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Here’s What Really Happens When You Miss a Credit Card Payment

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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Your phone rings — and rings, and rings some more. You know who’s calling. You know what the caller wants, too, but you can’t afford to give the money you owe on your credit cards. So, you let the debt collector leave a voicemail you have no intention of returning.

That’s the wrong way to deal with delinquent credit card debt, says Michaela Harper, debt counselor and director of the Community Education for Credit Advisors Foundation in Omaha, Neb.

“Don’t be afraid to talk to your creditor,” says Harper. “Avoiding them makes the problem worse because it sends it onto the next division” and brings your debt closer to being charged-off, which Harper says consumers with past-due debt should do their best to avoid. (More on that later.)

Credit card debts — or most debts for that matter — become delinquent the moment you miss a first payment. The events that follow the missed payment depend on how long the past-due debt goes unpaid. It begins with friendly reminder calls from the bank to pay your credit card bill, and can culminate in losing up to 25 percent of your annual income to wage garnishment.

The portion of consumers missing credit card payments has been on the rise since the lowest levels of delinquent credit card debt ever recorded were reached two years ago. About 2.47 percent of credit card loans made by commercial banks were delinquent in the second quarter of 2017, according to Aug. 23 figures from the Federal Reserve Economic Database.

Below is a timeline chronicling what happens when you miss a credit card payment, as well as tips from debt management experts on what you can do to mitigate the situation at each point. (You can jump to a specific time period by clicking on the milestones below.)

Zero to 30 days past due: Missed a payment

After you miss your first payment, your debt is delinquent and the clock starts ticking. Your bank should begin to contact you to remind you to make a payment. You are also likely to incur a late fee.

The first 30 days will sound more like courtesy calls, says Randy Williams, president and CEO of A Debt Coach. In reality, the bank is trying to verify your address and personal information to update the system in case your debt becomes more delinquent. (Williams used to work as a bill collector before switching over to debt consulting.)

What you can do

At this point, the bank’s agents may be more willing to provide customer service, so you can ask for an extension or create a payment arrangement to address the past-due debt before the missed payment begins to impact your credit report, which can be as early as 30 days past due. You may also try your luck at asking if the bank could waive any late fees already incurred, although the creditor is not obligated to extend this courtesy.

There’s only so much leeway a bank will give you, says Gordon Oliver, a certified debt management professional at Cambridge Credit Counseling. If you’ve asked for a late payment or interest charge to be waived in the past, you won’t have much leverage.

“There will be different reasons why a creditor may not extend those benefits at the time, but usually those terms are for borrowers who are in better standing,” Oliver adds.

30 to 90 days past due: Collection calls begin

Over the 30- to 60-day delinquency period, the bank will attempt to reach you to collect the past-due amount on your credit card bill.

“This is when they are trying to figure out what’s wrong. They are trying to collect the money,” says Williams.

“At this point it’s starting to affect your credit,” says Williams. He says the robo-collection calls may come as often as every 15 minutes. Borrowers with higher credit scores are likely to see a bigger drop than borrowers with lower scores. According to FICO data, for example, a 30-day late payment could bring a 680 credit score down 10 to 30 points and a 780 score down 25 to 45 points.

In addition to seeing your credit score drop, you will be charged late fees on the past-due account. After you have owed debt for two payment cycles, the CARD Act allows creditors to flag you in their system as a “high-risk” borrower, which means the interest you currently pay will rise to whatever the bank charges for customers at a high-risk status. That number varies from bank to bank but in some cases can get as high as 29.99 percent. The rate will stay that high at least until you have made six consecutive on-time payments, at which point the bank is required by law to reset the rate.

However, “the law doesn’t say they have to do it on their own,” says Harper. So, you will likely need to request a reset. You can find the APR charged to high-risk borrowers in your credit card terms.

What you can do

Harper says if you respond at this point, the bank may ask you to negotiate a payment arrangement.

“Never make a promise to pay that you can’t keep just to get someone off the phone,” says Harper. “If you are silent, you agree to the payment.”

Missing promised payments also gives the bank more leverage if the bill eventually goes to court, says Harper. “If they walk into court and they can point to all of the promised payments, it undermines your credibility.”

Harper advises debtors to be very clear if they cannot meet the bank’s proposed payment arrangements. You need to specifically tell them you cannot make the payments. If possible, take a look at your budget. If you find you are able to send them a small amount every month, tell them.

“That’s a valuable thing because it goes back to when the account charges off. You can slow down your progression toward charge-off by making the partial payments,” says Harper.

A charge-off happens when a creditor believes there is no chance of collecting your past-due debt, so the debt’s considered a loss. The debt gets written off the creditor’s financial statements as a bad debt and sold or transferred to a third-party collection agency or a debt buyer.

“If they feel like it’s a tough situation [you] are going through they will refer [you] to a credit counselor” around the 60- to 90-day mark, says Williams. Again, that benefit may not be extended to all consumers facing financial hardship.

90 to 120 days past due: Bank requests balance in full

After your bill is 90 days overdue, the bank will turn collection over to its internal recovery department to engage in more aggressive collection attempts. Williams says the bank will now be calling for the balance in full, not only the past-due amount.

The bank’s collectors will continue to call, but they may also send you multiple letters every day, or may attempt to reach you via social media, emails or emergency contacts.

Harper says the account may stay with the bank’s internal collections for another 90 days (180 days past due), but it’s important to note that at the 120-day past-due mark, your debt is at risk of getting charged off and being sold to a third-party collection agency.

That’s because the CARD Act states the past-due amount needs to be the equivalent of six months’ worth of your credit card’s minimum payment in order for the debt to be charged off. Including late fees and the amount added in higher interest payments, consumers may reach that figure in as little as four calendar months.

What you can do

If you can’t give them the entire past-due amount or balance in full, take a serious look at your budget. See if there is any room to make even a small payment. If you can find a few dollars, you may be able to enter a repayment plan with the bank, which will at least pause the collection calls. Don’t forget to leverage the collector’s insider knowledge. Explain your situation and ask if you can negotiate a solution with the bank.

“You want to pay off the debt, they want to pay off the debt. They may have solutions they can offer you that you don’t know about,” says Harper.

Once you’ve got an active repayment plan in place, the bank will pull you out of the collection list, Harper says.

120 to 150 days past due: Hardcore collection attempts

Watch your credit report carefully after your account becomes 120 days past due, as it may be charged off at any point. At this point, the collectors will continue to try every channel available to them to get in touch with you and collect on the debt. The attempts may get closer together and collectors may try more aggressive tactics to scare you into paying up.

“One hundred and twenty to 150 days, it is hardcore. Now they are going to offer you a settlement. They will do whatever they want to try and get to you to pay the debt off. It’s basically motivation to get you to pay now,” says Williams.

Debt collectors at this point may also take time to remind you of your rights under the CARD Act and Fair Debt Collection Practices Act as well as their right to collect on the past-due debt.

The bank’s collectors may not directly say they will proceed with legal action or wage garnishment if they do not intend to, as that is illegal under the FDCPA, but they may remind you of those possibilities if you do not pay and emphasize the bank’s right to collect on the debt owed to them, Williams says.

Williams adds, “They never say they are going to sue you; they say, ‘We have the right to protect our asset.’”

What you can do

Williams says at this point the debtor essentially has three options. Bring the account current by paying the entire past-due amount, arrange a debt settlement plan with the bank or try going to a credit counselor to create a debt consolidation plan.

“Near 120 days past due, they need to get some form of help to remedy the account before it goes to a charge off,” says Oliver, who adds that the timing the charge off will be difficult to predict.

For those who may be behind on several bills, Oliver also recommends getting some form of financial counseling to create a plan that addresses all your financial issues.

150 to 180 days past due: Last chance

At 150 days, collections efforts will remain aggressive and may even increase in frequency as the bank is now concerned about losing the debt to a charge-off.

Once your credit card payment is 150 days past due, you may start to hear the bank’s agents’ tactics shift as they may make a last-ditch effort to recover the debt, according to Williams.

What you can do

You will still have the options to pay the balance in full or reach a settlement with the bank, but you may have an additional option: Re-age your debt.

When your account is past due and you enter a re-age program, the late payments and collection activity are removed from your account. As a result, “your credit score may improve by 10 to 15 points if not growing every month from there,” according to Williams.

You will generally be asked to make at least three on-time payments on the debt before your account is re-aged. For example, the bank could ask you to pay $100 each month for three months before bringing your account back up to a current standing, but the bank will add the interest and fees you’ve already incurred to the total amount you owe. After the account is re-aged, you’ll go back to making minimum payments on the total amount of debt outstanding. Re-aging the account may also remove the “high-risk” stain from the account so your interest rate drops to to whatever it was before.

Williams says a re-age can be seen as a win-win for both parties: You are able to catch up on your delinquent debt and — in some cases — have its impact removed from your credit report, and the bank is able to recover the interest and fees that have accumulated since your account became delinquent.

Of course, the credit card company doesn’t have to allow you to re-age the debt and may not offer the option to you, but there is a possibility it will do so if you ask. Keep in mind you are only allowed to re-age an account once in 12 months and twice within five years, per federal policy, and re-aging is only an option on accounts that have been open for nine months or longer. Credit card issuers are allowed to set more strict re-aging rules for its accounts, as well.

After 180 days: Charged off to a third party

When you are about six months past due, it is extremely likely the bank will charge off your account and sell the debt to a third-party collection agency. If the bank does not charge off your account, it may take the matter to court.

If it goes to collection, third-party debt collectors may employ some of the same tactics the bank’s collectors did. Most collection agencies will push hard for the first 90 days, then at the end of that point in time they may decide to sue you, Harper says. Or they may sell your debt to another collections agency.

The third-party collectors will attempt to contact you using every channel available to them for the next 90 days or so, before they must decide to either charge off the debt or sue you. The collectors will likely demand you pay the full balance or ask you pay the balance in thirds, says Harper. If they can’t get a hold of you or get you to arrange a payment plan in that time, they may decide to turn it over to an attorney.

What you can do

You should try the same tactics that you would have used with the bank’s internal collections agency with the third-party agency, negotiating the price down and reaching a settlement with the third-party collector. If you don’t respond to the collection requests, you may be sued.

You may not be sued for some time. Companies can only sue you for unpaid debts within a certain period of time, called a statute of limitations — anywhere within three to 10 years, according to your state’s law. Your debt may be sold and resold several times before that happens. Check with the office of consumer protection at your state’s attorney general to find out what the rules are in your state.

If you are served with a lawsuit, you should check the letterhead to make sure the attorney or company filing the suit on behalf of the collections agency is licensed to practice law in your jurisdiction, says Harper, as you cannot legally be sued for credit card debt by an attorney outside your jurisdiction.

You should also be sure to respond to the lawsuit. If you don’t, you’ll likely lose. The court can automatically side with the lender if you don’t show up in court, also known as a default judgment. That may result in getting your wages or federal benefits garnished to pay the debt, not to mention the credit damage a judgment causes. Federal law states a creditor can garnish no more than 25 percent of your disposable income, or the amount that your income exceeds 30 times the federal minimum wage, whichever is less.

If you can’t afford to settle

If, given your current financial situation, the debt is unmanageable for you and you are not able to settle the account, you may want to consider bankruptcy. But you will have to file before a judgment is entered against you in court, which may be tricky to time, Harper says.

Given the difficulty in timing when the creditor will take your account to suit, you shouldn’t wait if you think bankruptcy is an option for you. Read here for more information on how and when to file for bankruptcy.

Brittney Laryea
Brittney Laryea |

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

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5 Signs You’re Probably Going to Default on Your Student Loans

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A newly released New York Federal Reserve analysis sheds some insight on factors that may determine if student loan borrowers are more or less likely to default on their loans.

According to Fed data, 28% of students who left college between 2010 and 2011 defaulted on their student loans within five years. That’s significantly higher than the students who left school five years earlier, between 2005 and 2006, of which only 19% defaulted within five years.

Defaulting on a student loan is big deal. Not only will someone who defaults on a student loan need to deal with collections calls, but a default can seriously harm a borrower’s credit rating, making it difficult to qualify for a personal loan or other large credit purchases like a new home.

The New York Fed’s analysis highlights factors that could determine default rates years after students leave school. They range from things a student can’t necessarily control —  family background and how selective the college they attended was — to things students may have a little more control over, like the degree and major they pursue.

The data show students in these categories are more likely to default on their student loans between ages 20-33:

  1. Dropped out before earning a degree.
  2. Enrolled in an associate’s degree program.
  3. Majored in arts and humanities.
  4. Attended a for-profit institution, community college or nonselective college.
  5. Came from a low-income family.

A few of the factors relate to things a student has some control over, like the kind of school chosen and the degree pursued. Another big factor, family background, depends more heavily on chance.

Here’s what the Fed found about how the factors influence default rates.

The school

For-profit, public, or nonprofit?

If a student attended a private for-profit two-year institution, their chances of default were highest of all — just above 3% were in default at age 22, shooting up to 42% by age 33. Students at private four-year for-profits weren’t far behind, with a default rate of

38.8% by age 33.

On the other hand, students were much less likely to struggle to repay their student loans at nonprofit institutions, both public and private. Private nonprofit four-year student had the lowest default rate at 17.2%. They were followed by students who attended public nonprofit four-year institutions.

Source: FBNY

Selective vs. nonselective

The Fed’s analysis found students who attended colleges that were more selective or competitive defaulted at lower rates that those who attended less-selective colleges. The analysis used Barron’s Profile of American Colleges to classify colleges into selective and nonselective based on competitiveness.

The degree

Graduate versus dropout

Whether or not a borrower graduated was the second-strongest predictor of default among borrowers, according to the Fed analysis. Overall, students who dropped out had higher rates of default versus borrowers who graduated no matter what kind of degree they attempted. The analysis notes that may be attributed to the fact graduates are more likely to find more gainful employment that would give them the ability to pay off their loans after earning a degree.

Source: FBNY

Associate versus bachelor’s degree

No matter what kind of college a graduate attended, students in a two-year degree programs had higher default rates than their peers who enrolled in a four-year college, according to the New York Fed analysis.

But the gap between default rates of two-year and four-year students was widest among students who attended public schools — 21.4% to 36.5%, respectively— a difference of more than 15 percentage points

STEM versus arts and humanities

Students who majored in arts and humanities defaulted on their loans at the highest rates — 26.3% at nonselective schools, 14.6% at selective schools— while STEM majors at selective schools (12%) and business students at selective schools (11.5%) defaulted at the lowest rates.  Overall, default rates among students who majored in business or a vocational programs were closer to STEM students than to arts and humanities majors.

Arts and humanities majors defaulted at higher rates regardless of the college’s selectivity, but if students majored in STEM, business or a vocational program, selectivity may have factored in more. By age 33, the default gap between students who chose a best-performing major and a worst-performing major was three percentage points at selective colleges, while at nonselective schools the gap was eight percentage points.

Source: FBNY

The student

Advantaged vs nonadvantaged

The Fed’s analysis took a look into defaulters’ income and family background, too. The analysis looked at the average income for the ZIP code area at a borrower’s youngest available age based on available loan data. The analysis defined students who came from households earning below the mean income based on ZIP code as nonadvantaged, and students from households earning above the mean income.

The analysis found borrowers who came from less-advantaged backgrounds based on income had higher default rates no matter what type of college they attended.

Taking both a borrower’s background and college into consideration, the widest gap in default rates observed in the analysis were among advantaged students who attended private nonprofit colleges (13% of whom defaulted by age 33) and nonadvantaged students who attended private for profit colleges (42.1% of whom defaulted by age 33).

Source: FBNY
Brittney Laryea
Brittney Laryea |

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

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Concealed Uber Data Breach Impacts 57 Million — Here’s What You Need to Know

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Some 57 million Uber users’ personal information was exposed in October 2016 when the car-hailing company experienced a cyber attack, the company announced Tuesday — more than a year after the occurrence of the incident. 

Bloomberg reported the company paid $100,000 to the hackers responsible for the attack to keep the breach private.  

What happened? 

Dara Khosrowshahi, Uber’s new CEO who was appointed by the board in August, said in a statement that two people outside the company “inappropriately accessed user data stored on a third-party cloud-based service that we use.” 

The attackers stole data of the 57 million people across the globe, including their names, email addresses and mobile phone numbers. About 600,000 U.S.-based drivers were among 7 million Uber drivers whose license numbers and names were exposed in the breach. 

The data breach was the latest in a string of high profile cyber attacks that weren’t revealed until months or years later.  Fortunately, it doesn’t appear that Uber users have to worry about any of their financial information being exposed. Khosrowshahi said no evidence indicated that trip location history, credit card numbers, bank account numbers, or dates of birth were stolen.  

What was done? 

After the attack happened, Uber “took immediate steps” to safeguard the data and blocked further unauthorized access to the information, according to Khosrowshahi. The company identified the hackers and made sure the exposed dada had been destroyed. Security measures were also taken to enhance control on the company’s cloud storage. 

“None of this should have happened, and I will not make excuses for it,” Khosrowshahi said. “While I can’t erase the past, I can commit on behalf of every Uber employee that we will learn from our mistakes. We are changing the way we do business, putting integrity at the core of every decision we make and working hard to earn the trust of our customers.” 

The company let go two employees who led the response to the incident on Tuesday, according to the statement. Uber is also reporting the attack to regulatory authorities.  

What can you do? 

Uber said no evidence shows fraud or misuse connected to the data breach.  

If you are an Uber rider…

The company said you don’t need to take any action. Uber is monitoring the affected accounts and have marked them for additional fraud protection, Khosrowshahi said. But you are encouraged to regularly monitor your credit and Uber accounts for any unexpected or unusual activities.

If anything happens, notify Uber via the Help Center immediately. You can do this by tapping “Help” in your app, then “Account and Payment Options” > “I have an unknown charge” > “I think my account has been hacked.” 

If you are an Uber driver…

If you are affected, you will be notified by Uber via email or mail and the company is offering free credit monitoring and identity theft protection.  

You can check whether your Uber account is at risk here 

Check out our guide on credit freezes and other steps you can take to protect your identity if personal information is compromised in a data breach.

Shen Lu
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Shen Lu is a writer at MagnifyMoney. You can email Shen at shenlu@magnifymoney.com

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5 Alternative Gift Ideas that Don’t Come from a Toy Store

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Parents spent an average of $422 per child on holiday presents in 2016, according to a survey by T. Rowe Price. An estimated 56 percent of parents with children ages 8 to 14 use credit to purchase gifts, which are bound to include gadgets that’ll be old news by New Year’s but not paid off until months after that. 

Indeed, the holiday season — the most wonderful time of the year, as it’s known to some — may be far from wonderful for budgets as some parents try to fulfill every child’s every wish. 

A 2016 Experian holiday shopping survey found:  

  • 56 percent of people said they spend too much money during the holidays. 
  • 55 percent admitted that they feel stressed about their finances during the holidays. 
  • 43 percent said the extra expense makes the holidays hard to enjoy.  

Some parents overload their children with “stuff” that will quite possibly be obsolete or bested in popularity by the next big thing just in time for the next holiday season. No great mystery that the U.S. has 3.1 percent of the world’s children, but consumes 40 percent of the world’s toys. 

“We are a materialistic society, and often our rituals and celebrations reflect this,” says Dr. Mary Gresham, an Atlanta-based psychologist who specializes in financial and clinical psychology. “Many parents get caught up in this and start to believe that the right toy will bring happiness to their child.”  

Here are five gifts to give your little ones besides presents this year. Your overflowing closets and pockets may thank you for considering other gift options.  

The gift of a financial head start

You could get them a $50 toy that they’ll lose or break in a matter of weeks … or you could open an online investment account in your child’s name and teach them the beauty of investing.

And don’t worry if you’re not an expert.  

Brendan Mullooly, an investment adviser for an asset management firm in Wall Township, N.J., suggests that novice investors interested in making a financial gift to a young person should use a service like Stockpile, an online company that simplifies the process of gifting stocks to minors.  Check out our review here

“You can purchase gift cards of individual stocks and some index ETFs to give as a gift,” says Mullooly.

And Stockpile allows you to buy fractional shares, so the gift cards can be for small amounts.  Mullooly recommends setting up view-only access to these custodial accounts so your young investor can check on how the investments are doing.  

“This offers a great way to give a gift that’s interesting, has monetary value, and also offers an educational aspect,” he says. 

The gift of giving

For children, the holiday season can be a “gimme” time of year. But it’s also the time when we often hear that it’s better to give than receive.  

Jayne Pearl, a family business and financial parenting expert and co-author of “Kids, Wealth and Consequences: Ensuring a Responsible Financial Future for the Next Generation, says it’s not hard to nurture a child’s giving spirit. She suggests combating the “gimmes” with the “givvies.”

Put part of your holiday budget toward giving to the less fortunate, perhaps through a charitable organization. For example, you could give a gift in your child’s name to an organization such as Unicef or the American Red Cross, or to an area animal shelter or humane society.  

“Giving kids the tools and the consciousness to try to help people is extremely empowering,” Pearl says.  

Her recommendation is to sit down with your children and find out what bothers them about the world, help them figure out how they can help, and make this part of your holiday celebration. Use the holidays as a time to teach your kids that “we have values and our values are not just ‘stuff,’ ” Pearl says.

The gift of membership

You can’t go wrong with season passes to a favorite destination like a local museum, an amusement park or the zoo. You can use them over and over throughout the year, which could ultimately help your family spend less on entertainment. 

Also, check out memberships to national organizations, like the Baseball Hall of Fame for the sports enthusiast. 

Or get a pass that’s fun for the whole family, like the $80 America the Beautiful Annual Pass, which pays for itself in as few as five visits to national parks. The pass covers entry to over 2,000 parks for a full year, and nearly 100 percent of sale proceeds goes toward improving and enhancing federal recreation sites.
 

The gift of travel

Pool the money you would spend on toys and trinkets and knock a destination off your family bucket list. You could time the trip to coincide with the holiday season or breaks during the school year.  

Erica Steed, 37, allowed her children to choose something they wanted to experience together in Christmas 2016. 

Ellison, who was 10, wanted to see the Statue of Liberty. Elian, 7, wanted to see snow, which doesn’t often happen in Georgia. They took a family trip to New York for the holidays, and although it didn’t snow, “we had such a great time that it made up for it,” says Steed, who lives in Roswell, Ga.

When you factor in the cost of airline tickets and lodging in New York City for a family of four during the holidays, this gift option didn’t save the Steeds the money they would’ve spent on presents.

But by planning, creating a budget and sticking to it, the family spent the holidays doing something they could all enjoy and remember for a lifetime. And this, Steed says, amounted to money well spent.  

The gift of learning

You know your children better than anyone. And every one of them is unique, with his/her own set of interests, so give a gift that helps a child develop existing or new skills. 

Sign them up for classes that help them take their passion or hobby to the next level.  

Consider coding camp for your computer whiz or cooking classes for your foodie. You can find classes offered by educational institutions, community organizations, companies or individuals. 

You could also take a look at online classes like these from MasterClass, which can help your child hone a craft with a celebrity idol without leaving home. 

KaToya Fleming
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KaToya Fleming is a writer at MagnifyMoney. You can email KaToya here

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7 Holiday Debt Traps that Can Sabotage Your Finances

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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For some consumers, the cheer of the holiday season soon will be replaced with dread over debt.  

Holiday shoppers in 2016 took on an average of $1,003 worth of debt, up from $986 in 2015, and 11 percent said they would only be making the minimum payments, which can extend the payoff date by years.  

“Consumer debt is at the highest of all time,” says Howard Dvorkin, CPA and chairman of Debt.com.

Total household debt rose to a record $12.96 trillion for the third quarter of this year, according to data released in November by the Federal Reserve Bank of New York. Credit card debt, for example, rose by 3.1 percent, to $808 billion. 

Dvorkin expects that this holiday season will be expensive as consumers make more online purchases with credit cards and because of overall optimism about the economy. 

Retail holiday sales were expected to grow to $1.04 trillion-$1.05 trillion in 2017, according to Deloitte’s annual holiday retail forecast. Deloitte also projects that e-commerce sales during the holiday season will grow to $111 billion-$114 billion, an 18-21 percent increase from the 2016 holiday season, and 55 percent of survey respondents planned to shop online for gifts. 

“When people feel really good about things, they tend to spend more,” Dvorkin says.   

Bruce McClary, vice president of communications at the National Foundation for Credit Counseling, says people have a tendency to overspend during the holidays, relying heavily on credit cards and not paying off the debt until later, sometimes even years later.   

McClary has also noticed that credit card delinquencies have been increasing slightly over the last two quarters. The Federal Reserve Bank notes in its report that “credit card balances increased and flows into delinquency have increased over the past year.”
 

While most Americans are aware and ready to spend a little extra during the holiday season, you can make it a little more merry by avoiding these common debt traps.  

Keeping up with the Joneses

Holiday purchasing pressure ranges from buying the hottest toys to giving (or buying for yourself) the latest tech gadget or the biggest TV on the block. People are tempted to get the latest and greatest, Dvorkin says. 

The average consumer spent roughly $967 on holiday shopping in 2016, up 3.4 percent from 2015, according to the National Retail Federation. Deloitte forecasts that the average consumer in 2017 will spend an average of $1,226, or nearly $2,226 among households earning $100,000 or more.

It all adds up, especially if you’re out to outdo a neighbor: The tree and all the trimmings; hostess gifts for parties; food for your own holiday meals and entertaining; your Clark Griswold-style light shows. Randy Williams, president of A Debt Coach, a counseling service in Kentucky, says the desire for personal reward can contribute to holiday debt. 

“You feel good when you do something for somebody,” he says. 

But then consumers may have the motto “One for you, one for me,” and purchase an item for themselves, which continues the spending cycle. 

Hot holiday toy crazes

Unfurling your child’s Christmas wish list can be at once fun and terrifying. Parents planned to spend, on average, $495 per child, according to 2016 holiday shopping data from the Rubicon Project. 

Lists could include hot holiday toys for 2017 like the $30-$45 Fingerlings (the little plastic monkeys that attach to fingers and move in response to sounds and touch) a $300 Nintendo Switch gaming console or even the $799 Lego Ultimate Collectors Series Millennium Falcon, the company’s biggest set with 7,541 pieces. 

When the toys start to run out, the prices can escalate. The Fingerlings, for example, typically retail at $14.99, but some were listed in November for twice as much on eBay. Since it can be harder for parents to say “no” to the frenzy when it’s a gift that’s going to bring a smile to a little one’s face, Williams says there’s extra incentive to plan well. 

Store credit card pitches

McClary warns not to get into store credit card offers. The instant savings of 10 percent off on the day of your purchase could come with a high cost, such as 29.99 percent APR later. 

“People should resist the temptation,” he says.  

Williams says there’s a reason for the incentives, such as a discount on your purchase, because the company will make back whatever you initially saved. 

“Most people do not pay off their cards within the intro offer time,” he says. 

Instead, set aside cash for holiday spending and use it, instead of credit. If you’re sure you can “affordably borrow,” Williams suggests using an existing line of credit instead of falling for the attractive offers from retailers.  

“Special” offers

Deals seem to abound when shopping online or in stores, but if you aren’t careful, some can land you in more trouble than no deal at all. 

McClary advises to avoid promotions like deferred interest cards and convenience checks. Discounts during the holidays are usually found during other times of the year, too, when the budget is less tight.  

“It’s to the advantage of the consumer to be looking at sales during the year and look for opportunities to get the most out of their money,” he says. 

Trying to keep family traditions alive

Wanting to continue your grandparents’ or parents’ traditions may be sentimental but also pricey in today’s economy. Maybe they held extravagant dinner parties, paid for holiday trips and gave their children  a certain number of gifts every year. You want to follow suit, but can’t afford it. 

“(I’m a) firm believer that what gets us in trouble in the holidays is wanting to do what Mom and Dad did,” Williams says. “Things are more expensive now.” 

Shopping with family members post-Thanksgiving, on Black Friday, although a tradition, also may be a temptation because of impulse buys or if family members don’t hold you accountable to sticking to a budget. 

“It’s tradition but it’s also a day people can’t afford,” Williams says.  

Hosting hordes of holiday visitors

While milk and cookies are left out for Santa, entertaining guests, from neighbors and co-workers to out-of-town family and friends, can increase your food and utilities spending in December. 

According to a holiday retail survey by Deloitte, 24 percent of people plan to attend and/or host more parties and events during the holidays.  

“You spend money in all sorts of ways,” Dvorkin says. 

Indulgent spending

“Where the problem is, we don’t plan for Christmas, we just do Christmas,” says Williams. He says that means sometimes consumers plan, mentally, to go into debt.  

He advises to plan ahead for the next season, adding that he knows people who start checking items off their list in February during sales, or in June or July when fewer people are buying and prices are lower.  

The NRF predicts holiday sales, including gifts and food and beverage items, to reach nearly $682 billion, up from $655.8 billion in 2016. Without careful spending, a large amount of that could be a debt burden on consumers until the next season comes around.

“You don’t want this to be a compounding problem that continues to grow each year,” McClary says. 

Kat Khoury
Kat Khoury |

Kat Khoury is a writer at MagnifyMoney. You can email Kat at kat+mandi@magnifymoney.com

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Here’s How the House and Senate Tax Reform Plans Would Affect Homeowners

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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House and Senate Republicans have rolled out separate versions of tax-reform plans, aiming to cut taxes for corporations and individuals. Although the two bills diverge in a number of ways and the fate of both remains in flux, one thing’s for certain: Homeowners would be affected under both plans.

In this article, we lay out the changes to housing-related provisions under both plans and explain what they would mean for existing homeowners and first-time homebuyers.

Where are we?

The House version of the tax bill passed by a 227-205 chamber vote ahead of Thanksgiving. The Senate Committee on Finance approved the Senate’s version of the Tax Cuts and Jobs Act late on Nov. 16 with a 14-12 vote along party lines.

The Senate’s bill is to go to the full Senate for a vote the week following the Thanksgiving holiday. President Trump has called on lawmakers to pass one cohesive bill by Christmas, and Republican legislators would like to see the reforms take effect in 2018.

What are the changes?

Here’s a quick overview of housing-related changes proposed in the bills:

  • Both bills nearly double the standard deduction, while eliminating personal exemptions.
  • The House and Senate both proposed changing residency requirements for capital gains home-sale exclusions by increasing the live-in time period to five out of the last eight years. Current law allows people to write off up to $250,000 — or $500,000 for couples filing jointly — from capital gains when selling a home, as long as they have lived in it for two out of the past five years.
  • Under the House plan, mortgage borrowers can deduct mortgage interest on loans up to $500,000, for debt incurred after Nov. 2, 2017. Currently, the tax deduction cap is $1 million. The deduction for state and local income taxes would be gone. But the state and local property tax deduction would remain but be capped at $10,000. (There is no cap, currently.)
  • The Senate bill would leave the mortgage interest deduction unchanged, but eliminate all state and local tax deductions (SALT), including deductions for property taxes.

Read more about the Senate and House bills here.

Fewer people will claim mortgage interest deductions

The National Association of Realtors (NAR), a vocal critic of the tax reform proposals, expressed through statements and press briefings that both plans would negatively affect homeownership. The association has called the tax reform legislation an “overall assault on housing.”

“Simply preserving the mortgage interest deduction in name only isn’t enough to protect homeownership,” NAR President Elizabeth Mendenhall said in a statement.

Nearly doubling the standard deductions and repealing some itemized deductions would likely mean that far fewer people would itemize when they file taxes. NAR officials worry that these moves will undercut the incentives to pursue homeownership.

The standard deduction is a fixed dollar amount, based on your filing status and age, by which the IRS lets you reduce your taxable income. The itemized deduction allows you to list your various deductions, including the mortgage interest deduction. You can claim one or the other — whichever lowers your taxable income more.

The standard deduction for a married couple filing jointly is $24,400 under the House plan and $24,000 under the Senate plan. Wolters Kluwer, a global information services company, suggested in an analysis that only those taxpayers who would deduct more taxes through itemizing than taking the bigger standard deduction — the top earners — would benefit from itemizing deductions like the one for mortgage interest.

Impact under House plan

Capping the mortgage interest deduction

The good news is that the majority of existing homeowners won’t be affected by the cap on the mortgage interest deduction, because only about 21 percent of American households take the deduction under the current law, according to the Tax Policy Center.

But about 18.5 percent of new homebuyers would get hit with a bigger tax bill on their housing-related tax liabilities, according to an analysis released by Trulia, an online real estate resource for homebuyers and renters.

Many economists say the mortgage interest deduction distorts the housing market by driving up home prices and soaking up much-needed supply, and that it doesn’t necessarily help increase homeownership rates.

“Because the mortgage interest deduction skews to upper-income families, it encourages people to buy bigger homes,” Nela Richardson, chief economist at Redfin, a Seattle-based real estate and technology company, told MagnifyMoney. “It also encourages builders to also build bigger homes, so it encourages sprawl.”

Less than 10 percent of the bottom 90 percent of the income distribution receive the tax subsidy on mortgages, the Tax Policy Center said.

Richardson added that this doesn’t mean the deduction should be completely eliminated. She said she thinks putting a cap on the deduction is only to make the math work for the corporate tax cut, though it is not structured in a way to help middle-class homeowners.

“People who have the means to buy those homes” with a mortgage of more than $500,000 “would continue to buy those homes,” Richardson said. “What we’d like to see is [changes] to help buyers who wouldn’t be able to afford a house unless they got some kind of tax credit. That would be a subsidy that was progressive instead of regressive.”

A silver lining to some: Middle-class homeowners might benefit from an income tax cut, which hopefully would help them purchase a house, experts say.

“The result of that is still a little fuzzy,” Richardson said. “It’s not clear that middle-class buyers in the long run would actually receive an income tax cut.”

What does it mean to first-time homebuyers in expensive cities?

The mortgage interest deduction provides little benefit to new home buyers because many new U.S. homeowners do not itemize or are in the 15 percent tax bracket or lower, William G. Gale, chairman of federal economic policy in the Economic Studies Program at the Brookings Institution, wrote in an analysis for the Tax Policy Center.

First-time buyers are generally looking for cheaper homes. Nationally, the median sales price for existing homes is $245,100, according to the Federal Reserve Bank of St. Louis, well under the $500,000 cap, so capping the mortgage interest deduction shouldn’t affect them too much.

But for buyers in high-cost markets, where demand is high and affordability is challenging, the cap will sting, Richardson said.

“You cannot find a $500,000 home in the Bay Area,” Richardson said. “Good luck with that.”

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In San Francisco, the median home sales price is around $1.2 million, according to Redfin and Trulia.

Home prices are expected to go up next year, as the Federal Reserve is expected to increase the short-term interest rate by year’s end, economists say.

“For the first-time buyer, you are dealing with this double whammy,” Richardson said. “If you add onto the fact that really expensive states’ first-time home buyers won’t be able to deduct all of the mortgage interest, then that is an additional expense. So it really is a challenging situation to put new buyers in.”

Trulia reported that across the 100 largest markets, more than half of homebuyers in coastal California, New York and Cambridge, Mass., would experience an increase in their home-related tax liabilities if they purchased a home under the House plan.

Impact on housing supply

Real estate experts expect less movement in the housing market since people who already own homes with big mortgages can continue to deduct the interest. This would make the housing supply crunch even worse in those expensive markets because people may choose to stay in the same house, knowing they couldn’t deduct the same amount of interest on their next big mortgage.

Factor in a longer live-in requirement for capital gains exclusions of homes sales, which economists believe will result in more homeowners waiting longer before moving to a different house to save on capital gains, and it would be even trickier for first-home buyers to bid for a desirable house in higher-end markets.

“It’s definitely not going to help alleviate price increases,” Cheryl Young, senior economist at Trulia, told MagnifyMoney. “But it will also contribute to competition.”

Trulia found that roughly 10 percent or more of existing homeowners in California and the Northeast would lose the incentive to sell their homes. Nationwide, the figure is 2.5 percent.

What does it mean for homeowners in high-tax states?

People living in high-tax states, such as New Jersey, New York and California, where homes are also costly, will see a rise in their property tax liability on taxes paid above the $10,000 property-deduction cap.

Trulia estimates that more than 20 percent of existing homeowners in New York and San Francisco would experience an increase in their property tax bills. Nationally, about 9.2 percent of existing homeowners will experience an increase in their property taxes.

Impact under Senate plan

Bigger property tax liability

Although the Senate plan is in some respects seen as more straightforward than the House bill, removing all SALT deductions would have a more expansive impact on homeowners across the country. That’s because they wouldn’t be able to deduct their property taxes anymore, Trulia’s chief economist, Ralph McLaughlin, explained in an analysis.

Existing homeowners in the Northeast and the Bay Area — New Jersey, New York, Connecticut and California — would be hit the hardest, according to McLaughlin.

A study commissioned by the National Association of Realtors and conducted by PricewaterhouseCoopers (PwC) found that, for many homeowners who currently benefit from the mortgage interest deduction, the elimination of other itemized deductions and personal exemptions would cause their taxes to rise, even if they elected to take the increased standard deduction.

The study found that homeowners with adjusted gross incomes between $50,000 and $200,000 would see their taxes rise by an average of $815.

Mortgage interest deduction would be worth less

Leonard Burman, a fellow at the Urban Institute and professor of public administration and international affairs at Syracuse University, wrote in an analysis that if homeowners cannot deduct state and local income, sales and property taxes, only the very wealthy and the very generous would benefit from itemizing. As a result, he estimated that only 4.5 percent of households would itemize under the plan, compared with the current 26.6 percent.

“Even for those who continue to itemize, the mortgage interest deduction may be worth much less than many homeowners believe,” Burman wrote. “This is because net tax savings depend not only on whether mortgage interest plus other deductions exceed the standard deduction, but by how much.”

Shen Lu
Shen Lu |

Shen Lu is a writer at MagnifyMoney. You can email Shen at shenlu@magnifymoney.com

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5 Places to Shop for Novelty Gifts You’ll Feel Good About Buying

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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For lots of people, holiday shopping consists of frantically running through the crowded aisles at Target, Walmart, T.J.Maxx, Macy’s and Best Buy — or typing things like “gifts for Mom” into the Amazon search field. And while they spend a good deal of time and effort shopping (and stressing), the outcome is all too often a load of generic products from big-box stores and a generous helping of conspicuous consumers’ guilt.

Sound familiar?

If you’re looking to break that pattern, there are lots of places where you can find holiday gifts that will stand out among all the other “stuff.” Here, we rounded up some noteworthy retailers and brand websites you could explore for interesting, unusual gifts, based on the personality of the person you’re shopping for.

A plus: You can feel good about spending money in these places because someone else will benefit from your dime.

For the sassy and quirky

A screenshot of the BlueQ website.

BlueQ is the place to buy a gift for someone with a good sense of humor. The Pittsfield, Mass.-based novelty gift manufacturer was founded in 1988, and its self-described mission is simple: “We just want you to be happy.”

From colorful stocks to quirky reusable handbags, and tin boxes to oven mitts, almost every item sold at BlueQ features a sassy phrase combined with edgy, vintage imagery. Want a taste?

I’m not bossy; I’m the boss” on an oven mitt.

House rule: Be nice, or leave” on a magnet.

Busy making a f–king difference” on a sock.

Nutcase” on a pocket box.

Always be yourself unless you can be a unicorn, then always be a unicorn” on a pack of gums.

Why we like it

Fun stuff doesn’t need to be costly. The price range for the goods is from $1.80 to $15.

The joy-bringing gift shop donates 1 percent of the sales of its socks to Doctors Without Borders and 1 percent of oven mitt and dish towel sales to hunger relief programs throughout the world. Another 1 percent, this from profit selling recycled purses and bags — made from 95 percent post-consumer goods — goes to support international environmental initiatives. BlueQ also employs people with disabilities to assemble its products.

Where to shop

You can order from BlueQ’s website, and many bookstores and gift shops carry BlueQ’s items. Find a store near you here.

For the creative and ethically conscious

A screenshot of the Uncommongoods website.

Uncommongoods is a marketplace for artists and crafters from across the world to sell independently designed, often fair-traded and hand-crafted products. To name a few:

Handwoven baskets from Rwanda

Cardboard iPad TV stands

Glass Zipper Bags

Why we like it

The company values sustainability as a business and a product distributor. Many the items sold on its website are made of recycled materials. Customers can choose a nonprofit organization that partners with Uncommongoods to give $1 with every order.

A team of buyers not only evaluates goods based on materials and function, but also cares where each design comes from, how it’s made and who made it, according to the shop’s website.

During the peak winter months, when Uncommongoods hires hundreds of seasonal workers, the company says it pays its lowest paid hourly worker 100 percent more than minimum wage.

To make your shopping experience easier, Uncommongoods has a search engine for gift suggestions for your loved ones, letting you filter different personalities and hobbies.

Where to shop

Uncommongoods is an online-only marketplace: https://www.uncommongoods.com/

For the indie foodie

A screenshot of the Mouth website.

Mouth is a paradise for your foodie friends and family. The company prides itself on producing interesting, indie, small-batch foods. You can buy your friends specialty eats from 40 states, and learn about the people who made the food you purchase here.

Why we like it

You won’t find convenience-store staples like Doritos or Hershey’s on Mouth. Most of the foods that Mouth sources are either handmade at local stores or workshops across the country, or come from brands started as homemade concoctions, according to its website. You would be supporting small, local businesses by purchasing treats that match your friends’ tastes. For ingredients that cannot be sourced domestically, such as coffee and chocolate, the company makes sure they are fair-traded and organic.

While Mouth is dedicated to selling treats that are made in an environmentally friendly, relatively healthier way, it by no means claims that everything on its website is good for you. But Mouth promises that its foods are not full of chemicals, preservatives or unhealthy fats.

Where to shop

You can browse snacks online at https://www.mouth.com/.

For the literary and intellectual

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Independent stores tend to have a rich history and offer diverse specialty books depending on the theme of the store and its location. Chicago’s Women and Children First, for instance, opened in a modest storefront in 1979 and is one of the country’s biggest feminist bookstores — it would be a great place to shop for someone passionate about supporting women. Sales from Indy Reads Books in Indianapolis support a nonprofit dedicated to improving adult literacy, and a book from there could be a meaningful gift for a philanthropic friend.

Why we like them

Apart from offering personalized services, specialized book selections and a platform for literary gatherings, many local bookshops are increasingly carrying gift items — pins, mugs, T-shirts, cards — consistent with the history or theme of the store.

If you have bookworms on your shopping list, pick a book from their favorite author or a souvenir from the shop they loyally frequent. This is a great way to support small businesses.

Where to find independent bookstores

You can use this guide to find a local independent bookstore near you.

For the artsy and modern

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Museum gift shops are stocked with fine-art-inspired collectibles — not just totes or posters. Gift shop items often embody the very best design principles in a form of functionality or art.

Depending on where you are and what types of art you like, you can find prints, office stationery, books, dining sets, home furniture, apparel and more from the country’s art museums or through their websites

Why we like them

The gift shop is usually a critical revenue generator for a nonprofit museum, according to the State Department Bureau of International Information Programs. So when you buy a Monet umbrella or an American Gothic magnet while visiting a museum, you’re showing your support. If you are a member of a particular museum, you can often get a discount. And the purchase is likely to be appreciated by your art-loving friends.

Where to shop

The Metropolitan Museum of Art: The Met Store has some of the best art book selections. It is now offering a 25 percent discount on select holiday ornaments, Christmas cards and calendars.

The Art Institute of Chicago: The Art Institute is America’s second-largest art museum after the Met in New York. It is best known for Impressionist and Post-Impressionist art collections. The collectibles at the gift shop well represent the museum’s masterpieces.

Museum of Modern Art: The MoMA in New York has an outstanding history with design. In 1932, the museum established the world’s first curatorial department devoted to architecture and design. The MoMA Design Store features a vast range of modern and innovative design objects. It is currently offering 20 percent off on 100 gift items.

San Francisco Museum of Modern Art: The SFMOMA gift store offers an impressive selection of modern and contemporary art books. Apart from that, you can order gallery-quality reproductions of artworks that are often exclusive to the museum, through its website.

Shen Lu
Shen Lu |

Shen Lu is a writer at MagnifyMoney. You can email Shen at shenlu@magnifymoney.com

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Senate Tax Reform vs. House Tax Reform

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Update: The Senate’s version of the Tax Cuts and Jobs Act is moving on to its next stage. The Senate Committee on Finance approved the Senate’s version of the Tax Cuts and Jobs Act late November 16 with a 14-12 vote along party lines.

The Senate’s bill will go to the full Senate for a vote the week following the Thanksgiving holiday. At least 52 senators must vote in favor of the bill’s passing to move it forward. If no Democrats vote for the bill, Republicans can only stand to lose two votes.

The vote was made only hours after the House version of the tax bill passed by a 227-205 chamber vote, just before the chamber’s Thanksgiving holiday. No Democrats backed the bill.

From the looks of it, the Senate isn’t exactly on the same page with their colleagues in the House of Representatives. The plan bears the same name as the House’s bill, but the Senate’s version of the Tax Cut and Jobs Act diverges from the House’s plan on a number of individual and business tax reforms.

Most notably, the proposed Senate Republican plan would delay cutting the corporate tax rate by one year, include more tax brackets than the House plan and retain the mortgage interest deduction, among a few other popular tax breaks.

The bills do share some things in common. For example, neither version calls for any changes in workers’ 401(k) tax contribution limits. And both tax plans would repeal the alternative minimum tax and maintain the charitable contribution deduction. Both plans also repeal personal exemptions, but double the standard income tax deduction for individuals, married couples and single parents.

Complying with a Senate rule known as the Byrd rule is an issue. Under that rule, during the legislative reconciliation process, senators can move to block legislation if, among other reasons, it would possibly mean a significant increase in the federal deficit beyond a 10-year term.

If the Senate is able to pass its tax bill, the differences between the two plans may lead to clashes over tax policy as a pressured Congress tries to get a single tax reform bill to President Donald Trump’s desk by Christmas.

Here is a quick breakdown of the major differences between the two plans. Read beyond the table for further detail.

Income tax brackets

The Senate’s plan maintains the tax system’s seven tax brackets—10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5% — as opposed to the House’s four. The senate plan notably maintains the lowest tax rate at 10 percent and modifies all but one other. The proposal also adjusts qualifying income levels.

The Senate plan would reduce the income tax on the nation’s highest earners to 38.5% from the current 39.6%. Individuals and heads of households earning more than $500,000, and married couples earning more than $1 million would pay the highest rate. The proposed income thresholds for the Senate’s plan are pictured below.

Alternatively, the House bill proposes four income brackets of 12%, 25%, 35%, and 39.6%.

The state and local tax deduction

The Senate plan fully eliminates the State and Local Tax, or SALT, deduction. Nearly one third of Americans took the deduction in 2015, according to the Tax Policy Center, so the repeal is likely to ruffle some feathers. While the House tax plan reduced deductions for state and local taxes, it still allowed Americans to deduct up to $10,000 in property taxes. The senate plan would completely get rid of the SALT deduction, including the deduction for property taxes.

Some critics fear eliminating the SALT deduction would disproportionately affect earners in states with high taxes, like New York and California. Across the nation, just six states— California, New York, New Jersey, Illinois, Texas, and Pennsylvania— comprised more than half of the value of all state and local tax deduction claims in 2014.

The mortgage interest deduction

Nothing would change under the Senate’s plan. Americans would still be able to deduct the amount of interest paid on up to the first $1 million of mortgage debt under the Senate tax plan. The House tax plan, on the other hand, had proposed to lower the threshold for the mortgage interest deduction to $500,000.

Only about six percent of new homes are valued at more than $500,000, according to an August 2017 report by the United for Homes campaign. The group argues lowering the cap would have “virtually no effect on homeownership rates.”

Corporate tax rate

The Senate plan still reduces the corporate tax rate from 35% to 20%, but corporations won’t get a break until 2019, when the Senate plan phases in the reduction. On the other hand, the House Plan would have initiated the reduced rate in 2018.

The decision to phase in the cut was likely made because a delayed corporate tax cut would make it easier for the Senate to reach its goal of passing a tax bill that does not increase the deficit by more than $1.5 trillion over the next decade.

The estate tax

The estate tax exemption is doubled from $5.49 million in assets ($10.98 million for married couples) onto heirs under both the Senate and House bills.

The House plan doesn’t get rid of the estate tax immediately. The House’s proposal also doubles the exclusion amount to $10 million, but eliminates the estate tax after 2023. The estate tax affects only the estates of the wealthiest 0.2 percent of Americans, according to the Center of Budget and Policy Priorities.

Adoption and child tax credits

Unlike the initial House tax plan, the Senate plan proposes keep some popular tax breaks. The plan proposes to retain the Adoption Tax Credit, which allows families to receive a tax credit for all qualifying adoption expenses up to $13,570. The Senate plan also slightly bumps up a proposed child tax credit compared to the House plan. While the House plan increased the credit from $1000 to $1600, the Senate plan proposes raising the credit slightly more, to $1650.

Student loan interest and medical expenses deduction

Under Senate plan, students will still be able to deduct interest paid on student loans up to $2500. Furthermore, taxpayers would still be able to claim medical expenses as a deduction if they account for over 7.5 or 10% of their income. This is a departure from the House plan, which would have eliminated both.

Pass through business

The Senate tax plan establishes a 17.4 percent deduction for pass through businesses like sole proprietorships, S corporations, and partnerships.The HIll reports the deduction would lower the effective tax rate on the highest earning small businesses to just over 30 percent, according to a Senate Finance aide. The deduction would only apply to service businesses based in the U.S

The House plan establishes a 25 percent tax rate for pass-through companies. But only 30 percent of the business’s revenue is subject to that rate. The remaining 70 percent would be taxed at the individual tax rate. The House amended the bill Thursday to create a new 9 percent tax rate for the first $75,000 of income of a married active owner with less than $150,000 of pass-through income.

What’s next for GOP tax reform?

The future is unclear for either proposed tax plan. The two chambers will likely need to compromise over differences in the coming weeks to get a bill passed and to the President’s desk by year’s end.

Thursday’s news came just as the House Ways and Means Committee finalized its own bill after announcing two amendments, with a vote expected next week.

Brittney Laryea
Brittney Laryea |

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

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Does Western Union Owe You Money? Company Settles FTC Lawsuit for $586M

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.

western union settlement
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By now, many consumers know to automatically delete suspicious emails or social media messages requesting wire transfers from Nigerian princes or scammers posing as long-lost relatives. 

Even so, people have lost millions of dollars to fraudsters via wire transfer scams. If you’ve fallen victim to a wire transfer scam involving Western Union, you might want to pay attention to this news.  

Consumers now can file claims to recoup money lost when scammers told them to pay via Western Union’s money transfer system, as part of a $586 million federal settlement with the company that was announced this week.  

The deadline to file claims with the U.S. Department of Justice is Feb. 12, 2018. The settlement applies to scams executed through Western Union between Jan. 1, 2004, and Jan. 19, 2017. 

“American consumers lost money while Western Union looked the other way,” Federal Trade Commission (FTC) Acting Chairman Maureen K. Ohlhausen said this week in a press release. “We’re pleased to start the process that will get that money back into consumers’ rightful hands.”  

The settlement stemmed from a January 2017 complaint against the company by the FTC, which said that lax security policies have made the popular money transfer service a way for scammers to defraud consumers.   

The case was investigated with the assistance of the Department of Justice, the Postal Inspection Service, the FBI and several local law enforcement agencies.  

“Returning forfeited funds to these victims and other victims of crime is one of the department’s highest priorities,” Acting Assistant Attorney General Kenneth A. Blanco, of the Justice Department’s Criminal Division, said in a Nov. 13 statement. 

Western Union also has agreed to implement an antifraud program and enhance its policies on federal compliance obligations.  

What kinds of scams are covered?

variety of scams may be covered by this settlement, according to the FTC, including but not limited to the following: 

  • Internet purchase scams: You paid for, but never received, things you bought online. 
  • Prize promotion scams: You were told you won a sweepstakes and would receive your winnings in exchange for payment, but you never received any prize. 
  • Family member scams: You sent money to someone who was pretending to be a relative in urgent need of money. 
  • Loan scams: You paid upfront fees for a loan, but did not get the promised funds. 
  • Online dating scams: You sent money to someone who created a fake profile on a dating or social networking site.  

How do I submit a claim?

If you’ve already reported your losses to Western Union, the FTC or a government agency, you may receive a form in the mail from Gilardi & Co., the claims administrator hired by Justice to handle refunds. This form will include a claim ID and a PIN that you’ll need when filing your claim online at www.ftc.gov/wu 

You also can file a claim if you did not receive a form in the mail. Visit www.ftc.gov/wu and click on the link indicating that you did not receive a claim form and follow the instructions to complete your filing. 

If you sent money to a scammer via Western Union, file a claim even if you don’t have any paperwork, according to the Justice Department. You may still be eligible for a refund. 

You can file more than one claim, if you were a scam victim more than once. 

Will I definitely get my money back?

Hard to say. Each claim will be verified by the Justice Department. If your claim is verified, the amount you get will depend on how much you lost and the total number of consumers who submit valid claims.  

If verified, you’re only entitled to a refund of the actual amount you transferred through Western Union, according to the Justice Department. Other expenses, like fees or transfers sent through other companies, will not be included in your refund. 

It could take up to a year to process and verify your claim. The best way to stay in the loop is to bookmark the FTC page for the Western Union settlement or westernunionremission.com and check frequently for updates.  

KaToya Fleming
KaToya Fleming |

KaToya Fleming is a writer at MagnifyMoney. You can email KaToya here

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4 Ways the House Tax Bill Could Affect College Affordability

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Congress is working around the clock to get a new tax bill to President Trump’s desk before the year is out. In addition to a host of tax cuts, both the Senate and House GOP tax plans include several proposals that could make saving and paying for higher education more costly for families. Considering Americans hold a collective $1.36 trillion in student loan debt and 11.2 percent of that balance is either delinquent or in default that’s not-so-good news for millions of Americans.

Both plans  include proposed ideas that could impact how students and families finance higher education. The House plan, for instance, includes proposed provisions that would affect the benefits parents, students and school employees like graduate students receive, which could ultimately impact the price students pay.

In a Nov. 6 letter to the House Ways and Means Committee opposing the provisions, the American Council on Education and 50 other higher education associations states that  “the committee’s summary of the bill showed that its provisions would increase the cost to students attending college by more than $65 billion between 2018 and 2027.” They reaffirmed their opposition in a Nov.15 letter.

The council and other higher education associations weren’t satisfied with the Senate’s version of the Tax Cuts and Jobs Act, either. In a Nov. 14 letter, the council says it’s pleased the Senate bill retains some student benefits eliminated in the House version, but remains concerned about other positions that it says would ultimately make attaining a college education more expensive and “erode the financial stability of public and private, two-year and four-year colleges and universities.”

Where are the bills now?

The House version of the Tax Cuts and Jobs Act passed by a 227-205 vote on Nov. 16, just before the chamber’s Thanksgiving holiday. No Democrats backed the bill.

The Senate Committee on Finance approved The Senate’s version of the bill late November 16 with a 14-12 vote along party lines. The bill will go to full Senate for a vote the week following the Thanksgiving holiday. At least 52 senators must vote in favor of the bill’s passing to move it forward. If no Democrats vote for the bill, Republicans can only stand to lose two votes.

If the Senate is able to pass its tax bill, the two chambers would need to hash out many differences between the proposed tax plans before sending legislation to the president’s desk.

In its plan, the Senate committee says the goal of tax reform in relation to education is to simplify education tax benefits. MagnifyMoney took a look at a few of the major proposed changes to the tax code that would impact college affordability most.

Streamline tax credits

The House tax bill proposes to repeal the Hope Scholarship Credit and Lifetime Learning Credit while slightly expanding the American Opportunity Tax Credit. The new American Opportunity Tax Credit (AOTC) would credit the first $2,000 of higher education expenses (like tuition, fees and course materials) and offer a 25 percent tax credit for the next $2,000 of higher education expenses. That’s the same as it is now, with one addition: The new AOTC also offers a maximum $500 credit for fifth-year students.

The bigger change is the elimination of the other credits. Currently, if students don’t elect the American Opportunity Tax Credit, they can instead claim the Hope Scholarship Credit for expenses up to $1,500 credit applied to tuition and fees during the first two years of education; or, they may choose the Lifetime Learning Credit that awards up to 20 percent of the first $10,000 of qualified education expenses for an unlimited number of years.

Basically, in creating the new American Opportunity Tax Credit, the House bill eliminates the tax benefit for nontraditional, part-time, or graduate students who may spend longer than five years in the pursuit of a higher-ed degree. According to the Joint Committee on Taxation, consolidating the AOTC would increase tax revenue by $17.5 billion from 2018 to 2027, and increase spending by $0.2 billion over the same period.

The Senate bill does not change any of these credits.

Make tuition reductions taxable

The House bill proposes eliminating a tax exclusion for qualified tuition reductions, which allows college and university employees who receive discounted tuition to omit the reduction from their taxable income.

A repeal would generally increase the taxable income for many campus employees. Most notably, eliminating the exclusion would negatively impact graduate students students who, under the House’s proposed tax bill, would have any waived tuition added to their taxable income.

Many graduate students receive a stipend in exchange for work done for the university, like teaching courses or working on research projects. The stipend offsets student’s overall cost of attendance and may be worth tens of thousands of dollars. As part of the package, many students see all or part of their tuition waived.

Students already pay taxes on the stipend. Under the House tax plan, students would have to report the waived tuition as income, too, although they never actually see the funds. Since a year’s worth of a graduate education can cost tens of thousands of dollars, the addition could move the student up into higher tax brackets and significantly increase the amount of income tax they have to pay.

The Senate bill doesn’t alter the exclusion.

Eliminate the student loan interest deduction

Under the House tax bill, students who made payments on their federal or private student loans during the tax year would no longer be able to deduct interest they paid on the loans.

Current tax code allows those repaying student loans to deduct up to $2,500 of student loan interest paid each year. To claim the deduction, a taxpayer cannot earn more than $80,000 ($160,00 for married couples filing jointly). The deduction is reduced based on income for earners above $65,000, up to an $80,000 limit. (The phaseout is between $130,000 and $160,000 who are married and filing joint returns.)

Nearly 12 million Americans were spared paying an average $1,068 when they were credited with the deduction in 2014, according to the Center for American Progress, an independent nonpartisan policy institute. If a student turns to student loans or other expensive borrowing options to make up for the deduction, he or she could  experience more financial strain after graduation.

The Senate tax bill retains the student loan interest deduction.

Repeal the tax exclusion for employer-provided educational assistance

Some employers provide workers educational assistance to help deflect the cost of earning a degree or completing continuing education courses at the undergraduate or graduate level. Currently, Americans receiving such assistance are able to exclude up to $5,250 of it from their taxable income.

Under the House tax plan, the education-related funds employees receive would be taxed as income, increasing the amount some would pay in taxes if they enroll in such a program.

A spokesperson for American Student Assistance says if the final tax bill includes the repeal, it may point to a bleak future for the spread of student loan repayment assistance benefits, currently offered by only 4 percent of American companies.

Take care not to confuse education assistance with another, growing employer benefit: student loan repayment assistance. The student loan repayment benefit is new and structured differently from company to company, but generally, it grants some employees money to help repay their student loans.

The Senate plan does not repeal the employer-provided educational assistance exclusion.

Brittney Laryea
Brittney Laryea |

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

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