Save Money with Credit Sesame

Should You Borrow From Your 401k?

Brian O'Connell — Wed, 16 May 2012 13:00:50 +0000

(Image by Scott Wills, Flickr)

Financially, times are tough and many Americans are looking under every couch cushion for extra change to make ends meet. Add in a job loss or a sudden loss of income, and many Americans find themselves in an even tougher financial bind and in urgent need of money to get by until they can get back on their financial feet again.

If this sounds like your situation, you may be asking yourself: Should I borrow from my 401k? At first glance, the easy answer is “why not”? After all, you may be many years from retirement, and figure you can easily pay the money back.

However, the real answer to this question is much more complex.

Yes, most 401k plans let you borrow up to half the balance (or $50,000—whichever is less), with a five-year period to repay the loan —or longer, if you're using the loan to buy your first home. Interest rates are usually only a few points above the prime rate. There's no credit check required and with some plans your money is only a phone call away.

In theory, it's a great idea—borrow from yourself and pay it back with interest. But like most financial issues, it's not as simple as it sounds. Ask yourself: Can you afford to forgo the tax-interest your retirement funds otherwise could—and should— be earning all the time?

Let’s break that question down further.

First, with any loan, be sure to do your homework, and be savvy about whatever form of loan you ultimately choose.

Next, look for alternative solutions. For example, if you’re a homeowner you may want to look into a mortgage refinance– mortgage rates are at historic lows, below 4% for those with good credit. Or, if you have a decent amount of equity in your home (not a certainty in the current economic environment), a home equity line of credit may be an option. The good news? With your home mortgage, you can use leverage you already have to pay off your debt – and the interest is tax deductible.

If that doesn’t work for you, start doing some detective work. Do you have a money market account? Or a savings account that’s not earning much interest? Borrowing money from either of these pose less risk for your long-term financial health.

You might also check into an unsecured debt consolidation loan. Keep in mind, though, these loans tend to carry higher interest rates than a mortgage refinance or home equity loan, and the interest won’t be tax deductible. Still, it’s still a better deal than most credit cards, and you won’t have to put a dent in your retirement fund.

If you have no other viable alternative, go ahead and tap into your 401k, but proceed with caution. If none of the above options apply, and you’re in a real financial emergency, borrowing from the 401k can help. The good news is the money can be repaid at relatively low interest rates. Just be sure you can repay yourself within the required time limits —and continue to make contributions to your 401k plan, so your retirement nest egg doesn’t take a major hit.

Some other tips include:

Pay yourself back. If you don't, your loan will be considered a premature distribution (assuming you’re under 59 ½ years old), and you’ll pay a 10% penalty, along with state and federal income taxes.

Read the fine print. If you change jobs, there’s a good chance you’ll have to pay the loan back immediately, in full, or face steep penalties and tax charges.

Don’t make a habit of it. Borrowing from your 401k may be a viable option in a pinch, but don’t let yourself fall into a pattern of dipping into your 401k instead of saving for things you need along the way. That’s a recipe for long-term troubles.

Employer Matching. Remember that you’ll miss out on any matching funds your employer may offer.

Consider a 401k loan as a last resort, and only after exhausting all other options, first. If you have no other options, make sure you pay the loan back as quickly as possible to keep your retirement on track.

{{GLOBAL_BIO_BRIAN_OCONNELL}}

Related Stories:

Q&A: Savings Advice for College & Saving for Retirement

Planning for Retirement: How to Retire on the Cheap

Battle of the Sexes: Better Investors — Men or Women?

This Week in Money Management: Save with Roth IRAs

Credit Scores & Short Sales – The Truth, The Whole Truth & Nothing But The Truth

John Ulzheimer — Tue, 15 May 2012 13:00:43 +0000

(Image by Justin Shearer, Flickr)

According to some sources between 25% and 30% of all mortgages are currently “upside down.” This means the homeowner owes more on the home than it’s worth. And while we’ve become accustomed to having auto loans that are perpetually upside down, we’ve only recently had to deal with the feeling in the mortgage environment.

What is a Short Sale?

The past few years have seen an increase of a fairly new method of disposing of an upside down mortgage loan, the short sale. A short sale is essentially a settlement reached between you and your mortgage lender where they’ll agree to take less than the loan balance and consider the loan to be paid. Normally it’s reported to the credit reporting agencies as either “settlement” or “charged off.” Both are accurate because they’re an accurate representation of the disposition of the loan.

If you owe $150,000 on a home loan but it’s only worth $120,000 it’s very unlikely that you’ll be able to find a buyer at $150,000. But, you might be able to find a buyer at $120,000. If your lender agrees to accept that $120,000 and call it a day, you’ve short sold you home.

Effect of Short Sales On Credit Scores

The problem with short sales isn’t so much the short sale, it’s how they’re being marketed and represented by some real estate professionals as being a better for your credit than a foreclosure. Despite the what you may hear, a short sale is not better for your credit scores than a foreclosure. They’re not better for your credit scores than a forfeiture of your deed in lieu of a foreclosure. They’re not better for your credit scores than a strategic default. Fact is: short sales impact your credit in the same manner as a foreclosure, deed-in-lieu, or a strategic default would.

And if you don’t believe me, perhaps you’ll believe someone from FICO, the company that invented credit scoring and the company behind the industry standard FICO credit score. “To the FICO score, there is very little difference between a short sale, a deed-in-lieu or a foreclosure — and we've been saying that to anybody who will listen, but this rumor that short sales are somehow benign has persisted," Craig Watts, a spokesman for Fair Isaac, the maker of FICO scores. You’d think that would put the issue to bed, right? You’d be wrong.

Perpetuating the Myth

There are three credit scoring myths that seem to be immortal regardless of how many times reputable sources confirm they’re false. They are:

Credit scores are used by employers—wrong.

Closing credit card accounts causes you to lose the value of the credit card’s age in your credit scores—wrong.

Short sales are better for your credit scores than foreclosures—wrong.

If you do a simple Google search on the topic of short sales and credit impact it won’t take you long to find conflicting and misleading suggestions about the impact. I’ve personally had to correct the short sale definition on Wikipedia because it, too, was suggesting that the impact was better than that of a foreclosure.

Don’t get me wrong, I love short sales. They’re a great way out of a bad loan that’s stuck with negative equity. Consumers will have credit issues for the next few years but that’s a small price to pay for getting out from under an albatross of a home loan. Because you’re actively marketing the house you’re more likely to keep the home in marketable shape, unlike someone who is simply waiting for the bank to evict them for non-payment.

{{GLOBAL_BIO_JOHN_ULZHEIMER}}

Related Stories:

Credit Scores and Employment Screening: Dispelling the Credit Myth of the Decade

Do You Have An Underwater Mortgage? Here Are 6 Options That May Help

Infographic: Credit Score Myths Busted

This Week in Money Management: Money Savvy Ways to Save When You’re Broke

Joelle Steffen — Mon, 14 May 2012 13:00:12 +0000

(source)

A vast majority of Americans have never had to wonder what it would be like to survive financially by eating on less than $2 a day, but in other parts of the world this is actually a reality for many. This week we're pealing it down to the bare minimum and taking a good look at what it's really like to struggle financially and ways to beat the challenge head on by being more conscientious about what we spend overall.

1. Live Below the Line. What do you eat when you don't have much to spare? Turns out a lot of junk food. Totally Money details her experience shopping with spare change.

2. When It's Broke, Fix It. What do you do when an appliance breaks? Buy a new one, right? Not so fast... The Frugal Girl shares her story of a dryer melt down and what it takes to get things up and running again.

3. When It's New, Wait. When it comes to the much anticipated new release of a big product, The Simple Dollar has simple advice: hold off. Waiting, even if only for a few months, can save you money and a whole lot of headaches.

4. Just Don't. While the motto in the US often seems to be "Just Buy It," All You suggests that you don't—at least when it comes to these 14 items.

5. Pass the Sunblock. Getting a jump on summer with a healthy golden glow to look good might sound great, but it can end up doing the exact opposite health wise, especially if you plan on getting it at a tanning salon. The Consumerist highlights a recent study looking at tanning bed trends.

6. Going to the Chapel. One of the first stops before the church is the local Target or Bed, Bath and Beyond to scan every item you may have ever wanted for a wedding registry. However, as people desire to connect more, registries seem impersonal. Wisebread has a few ideas for pulling together a better registry.

7. Do-It-Yourself. Nothing saves money quite like making it yourself, especially when the material needed haunts your closets and dresser drawers: old T-shirts. The Motherload shows you how to give new life to those worn sports shirts and participation tees.

8. 'Tis the Season. Come spring, we all dream of saving money and taking our workout outdoors. However, if you like to mix it up, some sporting gear might be in order, but it can also be expensive. Not Made of Money shares their secrets to buying balls, rackets and more on the cheap.

{{GLOBAL_BIO_JOELLE_STEFFEN}}

5 Absolutely Priceless Gifts for Mother’s Day

Joelle Steffen — Fri, 11 May 2012 14:00:21 +0000

(Image by Alex Indigo)

The box of chocolates is getting kind of old. She already has every updated appliance and almost too many pajama sets. Bath potions and lotions, check. Heart-shaped jewelry, check. Birthstone charms shaped like small children, double check. So what can you get Mom this year that’s original and says, “How did you put up with me for all those years?” How about something that costs nothing but means all the world?

1. Go for a bike ride.

Or a canoe trip, a hike, or a walk around the mall. My mom is an active senior (oh God, please don’t let her see that), so I took her for a bike ride. A 25-mile ride. Yes, she was dog-tired at the end. But I heard her re-tell the story of her first 25-mile bike ride for almost a month after. We’re gearing up for another big ride this year. It keeps us close to have this thing we do together, and we don’t fight because we’re both too out of breath. Perfect.

2. Keep her trendy.

Back in the day, my mom was stylish, hip, and naturally gorgeous (I got my looks from Dad. Thanks). However, after two kids and making us a priority, fashion and the rest went to the wayside (ie. mom jeans and kitty shirts). So, now that I’m older and somewhat trendy, I like to reintroduce my mom to the world. I take her shopping for jeans with no elastic band. I buy her a cool shirt that fits great and looks smashing for parties. Oh, and some completely impractical shoes. Sometimes, we go to see live theater to see something that’s making a splash. But for those on a budget, just showing her the movies and music in your collection gives her a connection not only to what’s hip right now, but also to what’s your taste and style (and believe it or not, moms really love to know what their kids are into. Even when their kids are 30).

3. Get back to their roots.

Before I was born, my parents camped. They went all the time with friends and have these amazing stories about bathing underneath waterfalls and cooking whole turkeys in the coals of a fire. Well, they stopped doing these awesome things when I was born, of course. So, even though I haven’t set a date yet, I’m warming my folks up to the idea of a camping trip. At first I got scorn, but I think they’re coming around to the idea. I hope so, at least. Doing something with your parents that they used to love is a way to connect with a side of them you weren’t around to see. I can’t wait for more stories and a few great memories of our own.

4. Listen.

As a child, I asked Mom tons of questions about how she grew up. I heard all her stories, so now as an adult, I don’t ask. I know it all. Or do I? Well, I found out how little I knew when I introduced a boyfriend to my parents. He had a somewhat checkered past, and I think my parents wanted him to feel comfortable, so they told him about their pot-smoking days… a revelation to me! I was floored (and of course completely humiliated—parents just have that ability). So what other stories are lurking out there? It may feel awkward at first to ask probing questions when you haven’t before, but Mom won’t mind. She’ll love it.

5. Treat her to dinner.

Ok, not original. Also not free. But here’s the point: You’re not taking her to McDonald’s or to the China Buffet (even though both of my parents absolutely adore the China Buffet and could eat there every day. I mean, they are obsessed with the ice cream machine and the teriyaki chicken on a stick. It’s a little weird). No, you’re taking her somewhere nice. And you’re paying, even if Mom insists, which she will, so find a way to get your credit card in the waitresses hands. The best technique--in lieu of fighting over the check at the table--is to go on a “bathroom break” and give the waitress the heads up that you will be paying and work out a system to make sure you pay. Why is this so important? Because you're giving Mom more than a meal, you’re giving her a reason to brag. To talk about what a great kid you are. Independent and generous. You paid, and she raised a good, decent kid who knows how to take care of Mom. And what more could a mom ask for on Mother’s Day (besides a sports car, diamond ring and fur coat. Love you, Mom.)

{{GLOBAL_BIO_JOELLE_STEFFEN}}

Related Stories:

Last-Minute Valentine's Day Gift Ideas: Good for Your Heart and Your Wallet

8 Tips to Save Money on Groceries — Without Coupons!

Stop Overspending: 10 Things You Can Cut From Your Budget Now

Ten Commandments for Home Buyers

Credit Sesame — Thu, 10 May 2012 18:32:29 +0000

(Image by James Perkins)

The sun is shining, flowers are blooming, and the spring home buying season is well under way — and going strong if the latest indicators have anything to say about it.

According to the Mortgage Bankers Association, mortgage applications have risen consecutively for the last three weeks, rising another 1.7 percent for week ending May 4.

The rise in mortgage applications has a lot to do with the record low rates on fixed rate mortgages. Freddie Mac reported 30-year fixed rate mortgage rates have dropped to 3.83 percent, the lowest since they began in the 1950s. And the 15-year fixed —a great option for homeowners looking to save on a refinance— dropped to 3.05 percent, beating last week's record low of 3.07 percent.

Factor in a recent report from the National Association of Realtors (NAR) —which expects total home sales to rise 7 to 10 percent this year, and 2012 looks promising for the housing market.

With record low mortgage rates, the dream of owning a home is more affordable than ever. If you're in the market to buy a house, here are ten commandments for home buyers you should know.

1. Know that you are ready to be a home buyer. Are you prepared to take responsibility for maintaining a home? There's more to it than making a monthly mortgage payment. Upkeep can be pricey, and the responsibility is all yours as the homeowner.

2. Have a financial plan. A home is likely the biggest ticket item you will ever buy. Make sure that you have a financial plan that works with all of the costs and benefits associated (repairs, new furniture, property taxes, mortgage, tax benefits) with your new home.

3. Know your credit standing. Before you apply for a mortgage, it's important to know where you stand from a credit perspective. To start, get your free credit reports from AnnualCreditReport.com. Dispute any inaccuracies and once you've confirmed that all of your information is up-to-date and accurate, get your free credit score from Credit Sesame. When it comes to saving money and qualifying for a mortgage loan, the higher your credit score, the better your chances of approval and the lower your rate will be.

4. Know what you want. How many bedrooms do you need? Bathrooms? What are you looking for in terms of a backyard, living area, do you want a dining room? Visualize your life in your ideal home. Distinguish between "needs" versus "wants." Be prepared to make some tradeoffs, but know the areas where you will not compromise. This will help you narrow your search.

5. Do your research and review the market and neighborhoods. Research neighborhoods, school districts, listings and more can be found through online tools like RedFin and Zillow. It's important to have a good idea of what you want, even before you sign on with a real estate agent.

6. Understand what you qualify to buy. Get pre-approved, not pre-qualified. Pre-qualified entails being reviewed by a loan officer. Getting pre-approved entails conditional approval by a mortgage underwriter based on selecting a property. Make sure you understand the difference.

7. Don't buy more home than you need. McMansions are out. Buy within your means. If we've learned anything in the last few years, living within our means is not only a commandment, but should also be considered a golden rule.

8. Organize your finances. Your loan officer is going to want a lot of documents for your loan processing. This includes bank statements, pay stubs, and two years of W-2s and tax returns. Make sure you have them at your fingertips.

9. Have the money that you need in the bank. Be prepared and ready for your loan closing. Don't wait until the last minute to know where your down payment will come from.

10. Avoid major purchases before you close on your new home. It may be tempting, but you should avoid buying new furniture or major appliances before your loan closing. When you apply for a mortgage loan, the lender will pull your credit score to start the process. It will take an average of 30 days or so to process the loan and close, at which time the lender will pull your credit score at the end of the process. If you go and charge large purchases, it could have a major impact on your credit and credit score, possibly causing you to lose the loan.

Related Stories:

Top Three Reasons You May Have Been Denied That Mortgage

Timing Is Everything: When Is the Right Time to Apply for a Mortgage?

When it Comes to Mortgages, All of Your Credit Scores Matter

Gas Spending Around the World

Credit Sesame — Wed, 09 May 2012 13:26:31 +0000

Memorial Day signals the start of the summer driving season, a time when many Americans ditch the hassle of airport security and opt to get in their cars and drive. But don't let the recent drop in gas prices fool you — with the rise in summer travel and an increased demand for gasoline, history shows that gas prices will likely spike right before the holiday weekend.

Mention high gas prices and many Americans will admit to feeling the pinch at the pump, but how do we compare to the rest of the world? Credit Sesame decided to take a look at gas prices around the globe to find out how much other countries spend, consume and pay for gasoline. The results might surprise you.

Embed the above image on your site

<a href="http://www.creditsesame.com/blog/gas-prices-and-gas-spending-around-the-world"></a><br /><br /> Get your <a href="http://www.creditsesame.com">free credit score</a> at CreditSesame.com

Education Costs: Understanding Coverdell Education Savings Accounts

Mark Di Vincenzo — Tue, 08 May 2012 15:58:15 +0000

(Image by woodleywonderworks, Flickr)

Remember Education IRAs? The name is gone, but they’re still around. They’re called Coverdell Education Savings Accounts, and as the name suggests, they help people pay for everything from elementary and secondary school expenses, to college tuition and fees.

If you want to understand how a Coverdell ESA works, it helps to understand how a Roth IRA works. Both allow savers to make an annual non-deductible contribution to an investment trust account. The money grows free of federal income taxes, and if all goes as planned, withdrawals from the account will be completely tax-free as well. Of course, the big difference is the Roth is for retirement and the Coverdell is for education.

Coverdells have become a very popular way to save for college and other education expenses, but they are not for everyone. As there are for all investments, Coverdells have pros and cons.

Pros:

Coverdells can be used for kindergarteners, college students and everyone in between. You can use it to pay a wide range of expenses, including tuition, fees, tutoring, books, supplies, related equipment, room and board, uniforms, transportation and computers.

Contributions aren’t deductible on federal or state income tax, but earnings accumulate tax-free. And you don’t get taxed when you withdraw the money to pay for expenses. You have until the student reaches age 30 to use the money, or you can roll one Coverdell account over to a Coverdell account for another family member if the student didn't use the money.

Cons:

The maximum annual contribution is only $2,000, and you can’t contribute after the student reaches 18. So most people who own Coverdells need other sources of income to pay for expenses at four-year colleges. Because the annual limit is only $2,000, your overall investment return can be affected by even a small annual fee charged by the institution that holds your Coverdell. So be sure to ask about fees before you open an account.

If the money isn’t used for education expenses, the earnings will be taxed as ordinary income, plus a 10-percent penalty.

You can open a Coverdell only if you earn less than $110,000 for a single filer or less than $220,000 for a couple filing jointly. A grandparent can open an account for a student whose parents earn more than that, or a company, including a tax-exempt organization, can contribute to someone’s account.Unless Congress acts, certain education savings account benefits will expire after 2012. K-12 expenses will no longer qualify, and the annual contribution limit will drop to $500.

When it comes to whether you should invest in a Coverdell ESA, do your homework, and find a financial adviser or another trusted professional to help you understand whether it makes sense for you or your family.

Related Stories:

Q&A: Savings Advice for College & Saving for Retirement

Failure to Launch: How to Help Boomerang Kids After They've Moved Back Home

How to Save for Your Child's College Education with a 529 Plan