo

Do you casually exchange money with family and friends? Venmo is part of PayPal and a solution for small, quick transactions between people who know each other. It’s particularly useful on the go, when dividing a restaurant bill for instance. No more getting stuck with the bill!

Download and sign up for the account for free. Then add money to your Venmo account balance or link your Venmo account to your bank account, debit or credit card. Data security is always a concern when adding your financial information to any online account. Venmo uses data encryption and secure servers.

Sending money with a debit card is free for major banks. Debit card transactions from some smaller banks may have a 3% fee. All payments through credit card cost 3% as well. Credit cards may also incur a fee.

3.Square Cash

You can use Square Cash for personal and business use. If you’re using the app to send and receive money from family and friends with your bank account, you can do so for free. You will pay a fee if you have to send money through credit card and that fee is 3%.

Using Square Cash for business isn’t free, and you’ll have to note that you plan to accept payment in exchange for products and services when you set up an account. The processing fee for businesses is 2.75% per payment received.

4.Google Wallet

Google Wallet works similar to each other system we discussed above. You can download the app for free on your iPhone or Android. To send money, you just need either the email or phone number of whoever the money is going to. Google Wallet also comes with 24/7 fraud monitoring which is unique. Sending and receiving money with Google Wallet is free.

Always Report a Scam

If you encounter anyone requesting iTunes gift cards for payment, run for the hills. And make sure to report it. You reporting a scammer may prevent someone less suspecting from falling for the same person’s con.

Taylor Gordon
Taylor Gordon |

Taylor Gordon is a writer at MagnifyMoney. You can email Taylor at taylor@magnifymoney.com

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Warning: Even the Best Small Business Credit Cards Do This

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Best Small Business Credit Cards

If you have a small business, you might be tempted to open a small business credit card. When used properly, small business credit cards can provide you with free working capital, rewards and the ability to manage the expenses of you and your employees more easily. However, there are real risks that you need to consider.

  • You are personally liable: when you apply for a small business credit card, you are signing a credit application that makes you personally liable for any spending that happens on that card. If your company fails to reimburse you or goes bankrupt, you will still be held responsible for making payments and should expect collection activity from your credit card issuer.
  • Your personal credit report and credit score can be impacted: with most cards, the balance will not appear on your credit report so long as you are current. However, if you miss payments, many major credit card issuers will report the balance and delinquency to your credit report. And if the credit card issuer ever sells your debt to a collection agency, you can expect a collection item to hit your personal report as well.
  • Your interest rate can be increased on your existing balance: In 2009, the CARD Act was passed. The legislation made it very difficult for credit card issuers to increase rates on existing balances. However, the law only applied to consumer cards: the interest rate on your small business account can increase at any time. If you want to use your small business credit card to borrow, you will not have certainty regarding the interest rate.
  • If you give cards to your employees, you are likely personally liable. Many small business credit cards give you the option of adding credit cards for your employees. Usually that means you are adding an “authorized user” who will have the same charging privileges as you. It is like adding your husband or wife as an authorized user to your personal credit card. If your employee goes crazy at the local bar or books a flight to Tahiti, you are personally liable for the charges.
  • CARD Act protections do not extend to small business credit cards. In addition to the limitations on price increases mentioned above, none of the other CARD Act protections apply to small business credit cards. I will explain all of those protections in more detail later.

Small business credit cards can still be a great tool (I use one). Just make sure you understand the risks and the alternatives. In general, a small business card can be an excellent deal if you earn points and pay your balance in full and on time, accruing no interest. In addition, the cards can be a useful way to fund very short-term borrowing needs. However, if you need to borrow a larger amount over a longer period of time, an installment loan with a fixed interest rate from a marketplace lender or local bank would likely be a better option.

If you are shopping for a loan, you can read more about the best small business loans

I will now explain each of the potential risks in more detail below:

Personal Liability

If you have a small business and need to borrow money, you will likely need to take provide a personal guarantee, which means you would be held personally liable for repayment of the debt. This risk is not unique to small business credit cards. If you take an SBA loan, borrow from a marketplace lender or go to your local bank, you will likely need to provide a personal guarantee.  You really need to think twice before borrowing. If your business needs working capital to fund orders, make sure you pay close attention to the credit-worthiness of your customers before taking on too much debt to fund their orders. And you also need to be very honest with yourself if your business is in financial difficulty. It might be surprisingly easy to borrow money, even when your business is struggling. But if your business ultimately fails, you don’t want to create unnecessary debt that will follow you even after your business is closed.

Personal Credit Report

Most small business credit cards will not report to consumer credit reporting agencies so long as your account is current. This is important, because you do not want the balance on your small business credit card to appear as personal debt. However, if you stop paying your small business credit card (and default), you can expect the negative information to end up on your personal credit report.

Many major credit card issuers will start reporting to your personal credit report as soon as you are seriously delinquent. In general, once you are 60 days past due you can expect the negative information to hit your report. The reporting will have a big negative impact on your score. Delinquencies of 60 days or more can easily take 100 points or more from a credit score.

Even if your small business credit card does not report to the credit bureau, a default can still appear on your report. Typically, credit card companies will write off the debt at 180 days past due and sell the debt to collection agencies. At that point, the collection agency registers a collection item on your credit report. And, along the way, you could also have a legal judgment.

In a best case scenario, the debt does not appear on your report. But if you miss your payments, you can expect big derogatory marks to hit your score, in addition to the collections activity.

Your Interest Rate Can Increase

If you miss a payment, even by just one day, you should expect a big increase in the interest rate on your existing balance. Even worse, your rate could be increased even while you are current. For example, if you max out your credit card you could appear riskier to the bank. Because you appear risky, the bank could increase your interest rate.

This could have a big impact. Imagine you have a $15,000 balance at a 15% interest rate. If the rate increases to 25%, you could see an increased monthly interest charge of $125. Your debt could cost you an extra $1,500 a year with no warning and no possibility to avoid the interest rate increase.

If you need to borrow money, you should consider a term loan from a marketplace lender or your community bank. With a term loan, you can get a fixed interest rate. For example, Funding Circle offers loans with an APR as low as 5.49% and LendingClub offers an APR as low as 7.77%. When you take a term loan, you are at least locking in the cost of your borrowing.

Before the CARD Act, the credit card industry was guilty of outrageous interest rate increases, especially using the vague language of “universal default.” That is why the CARD Act made such interest rate increases impossible. Unfortunately, small businesses never received that same protection and need to proceed with caution.

Note: you can use a personal credit card for business expenses. Because you are personally liable for the debt regardless, this could be a good option. The benefit is that the interest rate cannot be increased on your debt so long as you are current. (Remember that most interest rates are variable – so the rate could increase as the Prime rate increases, but you would not see an increase for punitive reasons). The risk is that you would be putting that balance on your personal credit report, which could impact your credit score and your ability to qualify for products like mortgages, because the underwriters would treat that debt as personal debt. If you want to find a consumer credit card, you can read our Best Credit Card Guide.

Employee Cards Can Make You Liable

Often you might want to give credit cards to employees so that they can make business purchases. Most credit card issuers will allow you to give supplementary credit cards to employees. There are two big benefits to this service. First, you can earn points or miles on purchases made by your employees. Second, you have complete visibility of the money being spent by your employees.

But there is a big risk. By giving a card to your employee, you are giving them access to your credit limit. It is just like a supplementary card that you give to your husband or wife. If your employee decides to have a big night out at a bar or a flight to Tahiti, you will be personally liable for the charges. Just be very careful before you agree to an arrangement like this.

Other CARD Act Protections

There were a number of consumer protections provided by the CARD Act that do not apply to small business cards. These include:

  • Penalty Fee Restrictions: penalty fees have to be “reasonable and proportional” to the relevant violation of account terms. In general, penalty fees for consumers should be restricted to $25 for a first late payment and $35 for each subsequent late payment.
  • Overlimit Fee Opt-In: issuers can only charge an overlimit fee if the customer opts in to overdraft protection.
  • Payment timing: Payments must be due on the same day of every month, reducing the risk of confusion.
  • Payment Allocation: When the payment amount exceeds the minimum due, issuers generally need to apply the amount above the minimum due to the balances with the highest interest rates first.
  • Monthly Statements: The statement needs to show how long it would take, and how much it would cost, to pay off the debt if only the minimum due is made. In addition, the statement needs to show the payment required in order to pay off the balance in three years.
  • Ability to pay: Card issuers cannot open a credit card or increase a credit line unless the ability of the consumer to repay is taken into account.

All of the protections listed above are required for consumer credit cards, but are not required for small business cards.

In many cases, credit card issuers have decided voluntarily to provide some of these protections to consumers. However, it is important to understand that these protections, when provided, are at the discretion of the bank and can be removed.

Small Business Credit Cards Can Still Provide A Valuable Service

When used properly, a small business credit card can still provide excellent value. Here are some of the benefits:

  • Small business credit cards can be a great way to manage discretionary expenses, particularly when combined with services like Expensify and integrated with QuickBooks. T&E, travel and other expenses can quickly get out of hand, and creating electronic records of every transaction can help the budgeting and management process.
  • A small business credit card is a free line of credit if you pay the balance in full and on time every month. In effect, you are being given a free working capital line of credit. For example, if you use Google AdWords to acquire customers, you can get 20 – 25 days (depending upon the length of the grace period) before you have to pay the bill. This can be very helpful for cash management purposes.
  • For short-term borrowing needs (for example, 30 days), a small business credit card could be the least bad option. Imagine you need to borrow $15,000 for 2 months until you get paid for a job. At an 18% interest rate, it would cost you about $450 of interest to borrow the money for two months. That is a lot cheaper than most merchant advance businesses, which have interest rates well above 40%.
  • You have the potential to earn rewards. It is easy to earn at least 2% on your spending, which can be serious money depending upon the spending needs of your business.
  • The debt associated with your small business will not appear on your personal credit report so long as you remain current, which can help keep your credit score up.
  • One of the greatest accounting risks faced by small businesses is that they co-mingle their personal and business accounts. By using a separate card, you can ensure you don’t mix up your personal and business expenses.

Just remember – if you have a longer term borrowing need, it is better to go through the process of applying for a term loan. Although the process will take a bit longer, you should be able to get a much lower, fixed interest rate.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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