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Strategies to Save

How Retirement Planning Can Help You Save for the Future

Editorial Note: 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 prior to publication.

Retirement planning
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Retirement planning, like any other long-term goal, requires some forethought and intention. Slow and steady wins the race when it comes to padding your nest egg, but many Americans are struggling to adequately prepare for their golden years.

Almost 50% of families in the U.S. have nothing at all set aside for retirement, according to research from the Economic Policy Institute. It’s little wonder that three in 10 workers say the topic stresses them out.

The truth is that it’s never too late to up your savings game. Whether you’re right on track or way behind schedule, retirement planning can make saving for the future a little easier. Here’s what you need to know.

What is a retirement plan?

A retirement plan is exactly what it sounds like — a strategy for shoring up your financial security when you’re no longer in the workforce. This begins with figuring out how much money you’ll actually need in retirement. (We’ll dive into this shortly.) From there, it’s about earmarking a reasonable amount of monthly income for your future self.

It would be wonderful if our income divided itself evenly between all our financial goals, but that’s rarely the case. Throughout your life, it’s normal to alternate between hitting your retirement savings goals and pulling back in order to fund other financial priorities, like paying down debt or building your emergency fund. Effective retirement planning usually requires some trade-offs, a little bit of effort and the ability to tweak and course-correct along the way as life happens. In other words, retirement planning is dynamic.

“The plan that gets you to retirement is more than likely not going to be the plan that gets you through retirement,” Jim Brogan, a Knoxville-based certified retirement financial adviser, told MagnifyMoney. “Until you retire, you’re in a saving phase of life; after you retire, you’re in a spending phase.”

Retirement plans take many forms. If you don’t know your 401(k)s from your IRAs, rest easy. Let’s unpack the details.

Types of retirement plans

401(k)s

This employer-sponsored retirement account automatically takes a percentage of each paycheck and earmarks it for retirement. The beauty of a traditional 401(k) is that your contributions are tax-deductible, which is a nice perk come tax time. The lower your taxable income is, the lower your tax liability will be. On top of that, because your retirement savings aren’t taxed when you contribute them, that means your money can grow tax-free. When it comes time to pull that money out for retirement, it’ll then be taxed as ordinary income.

401(k)s come with a number of perks, the biggest being if your employer offers any sort of match — that’s free money. Every company is different, so you’ll want to contact your HR rep to clarify the details. Some employers, for example, will match 100% of your contributions up to 3% of your salary. Others might match half of your contributions up to 3% to 5% of your earnings. That means you’ll cash in on your employer making regular deposits into your account, which is the most effective way to leverage all that 401(k)s have to offer.

Just keep in mind that the IRS does put a cap on how much you, as an individual, can kick into your 401(k). For 2018, you can contribute up to $18,500, unless you’re 50 or over, in which case you can contribute up to $24,500.

Side note: 403(b)s are similar to a 401(k). They’re essentially the same, except that instead of being sponsored by private companies, they’re available to certain employees at public schools, nonprofits and churches.

Individual Retirement Account (IRA)

This kind of retirement account has nothing to do with your employer. You open it independently and can load it up with a maximum of $5,500 every year. (If you’re 50 or over, that number jumps to $6,500.) There are two main types of IRAs: traditional and Roth.

You can open an IRA at many major banks, investment firms or any of the new robo-advisory services that have cropped up over the years.

Traditional IRA

Roth IRA

Like 401(k) contributions, what you put in counts as a tax deduction. Your money also grows tax-free, but it is taxed as ordinary income when you make withdrawals during retirement.

Just keep in mind that if you tap into it prior to age 59½, you'll typically have to pay taxes on it, plus a 10% penalty.

The Roth IRA works a little differently. You won't enjoy that tax break when putting money in, but your cash does grow tax-free and you won't get hit with taxes when you withdraw during retirement.

In fact, you can pull from it whenever you want, even prior to retirement, without any penalties. The only time you'll be penalized is if you tap into the appreciation (i.e. your investment returns) before age 59½.

One other thing worth mentioning is that Roth IRAs also come with income limits. If you’re single, your annual earnings have to be under $135,000; it’s under $199,000 for married folks filing their taxes jointly.

Pensions

If your employer offers a pension, they’ll kick money into your plan during the years you’re still working. Then when you retire, that money comes your way either in a lump sum or as a monthly payment — think of it as a retirement paycheck of sorts that’ll likely be considered regular taxable income.

How much you’ll get depends on a number of factors, like your salary and how long you worked for the company. A pension provides peace of mind because the money is guaranteed to be waiting for you in retirement, which makes retirement planning a little easier.

Health Savings Accounts (HSAs)

Don’t let the name fool you. Health savings accounts (HSAs) can double as retirement-saving vehicles that go beyond medical expenses and are offered by certain employers.

If offered by your employer, you can make contributions before taxes are taken out, typically via automatic withdrawals from your paychecks. (If you open an HSA yourself, any contributions you make can be claimed as a tax deduction, which lowers your taxable income.)

You can tap into this fund tax-free to cover qualified medical costs at any time, but the reason it’s great for retirement is that once you hit 65, that money is yours for whatever you like — free and clear, tax-free, whether it’s for medical expenses or not.

HSA rules: The main catch is that you have to be enrolled in a high-deductible health plan to qualify. This translates to a deductible that’s at least $1,350 for individuals; $2,700 for families. Contribution limits apply. For 2018, they cap out at $3,450 for single individuals; $6,850 for families. There’s also a catch-up contribution for 55+ folks, which allows you to kick in an extra $1,000. Check to see if your employer offers an HSA; if they don’t, anyone can open one if they meet the eligibility requirements.

Taxable investment accounts

Tax-advantaged accounts, like 401(k)s and Roth IRAs, are by far the best way to maximize your retirement planning efforts over the long haul. If you have some extra income leftover, directing it toward a taxable investment account is another way to build up your nest egg.

Brokerage firms offer these accounts as an additional way to save for retirement. Sure, they don’t come with tax benefits, but they also offer more freedom since you aren’t handcuffed to contribution limits, salary restrictions or early withdrawal penalties.

That said, you’ll have to ask yourself if it makes better financial sense to max out your 401(k) and/or IRA before looking to an investment account. Either way, you’ll definitely want to at least contribute enough to recoup any 401(k) employer match. Every case is different, but don’t be so quick to dismiss investment accounts because of the tax factor.

How to plan for retirement at every age

No matter what stage of life you’re in, you can always be working toward your retirement goals. Here’s what our experts have to say.

Retirement planning in your 20s:

“Your 20s is the best time to get into the habit of paying yourself first by automatically saving a portion of every paycheck,” Mark Wilson, an Irvine, Calif.-based certified financial planner, tells MagnifyMoney.

Time is on your side. Thanks to the magic of compounding interest, your early saving years are most powerful. Because you have more time to recover from any market setbacks, most experts recommend investing aggressively in stocks vs. safer, low-yield investments like bonds. A simple way to do that without getting too in the weeds is to sign up for a target-date fund.

Let’s say you open a Roth IRA and add just $50 a month starting at age 25. Assuming an average of 7% annual returns, you’ll have accumulated over $128,000 by the time you turn 65.

But how do you manage retirement savings if you have debt or can barely cobble together an emergency fund?

“For most 20-somethings, the number one goal isn’t saving for retirement,” Douglas Boneparth, a New York City-based certified financial planner, told MagnifyMoney. “Your 20s is really the time where you need to focus on equipping yourself with a strong foundation in personal finance.”

You may need excess income to help fund your financial goals, whether that be building a three- to six-month emergency fund, paying down high-interest debt or whatever matters most to you. That said, if your employer will match your 401(k) contributions in some way, passing on it means leaving free money on the table.

“Taking that match is a no-brainer; you could immediately get maybe a 25% or even 100% return on those first dollars,” said Wilson.

This certainly isn’t to say you shouldn’t get a jump on retirement planning — it just means that getting yourself on solid financial ground should be top of mind. Begin by getting a firm grasp on your income and expenses, then creating a realistic budget that feels doable for your lifestyle. After all your monthly bills are paid, how much is left over? This is what Boneparth refers to as “mastering your cash flow.”

How much should you save? He says earmarking 10% to 15% of your income for retirement is the ideal scenario, but if this isn’t feasible, the idea is to squirrel away at least enough to get an employer match. The most important thing is getting into the routine of saving. You can always dial up your efforts as you start earning more.

The main takeaways for your 20s:

  • Establish a strong financial foundation — track your income and expenses, and create a realistic budget.
  • Identify your financial goals, then use excess monthly income to fund them little by little.
  • If your employer offers a 401(k) match, try to contribute enough to lock down this free money.
  • Get into the habit of setting aside some portion of every paycheck for retirement. A little can go a long way when it comes to compounding interest.

Retirement planning in your 30s:

By this point, most people are earning more than they did the decade before, of course many also have new expenses — a mortgage, kids, child care bills etc.

Having competing money goals never really goes away, but padding your retirement fund should be a priority at this point. Brogan says that if you’re just starting to save for retirement now, you should aim to sock away 10% to 15% of each paycheck.

“This can feel overwhelming for someone who’s already established in their work life and used to spending that money, so I suggest starting small,” he said.

For example, begin by saving just 2% of your income, then increase it gradually every year. You can also direct, say, 50% of every work bonus or a percentage of every tax refund or raise to your retirement accounts. Using cash windfalls feels less painful since they’re separate from your monthly budget.

Also, if you don’t have life insurance, it’s time to seriously consider it. This is doubly important if you are a primary breadwinner or you have children who depend on you. Check out our guide to life insurance here.

The main takeaways for your 30s:

  • Shoot to set aside 10% of your income for retirement. If this feels overwhelming, start small and gradually work your way up.
  • If you’re short of your goal, boost your efforts by leveraging cash windfalls like work bonuses, raises and tax refunds.

Retirement planning in your 40s:

Our financial priorities are always evolving, but many people in this phase of life feel particularly torn between two biggies: college savings versus retirement. Parental instincts often nudge us to take care of our children before ourselves, but our experts actually say that your retirement should come before financing your kids’ education.

“Unlike college, there are no scholarships or loans you can get for retirement,” warned Wilson. “If you’re behind on retirement savings, this is the time to kick it up because by the time you get into your 50s, it’s only going to get harder.”

On that note, Wilson says those just getting started should strive to save no less than 15% of their income for retirement at this point. This obviously may require some budgeting overhauls. Tracking your expenses may help you reveal areas of wasteful spending. Can you negotiate down any bills or go without cable, for example? Can you pick up a side gig or consolidate high-interest debt to free up more money for retirement? Every little bit helps.

The main takeaways for your 40s:

  • If you haven’t started saving at this point, strive to earmark 15% of your income for retirement. This may require reworking your budget. Remember: Something’s always better than nothing, even if it’s short of that 15% mark.
  • Retirement savings on track? If possible, up your account contributions.

Retirement planning in your 50s

Now you’re really on the home stretch. Once you get five to 12 years out from retirement, Brogan suggests really sitting down and asking yourself what your income needs will be like once the time comes. This is important as fewer than 50% of Americans have actually calculated their retirement number, according to the U.S. Department of Labor.

Begin by clarifying how much guaranteed income will be provided. Social Security benefits and pensions, for example, fall into this category. To ballpark your Social Security benefits, check out this handy guide. According to the Department of Labor, these benefits, on average, are equal to roughly 40% of your pre-retirement earnings.

If, for instance, you’ll be getting $40,000 in Social Security between you and your spouse, and you’ve decided you need about $65,000 a year to live comfortably, that means you’re going to have to draw $25,000 from savings each year to maintain that lifestyle. (Just be sure to adjust for inflation.)

Those who aren’t quite hitting their savings goals can contribute more to 401(k)s and IRAs once they turn 50, at which point the IRS allows for higher contribution limits. The same goes for Health Savings Accounts once you turn 55.

The main takeaways for your 50s:

  • Think about what your income needs will actually be like in retirement. Then pinpoint any guaranteed income like Social Security benefits, pensions and so on. How much will you actually need to draw from your retirement accounts each year?
  • Continue kicking into your retirement accounts.
  • If you’re behind, consider leveraging catch-up contributions.

Retirement planning in your 60s

The average retirement age in the U.S. is 63, according to the Statistic Brain Research Institute. The good news is that those who are behind still have some time to shore up their finances before leaving the workforce. One of the best strategies is having a practical retirement date.

“Working an extra two years is the easiest way to make a big impact on your nest egg,” said Wilson.

Another workaround is to delay when you start taking your Social Security benefits. According to the Social Security Administration, you can begin cashing in on them at age 62, but how much you get increases every year that you get closer to what’s considered full retirement age (67). Here’s how the SSA breaks it down:

Age you start collecting Social Security

How much of your monthly benefit you'll get

62

70%

63

75%

64

80%

65

86.7%

66

93.3%

67

100%

One other tidbit: About five years before you retire, Brogan recommends beginning to set aside whatever money you’ll need during your early years of retirement — say, the first five years or so — into stable investments. If you find yourself in the middle of a market downturn right after you step away from your job, having some money in a traditional savings account, for instance, means you won’t have to liquidate money in the market while it’s down.

The main takeaways for your 60s:

  • Be reasonable about your retirement date. Staying in the workforce could majorly boost your nest egg.
  • Consider delaying your Social Security benefits, if necessary.
  • About five years before you retire, start setting a few years’ of retirement income into an account that’s separate from the stock market.

Final thoughts on retirement planning

Retirement planning is far from a one-size-fits-all approach, but some general rules of thumb do apply. Read up on which type of retirement account feel right to you. Then set yourself up for long-term success (and reap the benefits of compound interest), by beginning to save as early as possible. If your employer offers free money by way of a 401(k) match, all the better.

Once you get into your 60s, you can ratchet up your savings even more by settling on a reasonable retirement date and delaying your Social Security benefits, if possible. Of course, you’ll have to tweak and adjust along the way as life happens, but accommodating other financial goals doesn’t have to be an either/or situation.

The most important thing is to nurture the habit of routinely earmarking some portion of your earnings for your nest egg — in good times and bad.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Marianne Hayes
Marianne Hayes |

Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

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News

How I Paid Off $80,000 Worth of Debt by My 30th Birthday

Editorial Note: 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 prior to publication.

After wrapping up college in 2008, Tasha Danielle was like most new grads — feeling overwhelmed by debt. With more than $50,000 in student loans and several thousands of dollars more in credit card bills and auto debt, her entry-level salary at an accounting firm didn’t get her very far. Before long, she found herself on the hook for nearly $80,000.

It wasn’t easy, but Tasha managed to get all her balances down to zero by the time she turned 30. Here’s how she did it.

Digging a $80,000 hole didn’t happen overnight

“I knew going into college that I’d have to take out loans, but the plan was always to pay it all off as soon as possible,” Tasha tells MagnifyMoney.

Her initial student loan balance wasn’t a shock (education doesn’t come cheap), but her original plan of attack was to move back home after graduation to wipe it out as fast as she could — especially since she also had to take out a private loan to pay for the additional classes she needed for her CPA exam.

Tasha landed a job as an auditor at a Detroit accounting firm earning a $50,000 salary, but her debt repayment plan changed when she got engaged in 2009 and moved in with her fiancé. Between paying new bills and planning a wedding, sticking to her original debt-free timeline began feeling tough.

She spent the next few years covering all her minimum payments, but ended up taking on another loan when she financed a used car. By the time Tasha turned 25, her debt balances had ballooned beyond belief.

“The worst part [of being in so much debt] was that it wasn’t like I was living lavishly or going on shopping sprees and vacations,” she says.

At the time, she was shelling out $629 every month in minimum debt payments. It was her decision to end her engagement in 2011 that lit a fire under her to make a change. The situation created a financial emergency; she had to come up with $2,000 on a moment’s notice to cover their rent payments on her own. Tasha took out a cash advance on a credit card to get over the hump, which fixed her immediate problem but created a new one: she had effectively cancelled out any progress she’d made on her debt.

Tasha’s “aha!” moment came soon after, when she heard personal finance expert Michelle Singletary give a talk at her church.

“She posed a single question that changed my life: What if you were able to actually own your paycheck?”

That was the game changer.

Tasha dove head first into financial freedom blogs and podcasts, arming herself with as much knowledge as she could find. Prior to all this, she’d been throwing any additional monthly income she had toward her debts with the highest interest rates. But this approach hadn’t gotten her very far, and she was feeling less than inspired.

‘Not all my friends were supportive of what I was doing’

Photo courtesy of Tasha Danielle.

Tasha switched it up in 2012, opting for what’s known as the debt snowball method. In this system, you prioritize your smallest balance first; once you eliminate it, you take whatever money you were spending there and redirect it toward your next smallest balance until they’re all paid off.

Knocking out her balances so quickly gave Tasha the boost of momentum she needed to soldier on, especially when she saw her already-good credit score going higher and higher. (Keeping her payment history solid throughout her journey helped keep her score intact.)

Tasha also upped her income by working overtime whenever her company offered it — weekends, holidays, you name it. To accelerate her efforts even more, she curbed her overspending by adopting a cash system for discretionary spending.

“I used my checking account to cover fixed bills like my cell phone and internet, but went with an old-fashioned, cash-in-an-envelope system for groceries, gas and weekend money,” she says. For the latter, Tasha allotted herself just $25 per paycheck for going out with friends.

Staying on budget was a challenge, but she made it work with the help of some clever hacks. For instance, she’d bring extra food to work with her on days she knew she was going out afterward; this way, she wouldn’t be tempted to order bar fare. Similarly, she’d order budget-friendly drinks or simply find free things to do around town instead.

“My circle of friends changed a little; not all my friends were supportive of what I was doing,” she recalls. “But my real friends understood, and we just got creative about how we spent time together. Cooking dinner at home with friends is just as fun as going out to an expensive restaurant.”

Tasha began making serious headway, knocking out her balances faster than ever before. And to really supercharge her motivation, she rewarded herself every time she eliminated one. After knocking out one balance, she celebrated with a budget-friendly trip to Florida that she funded without credit cards. For Tasha, “all work and no play” is no way to live.

“You have to allow yourself to indulge in reasonable treats that don’t break the bank — otherwise, you’ll go crazy!”

Crossing the debt-free finish line

In 2014, Tasha’s journey inspired her to launch Financial Garden, a program that brings financial literacy to public schools. This passion project has since become her life’s work. Two years later, she paid off her final balance. It was surreal, she recalls, but well worth it.

The first thing she did was take her mom to Mexico before jetting off for a solo trip to South Africa — all of which she paid for without the help of a credit card.

“I actually get to keep my paycheck now, instead of handing it over to creditors every month,” she says.

She has also dipped her toes into real estate investing, recently buying her first rental property as a source of passive income. For Tasha, breaking free from debt is what jump-started her financial freedom.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Marianne Hayes
Marianne Hayes |

Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

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Personal Loans

Are Long-Term Personal Loans Ever a Good Idea?

Editorial Note: 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 prior to publication.

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The importance of having a rainy day fund can’t be overstated — you’re sure to encounter a storm at some point. While our insiders suggest setting your target at a minimum of three to six months’ worth of expenses, actually doing so can be a slow climb. This is especially true if you’re splitting your efforts between paying off debt. For many, a trip to the emergency room or a stint of unemployment is enough to seriously rock the financial boat.

That’s where long-term personal loans come in. Like any type of financing, they come with both benefits and risks. But if used wisely, they could potentially rescue you from a financial nightmare.

What is a long-term loan?

Personal loans are doled out by lenders and, unlike credit cards, are not revolving lines of credit. When we say “long-term” personal loans, we’re referring to loans that stretch beyond the one-year mark. Some may last only 12 months, while others can take a decade or more to pay off.

The most important thing to remember about personal loans is that the interest rate, monthly payment and payoff timeline are all fixed, meaning there’s virtually no wiggle room when it comes to how much you have to pay every month. In other words, when you sign on, you’re committing to this bill for the long haul. This could be taken as either a pro or a con, depending on how you look at it.

On the one hand, the fixed payment keeps the finish line in sight. Credit cards, on the other hand, give you the oh-so-tempting option of just paying the minimum, which stretches out the life of the loan, resulting in you paying more in interest over the long term. On the flip side, if you stumble upon financial hard times, having the ability to make lower monthly payments can be a godsend.

That said, long-term personal loans can be used for just about anything — from consolidating debt to seeing you through a financial emergency. Since the money is typically deposited straight into your bank account, you can use it however you wish. Of course, they don’t come without some strings attached.

Let’s break down the fees and rates for personal loans

For starters, personal loans are considered unsecured debt.

“Unlike your mortgage or an auto loan where you’re leveraging an asset (your home or your car) as collateral, personal loans are attached to no such security,” Pamela Capalad, certified financial planner and founder of Brunch & Budget, tells MagnifyMoney.

“As such, lenders understandably see them as being inherently riskier,” she added.
“This is precisely why you can expect strict repayment terms and potentially higher interest rates.”

The APR may not stand alone. In some cases, you could be hit with an origination fee to the tune of 1% to 6%. Some companies will also try and sell you insurance or other expensive, unnecessary products with these loans, says Lynn Ballou, certified financial planner and CFP Board ambassador.

“And if they’ve front-loaded that loan with extra interest or charged you an origination fee, that’s actually costing you quite a bit more than if you’d just looked for a less expensive option,” she added.

In other words, borrowers beware. Before signing on the dotted line, be sure to read carefully through the terms and fees. Ballou then suggests running the numbers through an independent loan calculator to make sure it’s actually a good deal for you. After factoring in the interest rate and potentially an origination fee, would it be less expensive to go with a different financing option? (We’ll explore this shortly.) Also, is the monthly payment within your budget? These are make-or-break questions to ask yourself before pulling the trigger.

When a long-term personal loan makes sense

Now that we’ve picked apart the nitty-gritty details, let’s explore when a long-term personal loan might be a good idea. A personal loan can be a powerful consolidation tool for those struggling to eliminate high-interest debts — assuming you snag a better APR. In addition to saving money, you’ll have a clear timeline in place and the convenience having just one monthly payment.

When it’s the cheapest borrowing option

“Personal loans actually have some great interest rates, especially now since the market has gotten really competitive over the last few years,” said Capalad. “With a long-term loan, you’ll probably end up paying off your debt faster, or at least about the same time as doing some sort of debt snowball method.” The debt snowball method involves ordering debts from smallest to largest balances and tackling the smallest debts first.

As far as rates go, the better your credit score and higher your income is, the better chances you’ll secure a good rate. If you have poor credit, however, you should expect to see a higher rate. Personal loan rates can eclipse credit card rates, getting as high as 35.99%.

Capalad does offer another word of warning. If you’re using a personal loan to consolidate debt, you have to be really disciplined to put those credit cards away. When people use the loan to get their cards down to what Capalad calls “that nice $0 balance,” it can be extremely tempting to run up the balances again. That said, if you’re disciplined and committed to using a long-term personal loan to get on stronger financial footing, it can represent a great solution.

Debt consolidation aside, sometimes it simply works out better from a dollar-and-cents perspective. If you find a personal loan with no origination fee and a reasonable APR, it may very well be less expensive than getting a cash advance via a credit card, especially since many financial institutions charge a 1% to 5% cash advance fee.

“Sometimes a personal loan is actually the least expensive option available, but sometimes it’s also the only option available,” added Ballou. “Not everyone has something to collateralize, like equity in their home to unlock a home equity loan.”

When a long-term personal loan doesn’t make sense

If you’re stuck between a financial rock and a hard place, being hit with costly fees or high interest rates is certainly better than filing for bankruptcy or defaulting on your bills. The good news is that doing some light research might reveal a different option that’s a better fit than a personal loan.

Begin by asking yourself what you need this loan for. Is it to see you through a financial emergency that’s unlikely to happen again? Or is it to take a last-minute vacation? That may sound obvious, but it’s a legit question to ask because it’s all about trade-offs here.

Let’s say you take out a five-year $5,000 personal loan at 19.5% APR. If you crunch the numbers using our personal loan calculator, it translates to a $131 monthly payment — you’ll also spend an additional $2,865 on interest. Is that really worth it for a family vacation? Perhaps not.

You might, on the other hand, feel like it’s your best option if you’re swimming in credit debt with higher interest rates and need a debt consolidation loan.

The scenario plays out better if you have a fully-funded emergency savings.

“If you have a steady job and you’re at that three- to six-month level, and the trip is extremely important to you because it’s for, let’s say, your best friend’s wedding, you’re better off dipping into your emergency fund and then paying yourself back — but you have to be extremely committed to topping it back off as soon as possible,” said Capalad.

When your cash reserves are running low and a long-term personal loan isn’t your best option, it’s time to explore the financial alternatives. (We’ll dive deeper into your options below.)

Getting a long-term personal loan

Ready to move forward with a long-term personal loan? Here’s what should be on your radar:

Checking your credit score

Whenever you’re seeking new financing, your credit score is perhaps the most important factor. This number basically sums up how creditworthy you are, which is what lenders care about. The higher your score, the better interest rates and financing options you’ll get. Here’s how FICO, America’s leading credit reporting agency, breaks down this all-important three-digit number. (There are a number of ways to access your credit score for free.)

This number is actually a reflection of what’s on your credit report, which sums up your credit history. Experian, TransUnion and Equifax (the three major credit bureaus) each generate their own report, which you can pull for free once a year at AnnualCreditReport.com. Doing so is vital to maintain a healthy credit score. What’s more, finding and disputing an error on your report may give your score a significant boost.

Where to get a long-term personal loan

Applying for a long-term personal loan isn’t all that different from locking down one with a shorter term. The internet has certainly streamlined the process. LendingTree, which is MagnifyMoney’s parent company, offers a way to compare loans from top lenders like BestEgg, Avant, LendingClub and more. Here, you can plug in a few pieces of information and possibly get quotes in a matter of seconds based on your credit score. It’s a soft credit pull, which won’t hurt your credit, but just know that when you officially apply with a lender, it will count as a hard inquiry.

Just be sure to compare rates as no two lenders are the same. Let’s say, for instance, your credit score sits at 660 and you’re looking to remodel your kitchen for $20,000. Short of a hard credit pull, here are some instant quotes:

Discover Personal Loans
APR

6.99%
To
24.99%

Credit Req.

660

Minimum Credit Score

Terms

36 to 84

months

Fees

No origination fee

APPLY NOW Secured

on Discover Personal Loans’s secure website

Discover’s personal loan gives you all the benefits that come with a traditional lender – fixed rates, availability in all 50 states, and flexible payment options. In fact, you can get up to 84 months to repay your loan, which is one of the longest repayment terms available. Discover does have a more in-depth application process than others and you may need to speak with a loan specialist to qualify.

Payoff
APR

8.00%
To
25.00%

Credit Req.

640

Minimum Credit Score

Terms

24 to 60

months

Fees

2.00% - 5.00%

APPLY NOW Secured

on Payoff’s secure website

The entire goal of Payoff is to help you pay down your debt and they typically don’t like being described as a loan company. They offer a quick, easy, and digital process for getting a personal loan and consolidating your credit card debt. If you have poor credit, little credit, or are continuing to take on more debt every month, you will find it difficult to get approved.

BestEgg
APR

5.99%
To
29.99%

Credit Req.

660

Minimum Credit Score

Terms

36 or 60

months

Fees

0.99% - 5.99%

APPLY NOW Secured

on BestEgg’s secure website

People looking for a process that is fast and simple can’t go wrong when applying through Best Egg for a personal loan. The best features of Best Egg are their simple terms and competitive interest rates for those with a strong, positive credit history. While keeping things simple, they only offer payback terms of 3 or 5 years, which may not be the best fit for everyone.

As you can see, there’s a pretty wide gap when it comes to interest rates. The good news is that the longer the term, the shorter the monthly payment — but you’ll ultimately pay more in interest over the long haul. For example, let’s pretend you lock down that $20,000 loan with no origination fee and an APR of 16%. Now let’s compare what happens when we tweak the repayment timeline:

Payoff Timeline

Monthly Payment

Total Interest Paid

60 months

$486

$9,182

40 months

$648

$5,935

24 months

$979

$3,502

There are a lot of moving parts here, which is why reading the fine print is vital. Before we jump into that, let’s talk about getting pre-qualified.

Getting pre-qualified for a personal loan

It’s probably a term you’ve heard before, but let’s unpack what it actually means. Pre-qualification utilizes what’s known as soft credit pulls as opposed to hard inquiries. Doing this does not impact your credit, making it much easier to shop around for the best deals. Soft inquiries essentially give lenders a little sneak peek of your credit. Once you pull the trigger on a loan, the bank will then do a deep dive by pulling your full credit report. (FYI, hard credit inquiries typically only shave a few points off your score, depending on your overall credit health, and you’ll bounce back relatively quickly if you keep up with on-time payments.)

Applying for a personal loan

Once you’re ready to formally apply for a long-term personal loan, you’ll need to gather up some documents. According to Ballou, this typically includes:

  • Photo ID
  • Proof of income and employment
  • Bank statements
  • Possibly a copy of a W-2 or tax return as proof of past income

Once the application process is in motion, the next step is approval, but Ballou says you could be denied if the lender sees you as a credit risk. Having bad credit, a short credit history, unreliable income or unsteady employment could all work against you.

Read the fine print

Before making the commitment, thoroughly read through all the terms and fine print. Here are some helpful questions to ask yourself:

  • Do you really need this loan? If it’s a true financial emergency, the answer might be yes. Otherwise, think long and hard before going all in.
  • Can your budget comfortably absorb the monthly payment? Remember, personal loans are locked in; you’re on the hook for that payment every month.
  • Is there an origination fee? Run the numbers and also factor in the APR. How much will your loan actually cost you when all is said and done? Is there a cheaper alternative? (We’ll jump into this in the next section.)
  • Are you okay with the repayment timeline? Think about your long-term financial goals. If, say, you’d love to save for a down payment on a house within the next five years, will this loan impede your ability to do so?
  • Is a prepayment penalty hiding in the contract? This could make it costly to pay off your loan ahead of schedule.

Alternatives to a long-term personal loan

Depending on your situation, a personal loan may very well be your cheapest option. If not, you’re not out of luck. Here are some alternatives worth exploring:

Home equity loans & lines of credit

Home equity loans (HELs) and home equity lines of credit (HELOCs) both use your home as collateral. You’re basically borrowing against the equity you have in your home by way of a secured loan or credit line. To get the best rates, you’ll need a decent credit score (ideally 660 and up) and at least 15% equity in your home. You also don’t want your debt-to-income ratio to exceed the 43% mark. One other crucial point: if you default on your payments, the bank could seize your home, so make sure you’re really comfortable moving forward.

Cash-out mortgage refinancing

A cash-out refinance lets you borrow additional cash to use as you wish. You could also tweak the terms, like extending to a longer-term loan, to lower your monthly payment and give your budget some breathing room. This, of course, will keep your mortgage debt alive and well for a longer period of time, and there may be fees, but in the short term, it may be your least expensive option.

Balance transfer credit cards

Seeking a personal loan to consolidate debt? Utilizing balance transfer offers may be a more strategic way to go. This is when you jump on low- or no-interest promotional APR offers to pay off your existing balances. Then you knock out the new balance before that teaser introductory period ends.

“If you can aggressively pay down the debt, then you can save a lot of money, especially if you have a lot of debt,” said Capalad.

Just be sure to read the fine print. There’s usually an initial fee that could be as high as 4%. And once the promotional period ends, your APR may skyrocket. This option really only makes sense if you can eliminate the balance within that time. Also, most banks won’t let you transfer debt from one card to another within the same bank.

Traditional credit cards

Your financial emergency may cost you less if you finance it with a traditional credit card, especially if the interest rate is reasonable and you’re able to accelerate your payments. While some personal loans will hit you with a prepayment penalty, you’re more than welcome to pay more than the minimum balance on a credit card. Here’s a simple credit card debt calculator to help bring the numbers into focus.

Borrowing from family or friends

It may bruise your pride, but borrowing cash from loved ones just might save you from financial ruin. (According to LendingTree research, 94.5% of people surveyed said they wouldn’t charge interest on a loan to a family member.) If you’re face-to-face with a true emergency, tap into your personal network to see what options may be available. You can work together to determine the terms and even draw up a contract if it gives your benefactor some peace of mind.

The Pros and Cons of Long-Term Personal Loans

Let’s recap, shall we?

Pros:

  • Long-term personal loans translate to on-the-spot cash that’s typically deposited right into your bank account, which you can then use for whatever you want.
  • If you routinely make on-time payments, you’ll end up boosting your credit score in the long term.
  • Using personal loans to consolidate debt could save you big time in interest.
  • They’re good for folks who don’t have something to collateralize, like home equity or a car.

Cons:

  • The monthly payment and payoff timeline are fixed, and there’s no wiggle room. If you miss it, you’re in default, which could do a number on your credit score.
  • Depending on your credit score, you may not be eligible for a reasonable APR. This could cost you.
  • Your loan may come with a prepayment penalty.
  • Making this monthly payment over a long period of time could impact your ability to save for other financial goals.
  • Opting for a long-term loan over a short-term one means you’ll ultimately shell out more in interest payments.

The bottom line

Moving forward with a long-term personal loan really comes down to your individual situation. The big idea here is to choose the least expensive financing option.

Using credit to live beyond your means is one thing, but debt that gets you to a better place and adds value to your life is another. If a long-term personal loan can help see you through a financial emergency relatively unscathed, it might be worth taking on some new debt.

As Ballou aptly put it: “The cost may be worth what it’s giving you.”

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Marianne Hayes
Marianne Hayes |

Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

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Get A Pre-Approved Personal Loan

$

Won’t impact your credit score

Advertiser Disclosure

News

How Tax Refund Advance Loans Really Work

Editorial Note: 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 prior to publication.

iStock

MagnifyMoney did some digging around to give you the lowdown on refund advances. Here’s what you need to know.

The checkered past of refund anticipation loans

These so-called “refund anticipation loans,” as they were once called, aren’t exactly new. They’ve been around since the late ’80s, when e-filing was just picking up momentum.

According the U.S. Census Bureau, these loans typically came with triple-digit APRs and hefty fees. What’s worse, 2009 data put out by the IRS suggested that these loans were marketed mainly toward low-income taxpayers. And more often than not, they were presented in ways that were misleading and falsely advertised, according to the National Consumer Law Center (NCLC).

Not surprisingly, refund anticipation loans grew to be a source of consternation among consumer advocates. To carry them out, tax-prep companies would take their cut, then deposit the remainder of the refund into a temporary bank account that the taxpayer typically accessed via a prepaid bank card.

Fortunately, these loans became a thing of the past in 2012 amidst major outcry from consumer advocacy groups like the NCLC and others. Ira Rheingold, executive director of the National Association of Consumer Advocates, tells MagnifyMoney that they were as predatory as payday loans.

“Thanks to consumer complaints and government action, things have gotten somewhat better, but these refund anticipation loans were known for sky-high interest rates and exorbitant fees,” he says.

How today’s tax refund advances work

Liberty Tax offers a free tax refund advance loan option.

These days, refund anticipation loans have been rebranded as tax refund advances. But the change runs deeper than just the name. According to top tax-prep servicers like H&R Block, Jackson Hewitt and Liberty Tax, these revamped products are 100 percent free for those who qualify. Advance amounts range depending on eligibility, but Liberty Tax is offering as much as $3,250.

Tax-prep servicers are exceptionally tight-lipped when it comes to the qualifying criteria. (See our handy chart below.) H&R Block is the most forthcoming, but there are still a lot of question marks.

Elgibility requirements include providing proper identification and having a “sufficient” tax refund, whatever that means.

However, there are a few things that could get you declined, including having bad credit, failing to present relevant tax forms like W-2s and 1099s, or not meeting certain income requirements, among other things. If you are approved, the loan amount is deposited into a temporary bank account you can access with a prepaid debit card, unless the servicer offers a direct deposit option. Either way, the loan itself is indeed fee-free and has a 0 percent APR.

Be that as it may, experts still encourage consumers to approach with caution.

“From the perspective of the consumer, I’d say they need to be very skeptical,” Adam Rust, director of research at consumer advocacy group Reinvestment Partners and managing director of the nonprofit WiseWage, told MagnifyMoney. “Private companies don’t provide free services and banks don’t make free loans.”

H&R Block is one of several tax preparer services that offers a tax refund advance loan to customers from $500 to $3,000.

Tax advances are indeed more accurately described as loans. The cash actually comes from banks, which are reimbursed when your refund comes in. In order to offer these advances, Rust says tax-prep companies cover the bank fees, essentially making them free for the consumer.

“It’s actually a cost item for the preparers, which is one more reason to suspect that these loans aren’t really free,” he said. “The price may say free, but that doesn’t mean it can’t be recovered within the cost of the tax prep.”

This is where things get a little less transparent. H&R Block declined a phone interview with MagnifyMoney, so I called up my local storefront and asked if there’s an additional charge for getting a tax refund advance. In other words, will my tax preparation fee be the same whether I get a refund advance or not? I was told it would be, but locking down an accurate estimate for the service isn’t easy.

According to the National Society of Accountants, the average tax-prep fee for federal and state returns during the 2017 filing season was $273 for folks who itemized their deductions; $176 for those who didn’t. The takeaway here is that the complexity of the return appears to increase consumer costs. To get an actual estimate, you’ll need to present your tax information, but the price you’re quoted is likely to vary.

In 2016, consumer advocacy group Georgia Watch sent mystery shoppers into paid tax-prep firms in low-income neighborhoods in southwest Atlanta. What they found was “a stunning lack of knowledge and professionalism from preparers, vast inconsistencies in preparation fees, and a wide range of outcomes given the same inputs at each site.”

Rheingold, who was not involved in the research, isn’t all that surprised by the findings.

“The quality of tax preparers in high-volume firms is often pretty poor,” he said.

Hidden costs to look out for

Refund transfers

If you’re declined for a tax refund advance loan, some tax preparation companies may offer you a concession prize: the chance to get a refund transfer.

A tax refund advance may be advertised as free, but the same can’t be said for a refund transfer.

Instead of paying your tax-prep fees at the time of service, you can defer it with a transfer. The tax preparer essentially creates a short-term account where your refund is deposited, at which point they’ll take their fee directly. H&R Block charges $39.95 for a federal refund transfer. It’s called an assisted refund at Jackson Hewitt, where it’ll run you $49.95. Meanwhile, Liberty Tax says you have to “consult your tax office” for pricing details.

It’s marketed for its speed and convenience, but Rust says taxpayers should think twice before opting in. Almost half of Liberty Tax’s filers last year ended up getting a refund transfer, according to the company’s 2017 annual report.

“That’s really telling to me because the refund advance is marked as free, but the refund transfer isn’t,” Rust said. “So why are so many people paying for the transfer?”

What Rust is getting at is that it appears as though the lure of a free refund advance gets people in the door, at which point they’re sold on the refund transfer after getting declined. Since offering these loans is a cost product for tax-prep companies, Rust says it’s a fair assumption.

The cost of accessing your funds

Prepaid debit cards essentially serve as substitute checking accounts for those who don’t have one. Many tax preparation companies offer prepaid debit card products that customers can sign up for in order to have their tax refunds deposited there. However, these cards my carry additional fees that can eat away at the value of the tax refund itself.

“One of the things we’ve seen is the growth of prepaid debit cards to access your refund advance,” said Rheingold. “Accessing your money through an ATM [often] comes with fees, which means you’re being charged to access your own money.”

Jackson Hewitt puts refund advance funds on the American Express Serve Card if you’re not doing a direct deposit into your checking account. H&R Block goes with the Emerald Prepaid Mastercard, and Liberty Tax uses a Netspend prepaid Mastercard.

Where to get a tax refund advance

Here’s what the major tax-prep companies are offering. Again, all advances are marketed as free, and you have to apply at a participating office by Feb. 28. Jackson Hewitt is in the game as well, but their website pushes people to visit a local office to learn more.

 

H&R Block

Liberty Tax

Loan amounts

$500, $750, $1,250 or $3,000

$500, $800, $1,300, $3,250

Eligibility

According to their website: "You first must meet certain eligibility requirements such as having a sufficient tax refund from the IRS, and provide appropriate identification. You then submit an application to BofI Federal Bank, the lender. The bank will evaluate your application based on standard underwriting criteria and makes the decision to approve or deny your application."

Must visit a Liberty Tax office for eligibility requirements

When is the advance available?

Typically the same day

Usually within 24 hours

Alternatives to a tax refund advance

You can always file earlier to expedite the arrival of your refund. Without a tax refund advance, most folks who file electronically can expect their refund in less than three weeks, according to the IRS. The most common cause for delay is if you’re claiming the Earned Income Tax Credit or the Additional Child Tax Credit, which will push your refund at least into late February.

Either way, for simple returns where the filer is only bringing in a W-2 and not itemizing, Rust says most preparers can probably complete the job in less than 90 minutes.

“Should that cost more than $200? Should the chance of receiving an advance justify spending that much when, instead, a low-income filer could go to a VITA site and have their return prepared for free?” he asked.

Rust is referring to the IRS Volunteer Income Tax Assistance program, which offers free tax preparation for people who earn $54,000 or less per year. Those who are above the income threshold can also opt for out-of-the-box software like TurboTax. Prices vary here depending on the complexity of your return, but it’s generally much cheaper than going with a storefront tax preparer.

Final thoughts on tax refund advances

If getting a tax refund advance means adding to your tax-prep bill, Rheingold says it doesn’t make financial sense to get one.

“Even if it says it’s free, it’s a safe bet that these places are baking the costs into the tax-prep fee to make up the difference.”

That said, if you’re in dire financial straits, it may be your only resource for quick cash — but buyer beware.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Marianne Hayes
Marianne Hayes |

Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

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Mortgage

Most Important Factors to Getting Approved for a Mortgage

Editorial Note: 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 prior to publication.

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When David Inglis and his wife decided to move to San Diego last year, they were expecting a relatively smooth process. They’d keep the house they owned in Los Angeles and rent it out as a source of passive income, then they’d buy a new house in San Diego. They even had a 20% down payment ready to go.

“The problem was that we found renters and had to get out of our current house and close on the new house within 21 days,” Inglis, 40, a yacht broker, tells MagnifyMoney. That gave them just 21 days to get a mortgage — easier said than done. As Inglis put it: “Getting approved for a mortgage is a process, to say the least.”

With what felt like a moment’s notice, the couple had to gather up and submit everything from tax returns to current income statements, and do mountains of paperwork in between to get pre-qualified for a loan. From there, their lender picked through their credit scores, debt-to-income ratio, employment history — you name it. They closed on their new house in the nick of time at the end of 2017, and it was anything but a stress-free experience.

If you’re new to the whole buying-a-house thing, locking down a mortgage loan isn’t something that happens overnight. That’s not to say it isn’t worth it though. One recent Value Insured survey found that the vast majority of younger folks—a whopping 83%, in fact—still associate buying a home with the American dream.

At the starting line? There are a number of important factors that go into determining if a lender will approve you for a home loan. Here’s everything you need to know.

Getting approved for a mortgage — 5 things lenders are looking for

Credit score

Remember: A mortgage is a type of loan. When you’re applying for any type of financing, your credit score is perhaps the most important piece of the puzzle. This three-digit number essentially provides lenders with a general idea of your creditworthiness.

If you have accounts in collections or a history of making late payments, for example, you’ll have a lower-than-average score, which directly affects your loan options. That means you could get hit with higher interest rates or bigger mortgage insurance premiums, or both.

“Your credit score is really important on conventional loans,” John Moran, founder of TheHomeMortgagePro.com, tells MagnifyMoney. “Some other loan programs are less credit-sensitive.”

For conventional home loans, Moran says your credit score has to be at least 620, but for FHA or VA loans, you may be able to get away with a score in the 500s. But it’s not just about getting approved. The lower your score, the higher your mortgage rate will likely be — and that can add tens of thousands of dollars to the cost of your loan over time.

FICO, America’s leading credit reporting agency, looks at several important factors when determining your score. Your payment history, amounts owed, and length of credit history are chief among them. If you’re aiming for a home in the next year or two, you’ve got time to improve your credit if you start now.

Trust us — it’ll be worth the effort. You can see below what estimated mortgage rate folks would get based on their credit score and how much it could cost them over time. For our purposes, we’ll assume they’re all getting a $250,000 30-year fixed rate loan.

Score Range

APR

Monthly Payment

Total interest paid

760-850

3.914%

$1,181

$175,224

700-759

4.136%

$1,213

$186,760

680-699

4.313%

$1,239

$196,072

660-679

4.527%

$1,271

$207,462

640-659

4.957%

$1,335

$230,777

620-639

5.503%

$1,420

$261,180

Source: Calculated using the MyFico Loan Savings Calculator
Rates current as of Feb. 2, 2018.

You can find a detailed breakdown of your credit score by pulling up your credit report for free. Your report unpacks your credit history for lenders, so it’s vital to know what’s on it. This is crucial because you could end up spotting an error that’s weighing your score down.

If your credit score could use some work, don’t fret—there are plenty of ways to give it a good boost before buying a home. Establishing credit history, keeping your credit utilization ratio below 30%, and making consistent on-time payments are all on the list.

Debt vs. income

Your credit score goes hand in hand with your current debt load. Lenders specifically zero in on how your debt relates to your income. Together, this determines what’s known as your debt-to-income ratio (DTI)..

To calculate out your DTI, it’s fairly simple: Add up all your monthly debt obligations (not including your current housing payment unless you own the home and plan on keeping it), then divide that number by your gross monthly income. So if you pay, for example, $2,000 a month toward debt and you’re grossing $4,500, your DTI comes in at about 44%.

What’s a good DTI? Strive for 36% or less.

Fannie Mae, which sets the lending standards for the vast majority of mortgage loans, generally requires a maximum total DTI of no more than 36%. However, if the borrower meets certain credit and reserve requirements, they can generally get away with 45%.

Why? A high DTI is a red flag to lenders that you may not be able to afford a new monthly loan payment. In a lot of ways, it’s more telling than your credit score.

“The only thing that really matters to lenders is how this new monthly payment and your other debts relate to your income,” said Moran. “One of the quickest ways people can turn things around is by paying down revolving debts like credit cards and lines of credit, which increases your available credit and decreases your credit utilization ratio.”

He adds that making a smaller down payment in order to pay down revolving debt might improve your chances of qualifying since doing so will boost your credit score relatively quickly. Knocking those balances down also lowers your monthly minimum payment, so you may be able to qualify for a larger loan. In other words, your DTI isn’t the end-all-be-all when applying for a mortgage loan, but it’s pretty important.

Down payment

Lenders also look at how much of a down payment you can make, which ties directly back into your debt-to-income ratio. According to Bob McLaughlin, director of residential mortgage at financial services company Bryn Mawr Trust, putting down a higher down payment makes you more likely to get approved since it essentially decreases the risk for the lender. As a result, better loan terms and interest rates will likely be on the table.

“If you have the ability to put 20% down, you also avoid having to pay private mortgage insurance, which makes it easier to qualify,” he said.

Another perk is that you’ll have more equity in your home as well as a lower monthly mortgage payment. But for many, saving for a 20% down payment is a serious barrier to homeownership. Not surprisingly, a 2016 report put out by the National Association of Realtors found that the average down payment for first-time homebuyers has fallen in the 6% range for the last few years. The good news is that according to Moran, you can still get approved with a lower down payment.

“You can put 0% down for VA loans, 3.5% for FHA loans and even as little as 3% for conventional loans,” he said.

“There are people all the time buying homes with these minimum down payments, but it really all boils down to what you’re comfortable with and the kind of monthly payment you can handle.”

FHA and VA loans are usually the first low down-payment loans that come to mind, but options like personal loans and USDA loans may also be worth considering. Just keep in mind that taking this shortcut could potentially translate to a financial burden — low down payments typically necessitate higher insurance rates and extra fees to protect the lender.

That said, lenders are really looking at your big financial picture, not just your down payment size. If you’re putting down less, but have a good score and a steady source of income, you’re much more likely to get approved for a mortgage loan than someone with a lower score and/or spotty employment status.

Employment history

Our insiders say that your income and employment history are just as important as your credit score, DTI and down payment size. Again, it all comes down to lenders feeling confident that you can indeed repay your loan.

“You have to fit the underwriting guidelines per your profession, and there is little flexibility there,” said McLaughlin.

Piggybacking on this insight, Moran says that the ideal situation is if you’ve worked for the same employer for two years and you’re salaried. The second ideal way to get the green light is if you’re an hourly worker who’s been with the same company for at least two years.

But all this begs one obvious question: What about self-employed folks? The freelance economy is growing rapidly. According to the latest Freelancing in America survey conducted by Upwork and the Freelancers Union, these folks are predicted to make up the majority of the U.S. workforce within the next decade. Moran says that for these workers to qualify for a mortgage, they’ll need to have a two-year work history.

Check out our guide on getting approved for a mortgage when you’re self-employed.

“It’s a little bit of a kiss of death to start self-employment right before applying for a home loan,” he said.

“Most lenders won’t approve you because they want to be sure you’ll be able to afford your new loan payment. The only way to really prove you have a steady income is with two years’ worth of tax returns.”

In rare cases, Moran adds, you may be able to get away with one year, but it’s not the norm. Things are different of course, for self-employed newbies who are applying with a spouse who works a steady 9-to-5, which could tip the scales in their favor. Again, it’s all about the big picture. That said, a new salaried position will typically erase doubts stemming from a spotty employment history, as long as you have about two months’ worth of pay stubs, according to McLaughlin.

Loan size

All the factors we’re highlighting here are interwoven. The size of the loan you’re applying for fits right in. The higher your loan amount, the higher your monthly payment, which impacts that all-important DTI.

This is why you may be more likely to get approved if you’re seeking a lower amount. But whether you’re looking for $100,000 or $400,000, it really boils down to how big of a monthly payment your budget can absorb. (Lending Tree, which is the parent company of MagnifyMoney, has a Home Affordability Calculator that can help you figure this out.)

The general rule of thumb here is to keep your mortgage loan (including principal, interest, taxes, and insurance) at or below 28% of your total income. Moran has worked with ultra-conservative folks who like to keep that number at 25%, but he says it really varies from person to person.

“Some people like to travel and don’t want to be house poor; others are homebodies and just really want a nice house because that’s where they’re going to spend their time,” he said.

“It’s all a trade-off, but either way, lenders will only pre-qualify you for what they think you can actually afford.”

How to get preapproved for a mortgage

Pre-approval is a term you’re likely to hear in the home-buying process. This is when the lender takes into account everything from your credit score and debts to employment history and down payment size to offer you a maximum loan amount.

When you come to the table with a pre-approved offer of lending from a bank, you’re already way ahead of the competition. And this can really give you an edge. When you’re living in a metro where most people are coming with double-digit down payments and pre-approvals to boot, you’re competing with very attractive borrowers.

Pre-approvals will ding your credit score, but the hit won’t be too bad if you complete several mortgage applications over a short time period, like 30 to 45 days. Multiple inquiries should only count as one hard inquiry on your credit report.

A good rule of thumb is to get mortgage quotes before you apply for pre-approval. You can get quotes quickly from different lenders at LendingTree by filling out a short online form.

Included in a pre-approval letter will be the estimated loan amount you might qualify for and your estimated mortgage rate.

The pre-approval process is also meant to prevent you from making offers on homes you can’t afford. But this doesn’t mean you have to actually take out a loan for the full amount. Many choose to get preapproved for their top number, then dial back during negotiations.

Final word

When it comes to mortgage approval factors, there are a lot of moving parts. Far and away, your credit score and debt-to-income ratio carry the most weight for potential lenders. From there, your ability to prove that you’re steadily and reliably employed is equally important.

At the end of the day, all that really matters is that you’re applying for a loan that you’ll actually be able to repay hiccup-free. The larger your down payment, the better your odds—especially if it eliminates the need for PMI. Either way, it’s probably in your best interest to meet with lenders before you start house hunting.

“You don’t want to put the cart before the horse by going with a realtor to look at houses, only to fall in love with something you can’t afford,” added McLaughlin. “Your emotions can definitely make the mortgage application process more stressful, which is why it’s best to go through the prequalification process first.”

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Marianne Hayes
Marianne Hayes |

Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

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Life Events

The Ultimate Layoff Survival Guide

Editorial Note: 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 prior to publication.

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Paul Catala, a 53-year-old entertainment reporter in Lakeland, Fla., knows firsthand about the struggles of unemployment. He was the victim of massive layoffs at a Tampa-area newspaper in December 2012. The result? A severance package of about $1,500.

“I was pretty much financially panicked,” Catala told MagnifyMoney, who also lost his health insurance. “All I had was my severance and nothing more than a couple thousand dollars in savings.”

As a single guy, he didn’t have a spouse’s salary to fall back on, but he made it work. During the year and a half that followed, he patched together a steady income by picking up a string of odd jobs and side gigs (more on this in a bit) before eventually securing a full-time job.

In 2017 alone, at least 255,000 planned job cuts have been announced, according to a report put out by the firm Challenger, Gray & Christmas. (The bright spot, however, is that the report also found that job cuts are on the decline.)

If you’re newly unemployed and not sure how to move forward, this ultimate layoff survival kit is for you. Here’s everything you need to know about weathering the storm.

What to do when you lose your job

Step one: Don’t freak out

If the financial implications and the stress of having to find a new job have your head spinning, you’re not alone. The longer you’re unemployed, the more likely it is to take a toll on your psychological well-being. According to a 2013 Gallup survey, roughly 20 percent of Americans who’ve been unemployed for a year or more have been affected by depression.

But while it’s certainly wise to make a plan, don’t take such a long view that you’re overwhelmed by the enormity of unemployment. As the old saying goes: “Inch by inch, life’s a cinch. Yard by yard, life’s hard.”

Do one thing at a time to avoid “analysis paralysis” (aka feeling so overwhelmed that you take no action at all).

Step two: Exit your current job with grace

Getting laid off hurts, but think twice before storming out in a blaze of glory.

“Anything you can do to leave on a good note is a good idea,” career coach Angela Copeland tells MagnifyMoney. “Thank-you notes and goodbye lunches all help to give positive closure.”

The last thing you want to do is burn bridges on your way out. When applying for new jobs, Copeland says you’ll be asked for references the hiring manager can call, which will likely include your previous employer. It’s in your best interest to keep these relationships positive.
Negotiating your severance package before hitting the road may also be on your to-do list.

“Some people have been able to negotiate an extra month of severance because they’ve been there longer and can quantify what they’ve brought to the job,” said Shannah Compton Game, certified financial planner and host of the “Millennial Money” podcast.

“Try and correlate it to something positive, like revenue or growth you’ve been able to do for the company,” she said. “Keep good records of the successes you’ve had because you just never know when you’ll be able to use that.”

On a similar note, you might be able to use rumors of impending layoffs to your advantage. Game says that it’s usually the people in the early rounds of layoffs who get the better severance packages. If you’re likely to be on the chopping block, volunteering to be let go sooner rather than later could be used as a bargaining chip to secure a better severance package.

Step three: Get your finances in order

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Before you panic, sit down and do a thorough audit of your financial situation. List all your monthly expenses, from fixed costs like rent and utilities to discretionary spending like entertainment costs. Then factor in any income you still have, like unemployment benefits (we’ll dive into how to apply in a minute), a severance package, and any cash you have coming from side gigs or passive income streams.

Now for the obvious question: What does your savings account look like?

“The goal marker is to have three to six months’ worth of fixed expenses saved in your emergency fund,” said Game.

To help curb temptation, she recommends parking it in an interest-bearing savings account that’s separate from your regular bank. (We’ve rounded up the best online savings accounts here.) If you’ve got an emergency fund, getting laid off is as good a time as any to dip into it — that’s what it’s there for. Of course, the idea is to make your savings last as long as possible. This is why Game suggests retooling your budget right out the gate.

“Is there anything in there you can cut, or at least make better?” she asked. “Can you negotiate a better cellphone or internet plan? Are you overpaying in some areas? When you’re unemployed, every dollar helps.”

Another thing to think about is your 401(k). Getting laid off makes you ineligible to take out a 401(k) loan, according to Game, but you can withdraw from it — for a hefty price.

“If you pull out of your 401(k) and you’re under 59½, you’ll have a 10-percent penalty, plus whatever you take out is added to your taxable income, so it could shock people if they took out a sizeable amount,” warned Game, who also recognizes that sometimes you don’t have any other choice.

Tapping your nest egg should be an absolute last resort. If it comes to that, Roth IRAs are a little more appealing because you can pull out your contributions at any time without tax or penalty (It’s just the appreciation you can’t touch until you’re over 59½). If you’re financially stuck between a rock and a hard place, a Roth IRA could serve as an extra backup emergency fund.

As for a 401(k) from your old job, Game says you have a couple of options. Some companies will let you do a direct rollover, which is a hands-off option that’s way easier than rolling it over yourself. This way, you won’t get a check for that cash.

“If you do, you have to have it deposited into your new account in a short time period so you don’t get taxed on that amount, which is why it’s better to do these things electronically whenever possible,” said Game.

No emergency fund or Roth IRA to tap into? You’re not out of options. Read on for more ways to access cash during unemployment.

Step four: Rev up your job hunting efforts

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“One of the biggest mistakes I see from people who’ve been recently laid off is that the experience is so stressful that they want to take a break,” said Copeland. “They think, ‘I need a few months to take some time for myself.’ What they don’t understand is that the longer you wait, the harder it becomes.”

Begin by dusting off your resume and updating it with any relevant new skills, accomplishments, and/or trainings you’ve completed. Do the same for your LinkedIn profile, which includes adding keywords that potential employers may be searching for (To get an idea of what these are, Copeland suggests browsing job postings you’re interested in). You’ll also want to follow companies on LinkedIn and connect with influencers within those organizations.

When it comes to references, Copeland adds that asking folks to leave you a written, public recommendation on LinkedIn can do wonders. Future employers are going to be looking at your profile. Seeing that people you’ve worked with have positive things to say is going to make them much less suspicious that something negative happened at your old job.

One other thing: Fine tune your elevator pitch so you’re ready to comfortably, and confidently, talk about yourself at a moment’s notice. After that, step away from your computer and get yourself out there (literally).

“A lot of people are told to apply online — ‘If you’re a good fit, we’ll call you ‘— but very rarely is that true,” said Copeland.

“It’s one-on-one personal connections that are going to help you find a job, and those people will be most helpful and empathetic very soon after you’ve been laid off.”

Let your network know you’re actively looking for work, attend industry events, and reach out to people for informational interviews. In some cases, this might mean cold emailing a colleague of a colleague and asking to pick their brain over coffee. They could always say no, or even ignore you, but Copeland says that when up against unemployment, this isn’t the worst thing in the world.

Step five: Protect yourself against the worst-case scenario

If your job hunt stretches past the one-month mark, you could end up draining your emergency fund faster than anticipated. According to the U.S. Department of Labor, the number of long-term unemployed workers (i.e. people who’ve been out of work for at least 27 weeks) held steady at 1.5 million as of December 2017. This makes up 22.9 percent of the unemployed.
If you find yourself in this boat, you’ll need to go beyond cutting cable and scaling back your entertainment budget to make ends meet.

“Can you call your student loan servicer and defer your loans for a few months?” suggested Game. “Remember, you’ll still be accruing interest when you do this, but it might help you out for a few months.”

Looking for other high-impact ways to free up cash? Game also suggests considering:

  • Taking on a roommate or renting out a room on Airbnb.
  • Getting a part-time job.
  • Taking out a short-term loan from a family member.
  • Using balance transfer offers to lower your credit card interest rates by moving debt to a 0% APR card.
  • Researching a personal loan. Going into debt is never advised, but if your situation’s getting dire, it may be your best worst option (It’s sure better than getting evicted or defaulting on your car payment).

This is precisely why Game says it’s so important to get your financial house in order while your career is going well. Flash forward to being laid off: Having a solid credit score is what’s going to enable you to get the best rate on a personal loan. The same goes for locking down a low-interest credit card, if it comes to that.

4 tips to help stretch your finances when you’re unemployed

How to apply for unemployment

Taking advantage of unemployment insurance can help stretch your savings and soften the financial blow of a layoff. Whether you qualify depends on a number of factors, one of the top ones being where you live; every state is different.

As long as you’re looking for work — and meet the qualifying criteria below — most states allow participants to collect benefits for up to 26 weeks (about six months). Just keep in mind that a severance package could impact how much you qualify for, depending on the state you live in.

  • Losing your job was out of your control: Being laid off generally ticks this box, but if you were fired or quit voluntarily, you’ll be ineligible.
  • You worked long enough and earned enough wages to qualify in your state: Every state’s threshold is different, but applicants must meet requirements for wages earned or time worked during an established time period in order to collect unemployment. You can research your state’s rules here.
  • You were laid off from a W2 job: In other words, you weren’t a freelancer or independent contractor. Since employers don’t pay unemployment taxes for these folks, benefits are typically off the table.

That said, there isn’t a one-size-fits-all answer when it comes to how much money you’ll actually get. What you were earning, where you live, and whether or not you received a severance package may all come into play. Your best bet is to contact your state unemployment office to start untangling the details.

How to apply for food stamps

Applying for the Supplemental Nutrition Assistance Program (SNAP), aka food stamps, is also a state-specific process. In order to qualify, you must meet resource and income requirements (SNAP provides this handy pre-screening eligibility tool to help clarify whether or not you qualify). Eligibility varies from state to state but is largely determined by your:

  • Resources: Things like bank accounts and vehicles fall into this camp. Some resources are generally off limits, like retirement plans and your home.
  • Income: You have to meet the income requirements outlined here. Some exceptions — like having an elderly or disabled person in your household, for example — may make it easier to qualify. Just keep in mind that any unemployment benefits you’re collecting will be factored in here.
  • Employment status: If you’ve been recently laid off, this one’s a biggie since SNAP eligibility is hinged, in part, on meeting work requirements. They include:
    • Registering for work
    • Not voluntarily quitting a job or reducing your hours
    • Taking a job if one is offered
    • Participating in your state’s employment training programs
    • If you’re an able-bodied adult without kids, you’ll also be required to either work or participate in a work program for a minimum of 20 hours per week to receive SNAP benefits for longer than three months in a 36-month period.

Ready to apply? Find your state here to get the ball rolling.

How to get help with a job search

There are a number of federal government programs in place to help see you through a stint of unemployment. CareerOneStop (backed by the U.S. Department of Labor) is packed with free job search assistance and training resources. Here you’ll find everything from job openings and resume guides to salary data and interview and negotiation tips.

COBRA might also make sense for newly unemployed folks. The program allows you to keep your employer-sponsored health plan after getting laid off. Before pulling the trigger on enrolling in a new health plan, be sure to check if COBRA makes sense for your health care needs and budget.

Pick up part-time work

Another way to unlock cash is to think of out-of-the-box ways to make money. Before Catala secured a new full-time job, he picked up a ton of side hustles to fill in the missing income. This included everything from tutoring at a local community college to cutting lawns to booking music gigs (He happens to be a pianist.). The takeaway? Look beyond your 9-to-5 skill set to pay your bills.

“At one point, I was doing like five different things and just making money,” said Catala, who earned too much from the gigs to collect unemployment.

“If you’re creative and willing to hustle, you’ll be fine. Even if it’s just $50 a week, that’s better than nothing.”

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Marianne Hayes
Marianne Hayes |

Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

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Mortgage, News

How The Simple Act of Negotiating Helped Us Save $40,000

Editorial Note: 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 prior to publication.

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You don’t have to be an expert negotiator to leverage the power of persuasion — and ultimately save big. Alison Fragale, negotiation expert and professor of organizational behavior at the University of North Carolina, tells MagnifyMoney that a little preparation can go a long way.

“Any time you have goals you need to achieve, and you need someone else’s cooperation to make those goals happen, that’s a negotiation,” she said, adding that coming to the conversation prepared is often a game changer.

We caught up with a handful of folks who did just that. From talking down debt, to negotiating salary increases, these everyday people successfully haggled their way to some big financial wins — to the tune of $40,000 worth of savings.

Here’s how they did it.

I shaved $7,400+ off my student loan balance.

As of 2014, the average college graduate wrapped up their studies with nearly $29,000 in student loan debt, according to The Institute for College Access & Success. But your balances aren’t always set in stone.

Danielle Scott, a 30-year-old public relations professional in New York City, used some persuasive bargaining skills to save thousands on her private loans. The inspiration? After several years of just paying the minimum monthly payment and calling it a day, she was discouraged to see that her principal balance was relatively unchanged, thanks to super high interest rates.

“One was as high as 15 percent, and my total loan balance was about $80,000,” Scott told MagnifyMoney.

She called her loan provider, Navient, and cut a deal — if they agreed to lower the interest rate on her loans, she’d up her monthly payments from $400 to $1,500. They agreed, lowering her rate to 1% on one of her two loans, and Scott put everything she had into paying down the debt over the next five years. She paid much more in the short term, but she saved big over the long haul since she was shortening the life of the debt and putting way more toward the principal balance.

Earlier this year, when her balance had gone down to $15,000, her loan servicer reached out to her with a deal of their own. They were willing to reduce her balance to $9,000 if she could pay it off in two lump payments. Scott countered.

“I asked them how low they could go if I agreed to pay it all off in one payment,” she recalls. “At first, they said no, but after pushing back a little, and being put on hold for 20 minutes, they came back with $7,600 as their final offer, but I had to make the payment that day.”

Scott dipped into her savings to pay it and, just like that, was debt-free.

While you might have some wiggle room negotiating private student loan debt, federal student loans are a different story. If you’ve defaulted on federal loans and they’ve been sent to collections, you can use one of the following standard settlements to make good with the U.S. Department of Education, according to student loan expert Mark Kantrowitz:

  • Pay off the current principal balance plus any unpaid interest; collection fees are waived.
  • Pay off the current principal balance plus 50 percent of any unpaid interest.
  • Pay off a minimum of 90 percent of the current principal balance and interest.

Just keep in mind that settlements are generally due in full within 90 days. (FYI: There’s also a chance you’ll have to pay taxes on whatever is forgiven.)

I talked my way out of $20,000 of medical debt.

In 2010, Robin, a Tampa, Fla., lawyer, was involved in a major car accident that almost cost her her life. The road to recovery was a long one and included multiple surgeries and hospital stays. Despite having health insurance, her bills eventually reached a whopping $197,000. But it wasn’t until she really pored over the statements that she noticed some major errors.

“A mix of in-network and out-of-network medical providers were billing me for whatever my insurance company wasn’t paying, even after I’d met my deductible,” Robin, 57, told MagnifyMoney.  She requested that we not use her full name because she’s still negotiating down her debts.

In many cases, she was getting treated by in-network hospitals, but by medical providers who, she later learned, were out of network. This led to tons of surprise bills; a phenomenon known as balance billing, which isn’t always legal in her home state.

“I called each and every medical provider, in some cases threatening to report them to the attorney general,” she recalled. “Some bills were forgiven more easily than others; some took years to resolve, but nothing was ever sent to collections.”

All in all, Robin has wiped out about $20,000 of her medical debt by directly challenging providers — a wise move considering that the Consumer Financial Protection Bureau reported that medical bills make up over half of all debt on credit reports.

I negotiated a $15,000 raise and promotion.

When it comes to nailing down a raise, getting a pay bump of 2 percent per year is the average, according to the U.S. Department of Labor. But you might be able to get more if you’re willing to negotiate.

Ariel Gonzalez, a 33-year-old front end development engineer in Orlando, Fla., has successfully negotiated multiple pay raises over the years. The latest got him a $15,000 pay bump and promotion after a year of working in a junior position.

“My demeanor is typically calm and confident, but firm,” he told MagnifyMoney. “I hate talking about money, but I know what I bring to the table as an employee.”

Gonzalez is a big believer in coming to salary negotiations as prepared as possible, researching comparable salaries on sites like Salary.com and Glassdoor. Referencing positive client testimonials in past negotiations has also proved fruitful. He landed his last raise in 2016 by showing up to the meeting with an air of respect and transparency.

“I came to my boss with my number, hat in hand, and said that it was what I needed to be comfortable and that I didn’t want to do the whole back-and-forth thing,” Gonzalez said, adding that the promotion and raise he was asking for were in line with his performance and proven results as an employee.

The preparation and confidence paid off; his boss had no problem granting his request. The takeaway? Do your homework ahead of time and ask for what you deserve.

Some expert negotiation tips to follow

Whether you’re looking to score a raise or buy a new car, Fragale suggests pinpointing the following three terms before beginning any negotiation:

1) What are you trying to achieve? This should be a clear aspiration that’s grounded in reality, given your circumstances.

2) What’s your walk-away point? Before going in, clarify the point at which you’ll abandon the deal. Fragale said knowing this beforehand is empowering because it discourages an “I’ll take what I can get” mentality.

3) What’s the alternative? In other words, if you don’t get what you want out of this deal, what’s going to happen? If the stakes are high and your alternative is terrible, you’ll be more inclined to settle for less than what you want. (Case in point: You’re more likely to settle for a low salary if your alternative is unemployment.)

“If you have the luxury, try and make your alternative as good as possible before negotiating,” says Fragale. “That tends to lift the whole boat.”

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Marianne Hayes
Marianne Hayes |

Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

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Pay Down My Debt

The Benefits of Living Debt-Free

Editorial Note: 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 prior to publication.

When it comes to debt, most of us have outstanding balances of one kind or another. Indeed, a whopping 80 percent of Americans are living in the red, according to a 2015 Pew Charitable Trusts report — eight in every 10 U.S. adults.

It goes without saying that debt can majorly impact your financial freedom. At one point, Simone Dennis, a 29-year-old health policy analyst in Baltimore, was shelling out in excess of $1,000 a month in minimum payments alone on a combination of auto, student and medical debt.

“I wrote that number down and looked at it every day,” she told MagnifyMoney. “I wanted to escape a life where I was burdened by debt and unable to change my situation because I needed the income.”

In other words, every financial decision she made revolved around her debt. But then she took charge and set her sights on becoming completely debt-free. At the starting line, she owed $65,000 in student loans, had $14,000 left on her car loan and had to contend with another $1,000 in medical bills.

Earlier this month, she reached her goal, wiping out $80,000 in just three years. (We’ll dive into how she did it in a bit.) These days, she’s excited to kick off a life where her income goes toward funding her long-term goals — not the creditors.

The benefits of living debt-free are often life-changing. If your current debt management style is making minimum payments and calling it a day, you might want to perk up and pay attention. Here are all the reasons why living a debt-free life should be your top priority.

What are the benefits of being debt-free?

More funds for your future goals

Unshackling yourself from debt frees up cash that was previously going toward paying down your balances. That means keeping more of your take-home pay. In some cases, it could mean breaking the cycle of living paycheck to paycheck.

Instead of being beholden to creditors, you can use this money to further other financial goals, like building up your emergency fund, kicking up your retirement contributions or whatever else comes to mind. Dennis is using that $1,000 of newfound cash to increase her 401(k) contributions for the employer match. She’s also planning a Mexican vacation to celebrate her accomplishment.

Marissa Lyda and her husband, Jacob, recently crossed the debt-free finish line after paying off $87,000 in student loan debt over a two-and-a-half-year period. This means they finally have some real saving power; getting out of debt has unlocked $750 a month that went toward minimum payments.

“We want to have a full emergency fund and start saving for a good down payment on a house,” Lyda, a 23-year-old accounting specialist in Portland, Ore., told MagnifyMoney. “We’re also putting more toward our retirement accounts.”

You’ll save money in the long-term

You’ll really feel the impact of getting debt-free if you carry any high-interest balances. Let’s say, for example, you have a $3,000 balance on a credit card with an 18 percent interest rate and a $125 minimum monthly payment. If you pay just that minimum, our handy debt payoff calculator reveals that it’ll take you 30 months to get to zero — and you’ll pay $747 extra in interest. These numbers are compounded even further if you have multiple balances and interest rates, which could cost you big time in the long run. (You’re essentially paying creditors to be mired in debt.)

In addition to the immediate financial freedom you can achieve, living debt-free can also majorly supercharge your retirement efforts. Think about it: If you took $400 you were spending each month on debt and redirected it toward a Roth IRA, it would grow to more than $485,000 over the next 30 years, assuming 7 percent annual returns. This mentality could make your golden years a lot more comfortable.

Your health might improve

Another interesting tidbit is that living debt-free may very well be good for our health. Money is the No. 1 stressor in the United States, according to the American Psychological Association’s 2015 Stress in America survey.

Chronic stress can suppress our immune systems and disrupt everything from our digestion to our sleep to our reproductive systems, says the National Institute of Mental Health. There’s also a link between long-term stress and depression and anxiety. It stands to reason that eliminating your debt worries could actually be good for your health.

Risks of debt-free living: How extreme is too extreme?

Conventional wisdom tells us that living without debt is the healthiest way to manage our finances, but this doesn’t mean swearing off credit all together. Doing so, in fact, can work against your financial fitness, according to certified financial planner and senior CFP Board ambassador Jill Schlesinger.

“If you live an all-cash life, then the moment you actually need a loan, you may be in trouble,” she told MagnifyMoney. “It’s highly unlikely you’re going to be able to buy a large asset, like a car or a house, in cash.”

When the time comes to apply for a car loan or mortgage, getting approved — and getting the best rate possible — is wholly intertwined with your credit score. A number of factors go into determining this number. Fifteen percent of your FICO score, for example, is determined by the length of your credit history. New credit makes up another 10 percent; having a mix of credit counts for another 10 percent. In other words, actively using credit responsibly accounts for 35 percent of your credit score. Going completely credit-free translates to a thin credit file that can impact important financing options down the road.

“I totally understand the anxiety of not wanting to live with debt, but going too extreme can be shortsighted,” said Schlesinger, who suggests one of two pathways for maintaining a robust credit score:

  • Use credit cards responsibly: This means paying off your balances in full every month and never carrying a balance. Your credit utilization ratio (i.e. how much of your available credit you’re actually using) makes up nearly one-third of your FICO score. Our experts recommend keeping your credit utilization ratio under 30 percent.Reaching for a credit card instead of cash or a debit card to pay for regular living expenses, like gas and groceries, is a great way to use credit to your advantage, so long as you’re paying off the balance in full every billing cycle. (If you can rack up rewards in the process, all the better.) Making on-time payments also shows future lenders that you know how to handle your credit.
  • Consider a secured credit card: Don’t trust yourself with a credit card? Thankfully, there are other ways to keep your credit score alive and well. Enter secured credit cards. These require the cardholder to put down a cash deposit, which determines their credit line, right off the bat. From there, you can use it like a regular credit card without the fear of digging yourself into a debt hole. Not carrying a balance and making on-time payments is key to boosting your credit as your activity is reported to the credit bureaus.

Eliminating debt: How to start

Pick a strategy

Making the minimum payment across all your open accounts isn’t the most effective way to pay down your debt. Dennis used what’s known as the snowball method to get debt-free as fast as she did. This means she continued making the minimum payments on all of her accounts, except for the one with the lowest balance, which she hit extra hard with bigger payments.

Once the lowest balance is paid off, you take whatever you were paying on that bill and apply it to the next lowest balance. It has a compounding effect, plus you can see your accounts closing one after the other, which can make you feel like a financial rockstar.

“I made monthly ‘mega-payments’ of about $2,700 on the debt with the smallest balance and repeated this method until all my debts were paid in full,” said Dennis. “The quick wins of the debt snowball method motivated me to keep going.”

One side note: While you’ll end up paying more in interest over the long haul, this tactic works wonders when it comes to keeping up motivation, according to The Journal of Consumer Research.

Alternatively, you can tackle your debt by prioritizing the accounts that have the highest interest rates. From a black-and-white, numbers perspective, this is smarter than the snowball method since you’ll ultimately get out of debt sooner and pay less in interest. Not sure which method is right for you? Our Snowball versus. Avalanche Calculator can help you make sense of your options.

You can accelerate your debt payoff journey even more by using balance transfer offers. These let you transfer high-interest balances over to new, lower-interest accounts with super-low promotional rates. These typically come with a 3-4 percent transfer fee, but if you can get a 0 percent card and pay off the balance within the promotional period, you can save big time in the long run.

Learn to budget

The key to accelerating your get-out-of-debt timeline is freeing up extra cash that you can throw at your debt. This, of course, requires sticking to a budget. Begin by listing out all your incoming money (income) for the month and subtracting all your outgoing money (expenses), which should include monthly contributions to your savings account. (Don’t worry, you can pay off debt and save at the same time. More on this shortly.)

What’s left represents how much you have to allocate toward your debt. If you come up with a negative number, it means you’re running in the red and need to make some lifestyle tweaks to avoid going even further into debt, which brings us to our next point.

Live within your means

Are there any ways to decrease your expenses? Dennis downgraded her cable package and cellphone plan, stopped paying for garage parking, and cooked meals at home in order to direct more money toward her debt. On a more extreme note, Lyda and her husband sacrificed their personal space and moved in with her parents to kick their debt repayment into high gear.

“We felt very suffocated by debt,” she said. “We weren’t making much, our rent was a lot, and our debt was enormous.”

In addition to lowering your expenses, think of out-of-the-box ways to increase your income, like picking up a side gig. Dennis tipped the scales by selling gently used household items on Craigslist and eBay. She also took on a part-time gig at a local yoga studio in exchange for a free membership.

How to maintain a debt-free life

Once you cross the debt-free finish line, celebrations are certainly in order, but you have to be intentional about not backsliding. Ask yourself how you got into debt in the first place. The way you answer is personal, but pay attention so you don’t repeat past mistakes.

Redirect debt payments toward savings goals

To keep you moving in the right direction, Schlesinger suggests immediately taking whatever you were putting toward your debt and redirecting it to some sort of savings vehicle, whether that be beefing up your emergency fund or upping your retirement contributions.

“It’s a great way to prevent falling back into those bad habits, and the more you can automate it, the better; out of sight, out of mind,” she said.

Top off your emergency fund

If you have nothing in your savings account, you’ll likely rack up new debt to see you through unexpected pop-up expenses. Set your sights on socking away three to six months’ of take-home pay in your emergency fund.

This, along with sticking to a budget, living within your means, and using credit responsibly, plays a major role in breaking the debt cycle once and for all. In some cases, your emergency fund could save you from financial ruin. The good news is that you don’t have to wait until getting debt-free to get your savings off the ground.

Debt versus savings: Which comes first?

According to Schlesinger, there’s a common misconception out there that competing money goals represent an either/or situation. But she says that it’s all about changing your mindset so you can fill more than one bucket at the same time.

“When people ask, ‘What should I do: pay off my debt, establish my emergency fund or contribute to my retirement account?’ my answer is always is the same: Yes!” said Schlesinger. “These big goals require some multitasking.”

If you’re actively in debt-payoff mode, press pause and focus your energy on setting the foundation for your emergency fund. Our insiders suggest setting a starting target of $1,000. Once you hit that milestone, go back to focusing on debt until it’s knocked out, at which point you can switch back to building your savings up to the three- to six-month mark.

Retirement savings don’t have to be put on hold, either.

“If you have 22 percent [interest] credit card debt, it’s hard not to make that the priority, but if you have a 401(k) match, you should put in enough to at least get that match; we shouldn’t be leaving free money on the table,” Schlesinger added.

The takeaway? You don’t want to be so laser-focused on paying off debt that you rob your future self of a comfortable retirement.

What you should do when you’re finally debt-free

Now is the time to ratchet up your savings goals. After bolstering your emergency fund, the next rung on the ladder, according to Schlesinger, is dialing up your retirement contributions — which is exactly what both Lyda and Dennis are doing. Schlesinger said the goal should be to max out your accounts.

Once that’s on track, you can start focusing on other savings goals like travel, saving for a down payment on a home, or saving for your children’s college education. Investing should also be a top priority at this point. We’re not talking about individual stock picking. Instead, the sooner you can zero in on low-cost index funds, the better. This will position you to really maximize your investment returns.

The path to getting, and staying, debt-free is rarely a linear one, but staying the course definitely pays off. The key is to strike a balance between using credit responsibly and sticking to a plan that lets you contribute to your other overarching financial goals.

The good news? A debt-free life is totally doable.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

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What Happens to Debt When You Divorce? 

Editorial Note: 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 prior to publication.

what happens to debt when you divorce
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For every two to three new marriages in 2014 there was at least one divorce, according to the latest Centers for Disease Control and Prevention data — a grim statistic that could easily kill deflate your inner romantic.  

Breaking up a marriage is hard to do and it’s made all the more difficult by the financial implications. 

The average price of a divorce, from start to finish, lands at around $15,500 (including $12,800 in attorney’s fees), according to a 2014 survey put out by Nolo, a publisher specializing in legal issues. If the legal expenses are one side of the coin, figuring out what to do with your joint financial assets and debts is the other.  

We’ve talked about what happens to debt after you’ve married. Now it’s time to ask what happens to debt when you divorce. 

Here’s everything you need to know, plus some tips for protecting your finances when a marriage ends. 

Where you get divorced 

When it comes to splitting up debts, the state you live in can sway the outcome in a big way. A majority are considered equitable distribution states, where the judge uses his or her discretion to divide up debt in a way that’s deemed fair and evenhanded. 

Each state has its own set of laws and procedures, but Vikki S. Ziegler, a longtime matrimonial law attorney licensed in multiple states, says the court generally has more leeway in an equitable distribution state.  

Simply put, the judge has the freedom to take multiple factors into consideration. This might include everything from one spouse’s income to another’s employment status.  

The situation could play out much differently if you live in a community property state. These states are listed below, and in them, debt is viewed a bit differently. 

  • Alaska* 
  • Arizona 
  • California 
  • Idaho 
  • Louisiana 
  • Nevada 
  • New Mexico 
  • Texas 
  • Washington 
  • Wisconsin 

*Alaska has an optional community property system. 

Community property states typically split all marital debt right down the middle, regardless of who actually accrued the debt. This means that if your spouse racked up hidden balances during the marriage, you’ll likely be on the hook for half. In community property states, the divorce process is typically more cut and dried than subjective. 

“The most important thing for someone leaving a marriage to understand is how the law applies in each state that they are getting divorced in,” Ziegler told MagnifyMoney. “How are you going to allocate debt, and who’s going to be responsible for what?” 

An experienced divorce attorney can help fill in the blanks. 

The type of debt 

The type of debt you have is another biggie. Let’s first zero in on secured debt, like a mortgage or car loan.  

According to John S. Slowiaczek, president of the American Academy of Matrimonial Lawyers, whichever spouse decides to keep certain assets — such as the house or a car — will also assume whatever debt is left over.  

“Debt associated with an asset will ordinarily be allocated to the person acquiring the property,” Slowiaczek tells MagnifyMoney. 

Your mortgage: The loan will likely be the responsibility of both parties equally, unless it’s only in one party’s name. If you both co-borrowed the mortgage, you’ll have to decide who will keep the loan and who will exit if one partner wants the house. One way to get one name off a mortgage loan is to refinance the debt and put the loan under just one person’s name.  

The equity built up in the home usually belongs to each party 50/50 as long as the title is held as joint tenants with right of survivorship or tenants by the entirety; don’t be intimidated by the legal jargon. All this means, essentially, is that you legally own the home together.  

If you decide to sell the house, either the couple or the court will likely compel that process, after which you can divide the proceeds equally after paying off the debt.  

If you’re planning on staying in your home, refinancing your mortgage before you divorce can help ease the financial blow. With divorce being as costly as it is, finding ways to trim your budget can better prepare you for a single-income lifestyle. Refinancing could do just that, lowering your monthly payment and potentially your interest rate, assuming you have good credit.  

A lower bill may also make it financially possible for you to stay in the house, if that’s what you want. Plus, if you apply before splitting, you’re more likely to get approved since a combined income will likely make you more attractive to lenders.  

Your car loan: The same usually goes for car loans — if one spouse wants to keep the vehicle, he or she could refinance the loan under his/her own name. Or you can sell altogether and divvy up the cash. As Slowiaczek mentioned above, remaining debt follows the asset, so whoever keeps the car will assume the debt. 

Credit debt. The way nonsecured debts, like credit cards, are handled goes back to individual state laws.  

In a community property state, Ziegler says the courts usually take a 50/50 view of marital debt. But equitable distribution states typically look at who contributed to the debt, how much money each party makes, and other statutory requirements that allow them to potentially allocate the debt differently. In other words, things aren’t as black and white, and the courts have more interpretive wiggle room.   

Barbara, a 36-year-old sales professional in Tampa, Fla. is eight months into the divorce process. Florida is an equitable distribution state, meaning the debt she and her husband accrued could end up being split any number of ways. One of the toughest parts of her experience has been the $35,000 of credit card debt she says she shares with her ex. 

“It was mostly accrued by [my husband], but mostly in my name,” she told MagnifyMoney. The couple also have a $202,000 mortgage, and deciding who will assume the mortgage (and the equity in the home that comes with it) has been a point of contention.  

Ziegler says Barbara probably has more leverage than if she lived in a community property state.  

Student loans. Generally speaking, Ziegler says the court is required to look at the purpose of the degree each spouse pursued to determine whether it’s marital or non-marital debt. Again, it really depends on the nature of the debt, who benefitted from it, and what state you live in, among other things.  

For example, a student loan may be in your spouse’s name, but who’s making the payments? And which one of you is the primary earner? These things matter and could potentially play into your divorce agreement. 

When you acquired the debt 

One bit of good news: no matter where you live, Ziegler says premarital debts are off limits. Where divorce is concerned, the court is only interested in debts that were accrued during the marriage. The same generally goes for debt acquired post-separation.  

How the debt was used 

Every case is different, but the reason behind the debt can sometimes be argued. If, for example, debt was taken on for one spouse’s personal use, the other spouse might argue against being on the hook for it, depending on the property laws in the relevant state. 

“Credit card purchases to buy groceries or make a car payment are obviously marital, but what about debt that was racked up for personal use, like [cosmetic surgery] or gifts for someone your spouse was having an affair with?” asked Ziegler. “It can be argued that those expenses are not marital debt and should be assumed by the individual.”  

This underscores the importance of parsing out individual versus marital debts. To help make it easier, Ziegler recommends that couples maintain two different types of accounts: joint for marital expenses, and individual for personal spending. It’s also wise to keep your statements handy.
 

How to financially protect yourself during a divorce 

Divorces don’t usually come cheap, but there are steps you can take to soften the blow. 

Sign a prenup

Prenuptial agreements aren’t as taboo as they once were. According to a survey released by the American Academy of Matrimonial Lawyers (AAML) in 2013, “prenups” are on the rise; a whopping 63 percent of divorce attorneys cited an increase in recent years. This is because they serve as a loophole against state rules, dramatically simplifying the fight over debts and assets. 

“Most prenuptial agreements say that if the debt is in either party’s name, it’s separate debt that cannot be allocated or redistributed for payment,” said Ziegler.  

If you’re already married, it isn’t too late to protect yourself. As of 2015, 50 percent of AAML members reported an uptick in postnuptial agreement requests. 

Safeguard your credit

Take steps to safeguard your credit before you divorce. As soon as you begin the separation process, do yourself a favor and make a list of all your individual and joint debts to get an idea of what you’re dealing with. Are you or your spouse listed as authorized users on any accounts? If so, cancel those straight away to avoid accruing any new joint debt. To make sure you don’t miss anything, pull your credit report and take a thorough look at your open accounts. 

Ziegler also suggests making it clear in the divorce agreement who’s responsible for which debts — but that doesn’t always protect you. 

“The reality is, if your name is still attached to the account, and your ex-spouse defaults on payments, it’s going to negatively impact your credit,” she warned.  

If your ex agrees to pay off any debts, you can protect yourself by transferring the balances fully into the former partner’s name. 

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

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Instant-Approval Credit Cards: What You Should Know

Editorial Note: 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 prior to publication.

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Instant-approval credit cards are exactly what the name implies — immediate, instant-access lines of credit for those who qualify. It goes without saying that they’re ideal for those who need spending power now, but be sure to do your homework before going on an application spree.

Here’s what to know about instant-approval credit cards.

Instant-approval credit cards: Explained

These cards work just like any other credit card, except that in many cases, you can begin using an instant-approval card the same day you’re approved.

In other words, you’ll want to use these cards responsibly to avoid digging yourself into an unplanned debt hole. (We’ll unpack those details in a minute.) The application process varies from card to card, but the higher your credit score, the better your chances of scoring a card with reasonable terms.

You’re more likely to get approved by Discover, for example, if you have “good to excellent credit.”That’s not to say that instant approval cards are off the table if you have less-than-perfect credit; there are plenty of lenders willing to work with people in this camp, but keep in mind that those with higher credit scores will generally get better interest rates and higher spending limits.

Beverly Harzog, credit card expert and author of “The Debt Escape Plan,” cautions people looking for quick access to credit to be sure they’re using it for smart reasons.

“The basic rules are the same: read the fine print and try not to carry a balance,” Harzog tells MagnifyMoney. “Just because it’s instant doesn’t mean it’s a good card for you. Research all your choices and make an informed decision.”

Another thing to keep in mind is that the word “instant” can’t always be taken literally. With the Discover card mentioned above, for instance, the company usually issues what’s called a “conditional approval” after receiving your credit score and approving your application. This will take a deep dive into your credit history, income and financial background, while also verifying that you indeed meet all the card’s requirements. The takeaway? Instant approval doesn’t always mean it’s a guarantee.

Why you might need an instant-approval card

Instant-approval cards are ideal for people who need credit in a hurry. There’s also the convenience factor of not having to wait too long to start using them. While the application and approval process are more accelerated, Harzog says that your standards should stay high.

According to Harzog, the ideal candidate for an instant-approval card is someone who needs to make an immediate purchase and will be able to pay it off by the time the first credit card bill comes due, thus avoiding interest. If it’s a big-ticket purchase that’s going to take you a bit longer to pay for, using an instant-approval card with a reasonable interest rate is your second-best choice.

Just remember: Applying for credit cards leads to inquiries into your credit report, which can adversely affect your score. To reduce the sting, see if the bank offers a prequalification service. You provide minimal personal information (usually just your address, name and the last four digits of your Social Security number), and the bank tells you if you’re prequalified for a card. This in no way affects your credit score, but it does serve as a great way to help you pinpoint the best card to apply for.

Though an affirmative prequalification doesn’t always mean you’ll ultimately be approved, at least this way you’ll know you’ve got a good shot.

The risks of instant-approval credit cards

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All credit cards come with some level of risk. Harzog warns that there are a number of instant-approval cards on what she calls “the bad credit market.” With these lenders, as long as they can verify your identity, you’re good to go. This may sound amazing for consumers with bad credit, but Harzog advises wariness.

“You have to be really proactive in the way you protect yourself because while some are fine, many use high APRs and maintenance fees to really take advantage of people,” she says.

She points to First Premier as an example. The bank boasts 60-second approvals, but it also charges a $95 “Program Fee” to open your account. From there, consumers are hit with a 36% APR, along with an annual fee that could range from $45 to $125, depending on your credit limit. The lower your credit score, the more careful you need to be, according to Harzog.

Aside from sky-high interest rates and surprise fees, another inherent risk that comes with instant-approval credit cards has to do with the likelihood of overspending. Having to wait 10 days to receive a regular credit card is a built-in safeguard against impulse shopping. On the flipside, getting excited about an unplanned purchase — then having instant access to a ready-to-use line of credit — could be a recipe for financial disaster.
“Just be sure that the reason you need to have an instant-approval card works with your overall financial goals and is within your budget if you plan to start using it that day,” Harzog says.

 

Application Fees

Annual Fees

Ongoing APR

Our take...

First Premier

$95

$75-$125 annual fee the first year, then $45-$49 after that.

36%

An awful deal, given the upfront and annual fees, not to mention the skyhigh ongoing APR. If you really need money fast, consider alternatives like a personal loan that doesn’t charge upfront fees.

FingerHut

You may have to make a down payment, depending on the credit program you qualify for.

$0

26.15% (variable)

We aren’t big fans of FingerHut, an online shopping catalog that lets consumers finance their purchases through one of its credit programs. You’re much better off going with one of the secured credit cards featured in the next section.

Total Visa Card

$89

$75 for the first year; $48 after that, but you’ll also incur a total of $75 per year in monthly servicing fees.

29.99%

This is another one that has terrible fees . It makes a lot more sense to take the money you’d spend on these fees and put a deposit down on a  secured credit card . The only way we can justify going with Total Visa is if you really cannot get approved anywhere else, and you really need to build credit. Even then, a secured card would be a better option.

The potential benefits of instant-approval credit cards

Like any other credit card, instant-approval cards, when used wisely, can help you out of a financial jam if you have no other quick financing options. This is especially true if you get a card that allows for cash withdrawals with limited or no fees.

And those playing the long game can actually use them to improve their credit score by keeping their utilization rate low and always making on-time payments.

But if you can’t find an instant-approval card with good terms, going with a secured credit card or prepaid debit card might be a better starting point, assuming you don’t need the spending power right this minute.

Instant-approval credit card alternatives

Secured cards

Let’s make one thing clear right off the bat: A secured card won’t be helpful to someone who needs to put a large purchase on credit right away, doesn’t have cash to fund a card and is looking for speedy credit-card approval.

But if you are looking for a solid way to build credit without going deeper into debt, a secured card is one of the best ways to accomplish that goal.

A secured credit card requires the cardholder to put down a cash deposit at the outset, essentially protecting the bank should you default on your debt. The deposit itself often dictates your credit limit; so putting down a $500 deposit translates to a $500 credit line.

Need more credit? Simply add more and you’re ready to roll. The setup is a roundabout way to build your credit or rehab a poor score (assuming you maintain a low utilization rate and pay the balance off in full each month) as your activity is reported to the credit bureaus.

If you are approved for a secured card, you’ll just need to make the minimum deposit, which varies from issuer to issuer. As your credit score gradually rises and you prove your creditworthiness, you may have the opportunity to request an upgrade to a regular credit card or your lender may bump you up to a regular credit card.

Remember, if the idea is to improve your credit, you’ll want to wait until your score hits the 650 mark before you consider making such a switch. That said, our experts recommend keeping a secured card active for at least one year if you want to see a tangible difference in your credit score.

Harzog adds, “Your score is considered, but they also look at your credit report to see if you have negative items, such as a recent bankruptcy; your income is also a factor.”

When it’s time to transition up, you can begin the process by reaching out to the bank directly to see what regular credit cards you qualify for. (Steer away from ones with annual fees, of course.)

If a secured credit card sounds right for you, check out these two noteworthy picks:

 

Minimum deposit

Fees and fine print

APR

Can you convert to a regular card?

Discover it® Secured

At least $200

$0 annual fee

24.49% Variable APR

Yes

Capital One® Secured Mastercard®

$49, $99 or $200, depending on your creditworthiness

$0
annual fee

24.99% (Variable) APR

Yes

Discover it® Secured

The Discover it® Secured offers decent rewards to cardholders, like 2% cash back at gas stations and restaurants on up to $1,000 in combined quarterly purchases, along with 1% back on all other purchases. The interest rate is high, making it all the wiser not to carry a balance. On the bright side, after eight months, Discover will start running automatic monthly reviews to see if you’re eligible for a unsecured card. To learn more, check out this in-depth MagnifyMoney review.

Capital One® Secured Mastercard®

The interest rate is super high on the Capital One® Secured Mastercard®, but again, this is a nonissue if you’re paying off the balance each month. Unlike with the Discover it® card, you can’t earn cashback rewards with this offering, but the minimum deposit may be lower, making it a more accessible secured credit card for someone looking to improve his/her credit. One other perk: if you’re unable to pay the full deposit all at once, Capital One will give you 80 days of being approved to do so.

Prepaid debit cards

Getting a prepaid debit card is easy enough — simply use cash to load up the balance, and you’re set. They’re not the same as credit cards, but can be a good alternative if you don’t have access to a traditional checking account or just want an easy, cash-free way to access your money.

How do they work?

Since your payment history for a secured credit card is reported to credit bureaus, using one responsibly is a legit way to build up your credit. Not so for prepaid debit cards. Instead, you prepay the balance, then swipe away until you hit zero.

When are prepaid debit cards a good option?

“If you can’t get a checking account, for whatever reason, a prepaid card might help bridge the gap until you can get an account again,” says Harzog.

In other words, prepaid debit cards represent an efficient, simple way to manage your money. They’re also ideal for people who generally carry a lot of cash on hand, protecting them from theft. Another perk comes if you set up direct deposit so that your paycheck is funneled straight to your prepaid card. According to our insiders, some prepaid card issuers may credit your account with your payroll earnings a full two days early — a worthwhile perk if money is tight.

Just one other important note regarding prepaid debit cards: The fees can be killer. Some attach charges for everything from loading your card to using an ATM. One upside, however, is that the Consumer Financial Protection Bureau has recently tightened up rules for the prepaid debit card industry, issuing a slew of new consumer protections that will take effect next year.

“There are a few that have minimum fees, and these are good candidates,” adds Harzog. “For example, you might want to give your teen’s allowance via a prepaid card so the kid can get used to using plastic responsibly, but if they have a checking account, a debit card can accomplish the same thing.”

If you’re on the market for a prepaid debit card, they’re relatively easy to find. A number of large banks, like Chase and American Express, offer their own versions. You can also find different variations at retailers like Walgreens. Again, just be sure to triple-check the fine print so you know exactly what you’re signing up for.

Prepaid debit cards to consider

Comparing prepaid debit card options? Here are a couple worth mentioning and a few key fees for you to watch out for.

 

Monthly fee

Reload fee

ATM fee

Replacement card fee

Amex Bluebird

$0

$0, unless you want same-day access to a check you deposit via mobile check capture; fee is equal to 1% or 5% of check value.

$0 at any MoneyPass® ATM. Otherwise, there's a $2.50 fee.

$0

Chase Liquid

$4.95

$0

$0 at any Chase ATM, otherwise there's a $2.50 fee.

$0

Bluebird by Amex

Bluebird is operated through a partnership between American Express and Walmart. As far as fees go, Bluebird stands out (in a good way). The card itself, which requires no credit check, is free if you purchase it online; it’ll cost you up to $5 if you go through a retailer.This card gives you plenty of ways to add funds free of charge, including direct-depositing your paycheck, which will get you access to your funds two days faster. You can also reload with cash at Walmart or go with a free debit card transfer. Mobile check capture is another free option.

For mobile deposit, you’ll have to wait 10 days to access your money, or you can get it in a matter of minutes if you’re willing to pay a fee equal to 1 or 5% of the check’s value (or a minimum of $5). We highly recommend sticking to the direct deposit option if you can.

A downside to Bluebird is that to avoid ATM fees, you have to use an ATM that’s within its MoneyPass® network. (You might want to check your nearest locations before opening an account.) Another snag is that cash back from retailers is off the table. You’ll also need to keep in mind that this is an American Express card, which isn’t as widely accepted as other major cards.

Chase Liquid

Chase Liquid is another prepaid debit card worth considering if you plan on reloading funds fairly often. This card lets you load checks and cash, for free, at any Chase ATM. You can also use direct deposit or transfer money from an eligible account. But unlike Bluebird, you can expect a few more fees with Chase Liquid.

You have to have one of Chase’s qualifying accounts, like Chase Premier Checking, to get away from the $4.95 monthly service fee. One other thing: you have to go to a local branch to open your account, so this card doesn’t make sense if there isn’t one in your area.

Final thoughts

Instant-approval credit cards can be a great option for when you need credit now, assuming you don’t carry a balance and you go with cards that have reasonable rates and little to no fees. If that’s out of reach, secured credit cards are an effective way to build up your credit score until you qualify for better deals. As another option, a prepaid debit card is a solid starting point on the road to better money management.

Advertiser Disclosure: The card offers that appear on this site are from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all card companies or all card offers available in the marketplace.

Marianne Hayes
Marianne Hayes |

Marianne Hayes is a writer at MagnifyMoney. You can email Marianne here

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