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5 Tips to Help You Rebound from Bad Credit

For people grappling with a history of debt payment problems, improving their credit record may seem like a daunting task. FDIC Consumer News offers these tips, which can help increase the chances of qualifying for better loan terms, lower insurance rates, and perhaps even a new job or apartment.

1. Order Your Free Credit Reports and Look for Errors

Credit reporting companies, often referred to as "credit bureaus," maintain reports that show how an individual handles certain aspects of his or her finances. Your credit report includes information on:

  • How much credit you have available
  • How much credit you are using
  • Whether you pay loans and other bills on time
  • Your payment history on closed accounts
  • Any debt collections or bankruptcy filings 

Credit bureaus and other companies use the information in your credit report to generate a credit score to predict, for example, how likely you are to repay your debts or how reliable you may be as a tenant.

Federal law requires credit-reporting companies to provide consumers with a free copy of their credit report once every 12 months, if requested. You can easily obtain your free credit reports from each of the three major credit bureaus (Equifax, Experian, and TransUnion) at one Web site — AnnualCreditReport.com — or by calling 1.877.322.8228.

Under other circumstances, such as being denied a loan or employment based on your credit report or if you believe you may be a fraud victim, you are also entitled to a free copy directly from the credit bureau that provided the initial report. Be cautious of costly subscriptions to additional credit-related services that you may be offered while requesting your credit report.

Because mistakes can easily happen, closely review your credit report(s) when you receive it. According to a 2012 study from the Federal Trade Commission, more than 25 percent of consumers surveyed identified errors on their credit reports that might affect their credit scores.

"It's important to dispute inaccurate information, in writing, with both the credit reporting company as well as with the original source of the information so that the error does not show up again," said Jennifer Dice, an FDIC Supervisory Consumer Affairs Specialist.

If you have a complaint about a credit reporting company, you can contact the Consumer Financial Protection Bureau (CFPB) online or by calling 1.855.411.2372. 

2. Improve Your Credit History by Paying Your Bills on Time

Paying on time is one of the biggest contributors to your credit score. If you have a history of paying bills late, find out if your bank will send you an e-mail or text message reminding you when a payment is due. You may also consider having your payments automatically debited from your bank account.

Once you become current on payments, stay current. "The more you pay your bills on time after being late, the more your credit score should increase," Dice added. "The impact of past credit problems on your credit score fades as time passes and as your current timelines in paying bills is reflected on your credit report."

3. Reduce the Amounts You Owe

You can get on track toward a better score by paying down balances owed.

It takes some discipline, so start by getting organized. Make a list of all of your accounts and debts (perhaps using your credit report, if it's accurate, and recent statements) to determine how much you owe and the interest rate you are being charged. You may be able to reduce your interest costs by paying off the debts with the highest interest rate first, while still making the minimum payments (if not more) on your other accounts.

Also consider how to limit your use of credit cards in favor of cash, checks, or a debit card. "While regular, responsible use of your credit card may help your credit score, it is best to keep your balance low enough so that you can pay the account balance in full, on time, every month," suggested Heather St. Germain, an FDIC Senior Consumer Affairs Specialist.

4. Consider Free or Low-Cost Help from Reputable Sources

Counseling services are available to help consumers budget money, pay bills, and develop a plan to improve their credit report. Be cautious of counseling services that advise you to stop making payments to your creditors or to pay the counselors instead (so they can negotiate on your behalf with the lender). These programs can be costly and may result in your credit score becoming even worse.

5. Beware of Credit Repair Scams

Con artists lure innocent victims in with false promises to "erase" a bad credit history in a short amount of time, but there are no quick ways to remove credit problems on your record that are legitimate. "You'll also know you've encountered credit repair fraud if the company insists you pay upfront before it does any work on your behalf or it encourages you to give false information on your credit applications," said St. Germain. In general, before doing business with a for-profit credit repair company, learn how you can improve your own credit history at little or no cost.

For more information from the FDIC, the CFPB, or the Federal Trade Commission and other government agencies on topics such as credit reports, credit scores, fixing a credit problem, and how to choose a credit counselor, go to mymoney.gov and search by topic.

Article source: FDIC Consumer News, Summer 2014 issue

Budgeting 101

Despite the importance of a budget, more than half of Americans don't have one, and 22% say they don't have a clear picture of what they spend on housing, food and entertainment. What's most surprising to us is that 78% of Americans say they do know what they are spending their money on, yet half don't have budgets.

Without a budget, your financial picture is at best muddy. At worst, you might find yourself overspending, racking up credit card debt and feeling confused and anxious about your situation. But a good budget gives you the confidence and a blueprint to live the life you want.

Budgeting in a Nutshell

A budget is a monthly financial plan that divides your income into categories. It uses your monthly income as a cap on your spending and then determines how you allocate your money to savings goals and expenses within that limit. It is the most crucial element of your personal finances, the key to living within your means and building your wealth. In short, a budget is part of any financially with-it adult's life plan. And it can and will change as you mature and see your wants, needs and goals shift.

Why Budgets Are Important

A budget will:

  • Give you a clear picture of your financial situation so you can live within your means
  • Show you how much you can afford to spend — right down to the dollar — on everything from food ($200) to rent ($900) to a cocktail dress ($103)
  • Keep you motivated and accountable on your way to reaching your financial goals

We also love budgets because they give you a convenient framework in which to talk to yourself and others about what you can and can't afford. "It's way too expensive," in response to your mom urging you to fly home for a second visit in this summer isn't nearly as polite and effective as, "Another plane ticket just isn't in my budget." (Try it — you'll see the difference.)

How a Budget Prioritizes Your Money

Another benefit of a budget is that it helps you prioritize your spending. LearnVest recommends your budget follow the 50/20/30 rule. After your income comes in, this rule recommends that your money go out in this order.

50% of Your Budget Should Go to Essential Expenses

These are the expenses you always have to pay as a minimum to keep your life going, such as your housing, transportation, groceries and utilities. 

Next, 20% Should Go to Financial Priorities

These are expenses that help you accomplish important financial tasks, such as paying off loans, building savings, saving for retirement and more; they generally include savings, debt repayment and financial contributions.

Lastly, 30% Should Go to Lifestyle Choices

This is what's leftover, which is what you get to live on and enjoy now, on expenses such as dining out, shopping and other fun spending. As you can see from these general guidelines, a budget is very personal. Your best friend the foodie might give herself a restaurant budget of $200 a month while setting a low limit of $30 on entertainment. Meanwhile, because you're a music buff, you might set aside $150 for concerts every month and scrimp everywhere else. Similarly, the budget of someone paying back student loans and working in public service will be very different from someone who is debt-free and working in finance. But both can enjoy life and stay within budget, as long as they are realistic and know what they want out of their money. 

How to Get a Budget to Work for You

Always, always have a realistic budget.

Stick to it. We build monthly budgets, but that doesn't mean you should only check in once a month. Depending on how tight your budget is, you should check in to see how you are doing every week, every day or maybe even before every purchase. Remember, there is a limited amount of money you can spend every month after your Essentials and Priorities are taken care of, so you want to be mindful of how much you've already spent as the month goes by. If you're finding it hard to stick to your budget, then you should question whether it's truly realistic. You may need to earn more or cut costs to make it work.

Revisit your budget. Your budget will change as your wants and needs change, and also if you get a raise! At the end of each month, look at how you did and get realistic about your budget. If you are consistently going over your grocery budget, maybe you should cut back in other areas in order to increase it, or look for new ways to cut it. This is not to say, however, that you should redo your entire budget on a daily basis. You'll confuse yourself and never learn from month to month how well you're sticking to your goals. And when you get a raise, don't just start spending more on dinner or get a nicer apartment. Also increase your savings, debt repayment and other priorities in order to keep your budget balanced and in line with the 50/20/30 rule. 

Beginner’s Guide to Getting a Mortgage

Getting your first mortgage is a big deal, and sometimes a difficult one. However, whether you are buying your first house or opening a second mortgage for refinance reasons, here is a guide to gaining that mortgage without intimidation.

What is A Mortgage?

Basically, a mortgage is a loan used to purchase a home. Sometimes, a mortgage is taken out to refinance an existing mortgage to increase a home's equity (the worth of your home when used as collateral for a separate loan). Then, you make payments back to the lender with a bit of interest tacked on. Eventually, you will complete the payments, the house will truly feel like yours, and that extra sum of money that used to go to the mortgage payments will be up for spending or saving!

What Do I Need to Get A Mortgage?

To get approved for a mortgage, it is very helpful to have a consistent job and an outstanding credit report. A few more documents you need are:

  • Recent tax returns
  • Recent bank statements
  • A list of all of your assets and debts

A Quick Fix

However, not everyone has a steady career that seems reliable to lenders (lenders are hesitant about self-employed, part-timers, etc.), or maybe your credit score looks subpar. If that's the case, start looking for mortgages at least one year before you need it, and work on cleaning up your credit score, which symbolizes how responsibly you will make your mortgage payments. Improving your credit score not only enhances your options of mortgages, but also lets you borrow more money with a lower interest rate. 

Improve Your Credit Score

At least six months before applying for a mortgage, improve your credit score to heighten the chances of mortgage approval by utilizing the following tips:

  • Pay off any other debts
  • Do not use your credit card for expensive purchases
  • Do not take out other loans
  • Cancel any credit cards or accounts that aren't in use
  • Make all payments on time

Save Up!

Of course, to buy a house you need money — a lot of it. Expenses that you would never think of arise when buying a home, and mortgage lenders want to ensure that you have enough to cover all of the following:

  • Down payment
  • Closing costs
  • More than one year's worth of taxes and insurance
  • Home inspection
  • Furniture
  • Appraisal costs
  • More money just in case you lose your job

Where Do I Get a Mortgage?

First become confident in your finances and be ready to look for a home, and then seek an official lender to prequalify you for a mortgage. This way, you know which price range of houses to search for. Unlike applying for a regular mortgage, prequalifying for a mortgage does not take too much time because a background check and confirmation of every detail on your application is not necessary. A lender simply looks at all of your qualifications and gives you an estimate of how much money you can spend on a house.

Sources to Obtain a Mortgage

After some house shopping, there are quite a few different sources for obtaining a mortgage such as:

  • Banks
  • Credit unions
  • Mortgage brokers
  • Online mortgages

Once you find a mortgage lender suitable for you, and the house of your dreams, pay the largest down payment affordable in order to reduce the interest and future payments. According to US News, the down payment should be no less than 20% of the entire mortgage.

Overall, with responsible financing, some saved cash, a reliable credit report and a new home in mind, you won't have any problems obtaining a mortgage. Good luck!

Types of Mortgages

Purchasing a home can be overwhelming. The amount of money you are about to put into your future house can seem alarming and maybe even impossible. This would normally be the case, but instead, we have mortgages. A mortgage is a loan that helps you purchase property by using the property itself as collateral. Mortgages are incredibly important to understand and fully utilize. To learn more about mortgages and the subsequent benefits, look no further.

How a Mortgage Works

A bank will loan you a specific amount of money that you will have to repay in a certain number of years with a certain set interest rate. Most mortgages are generally paid off anywhere between 15 to 30 years with monthly payments. Usually, you are also required to provide a down payment for a portion of the amount; the down payment value can range from 5% to 20% depending on the bank and your situation. It is important to keep in mind, that if your down payment is less than 20% you could be viewed as a riskier loan compared to others.

Mortgages use your home as collateral, which means if you don't repay the debt, the lender could potentially take back the property and sell it to cover the debt. This would affect your ability to buy a home in the future, so it is important to borrow wisely and avoid financial trouble.

Educating yourself is the best choice for smart financing, especially with the many different types of mortgages available.

Loans usually fall into one of two categories: Fixed-Rate Mortgages or Adjustable Rate Mortgages.

Fixed Rate Mortgages

Fixed rate mortgages have the same interest rate during the entire repayment term.

Adjustable Rate Mortgages

  • Have an interest rate that changes over time
  • Usually have a cap for the interest rate 

Along with interest rates, loans can also be issued as government-insured loans instead of conventional loans.

Conventional Home Loan

A conventional home loan is one that is not insured or guaranteed by the federal government in any way. 

Government Issued & Insured Loans

Federal Housing Administration (FHA)

The FHA loan is available to all types of borrowers.

US Department of Veteran Affairs (VA)

The VA loan is specifically for military members and their families.

The United States Department of Agriculture (USDA)

The USDA loan is for rural borrowers who meet certain income requirements.

Jumbo vs. Conforming Loan

Additionally, there is the difference between a jumbo and conforming loan. A conforming loan falls within maximum size limits, and otherwise "conforms" to pre-established criteria. While a jumbo loan exceeds the conforming limits established.

The Benefits of a Mortgage

Absorbing this much information at once can be overwhelming, but remember that having a mortgage on your home can be incredibly beneficial.

Mortgages make home ownership affordable and can help you lock in the dream home you've been hoping for. It is also helpful that interest rates on mortgages tend to be lower than any other form of borrowing, because the loan is secured against your property. Keep in mind that prompt and timely payments on a mortgage will help greatly improve your credit rating and increase your likelihood of receiving loans in the future.

Mortgages are very beneficial and continuously help homeowners find and purchase the property they desire. Take the time and effort to sit down and work through the different types of mortgages to determine which one is the best fit for you and will benefit you the most in the long run.

Types of Personal Loans

The flexibility of personal loans has made these types of loans increasingly popular. They can be used for any reason and have many benefits. Many individuals apply personal loans to consolidating previous debt, but they can also be used for major purchases, home remodels, vacations or any other personal reason.

Some of the benefits could include:

  • Faster access to money
  • Fixed-rate interest
  • Large loan amounts
  • The loans do not have to come from a bank — loans are given at the discretion of the buyer and can be issued for a specific amount.

Unsecured and Secured

A personal loan can be a secured loan or an unsecured loan.

With a secure loan, the borrower offers an asset that will pose as collateral. If the borrower cannot pay back the loan, the creditor can take the asset, which can be something along the lines of a car, house, or other item of great value. A home equity personal loan is an example of a secured loan where the amount is fixed, and the house itself poses as an asset.

An unsecured loan is considered more high risk seeing as it does not require any kind of collateral. Consequently, the interest rate will be higher. Each loan can have its benefits and depends on the individual when deciding which loan is best.

All personal loans will either be secured or unsecured. While the actual types of personal loans can vary and the possibilities are almost endless, these are some common types of personal loans.

Installment Loans

This is the most well-known type of loan. The loan is a set amount and is repaid over time along with interest. The term of the loan varies and the creditor usually determines the interest rate, as well as how often payments are made and for how much. These loans are low risk, can be approved of faster than most and usually will have lower monthly payments. 

Fixed-Rate Loans

Another common type of personal loan is the fixed-rate loan. Almost all personal loans will be fixed-rate. The loan is a set amount with an interest rate that does not change, which is what makes this loan appealing to individuals wanting to make big purchases such as a home or a car.

Convertible Loans

This loan is ideal for businesses and should be agreed upon between a borrower and a lender who have a trusting relationship. With convertible loans, if the borrower has a withstanding amount after a certain period of time, the lender has the option to convert all or a portion of the outstanding loan amount into some form of equity with the borrower's company. Over time having equity or, in some cases, partial ownership of the company, might be worth more for the lender. It is a kind of investment on the lender's part and is appealing to many lenders. 

Interim Loans

Also known as single payment loans, the interim loan is used for temporary financing and is repaid with interest in full at the end of the agreed-upon term. The interim loan is typically sought after as a short term solution while a long-term solution is being arranged. Many start-up businesses will apply for an interim loan until further funding can be acquired. Home equity line of credit and a short-term personal loan is an example of a secured interim loan.

Adjustable Loans

Also called variable-rate loans, adjustable loans are a riskier loan where the interest rate adjusts at different intervals throughout the term of the loan based on numerous factors. The lender has to abide by an interest rate cap where they can no longer raise the amount of interest. Adjustable loans are easy to get and the original interest rate is typically lower than interest rates of other loans.

Finding the right loan can be a timely process that involves sorting through long lists of available loans. When looking for the right loan, keep in mind that a lot of personal loans are a scam. Do as much research as possible, talk to people who have already taken out personal loans, and know the risks involved.

To Co-Sign or Not to Co-Sign a Loan

The Co-Signer's Notice

When you co-sign a loan, the lender (known as the "creditor") must spell out your obligations in a co-signer's notice, which says:

  • You are being asked to guarantee this debt. Think carefully before you do. If the borrower does not pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.
  • You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.
  • The creditor can collect this debt from you without first trying to collect from the borrower.* The creditor can use the same collection methods against you that can be used against the borrower, including suing you or garnishing your wages. If this debt is ever in default, that fact may become a part of your credit record.

Before You Co-Sign

Despite the risks, there may be times when you want to co-sign. Your child may need a first loan, or a close friend may need help. Before you co-sign, consider how it might affect your financial wellbeing. Can you afford to pay the loan? If you're asked to pay and can't, you could be sued, or your credit rating could be damaged.

  • Even if you're not asked to repay the debt, your liability for the loan may keep you from getting other credit. Creditors will consider the co-signed loan as one of your obligations.
  • Before you pledge property to secure the loan, like your car, furniture, or jewelry, make sure you understand the consequences. If the borrower defaults, you could lose these items.
  • Ask the creditor to calculate the amount you might owe. The creditor doesn't have to do this, but might, if you ask. You also may be able to negotiate specific terms of your obligation. For example, you may want to limit your liability to the principal on the loan, and not include late charges, court costs, or attorneys' fees. In this case, ask the creditor to include a statement in the contract — like "The co-signer will be responsible only for the principal balance on this loan at the time of default." — before you co-sign.
  • Ask the creditor to agree, in writing, to notify you if the borrower misses a payment or the terms on the loan change. That will give you time to deal with the problem or make back payments without having to repay the entire amount immediately.
  • If you're co-signing for a purchase, make sure you get copies of all-important papers, like the loan contract, the Truth-in-Lending Disclosure Statement, and warranties. These documents may come in handy if there's a dispute between the borrower and the seller. The creditor doesn't have to give you these papers; you may have to get copies from the borrower.
  • Check your state law for additional co-signer rights.

*Depending on the laws in your state, this may not apply. If state law forbids a creditor from collecting from a co-signer without first trying to collect from the primary debtor, this sentence may be crossed out or omitted.

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