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5 Things You Need to Know About Paying off Debt

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Many people believe that paying off debt is always a good thing. While it is true more often than not, there can be some surprising implications if you handle those financial obligations, particularly if you pay them off early. If you are working your way toward being debt-free, or are considering getting on that path, here are five things you need to know about paying off debt.

1. Your Credit Score May Drop When Paying Off Debt

While it seems counter intuitive that paying off debt could hurt your credit score, it is possible. Usually, there’s only a negative impact if eliminating the debt also comes with closing the account. When an account is removed, it alters a few aspects of your credit report, and not always in a good way.

For example, closing an account changes the average age of your open accounts. If that average falls significantly, your score could dip. Getting rid of a debt could shift your credit mix, leading to a score change. Additionally, if you close a credit card and have another one open that has a balance, your credit utilization may go up, causing your score to fall.

Now, the credit score dip usually goes away with time, especially if you continue to make smart financial choices. However, it’s important to know that it can happen, so that you aren’t surprised if your score falls as you make positive progress on your debts.

2. You Could Get Hit with a Fee

While most loans don’t have early repayment (or prepayment) penalties, some do. That means, if you pay off that debt ahead of schedule, you may owe a fee. That penalty is solely for the lender’s benefit, allowing them to essentially recoup some of the interest you aren’t paying because you paid off the debt early.

Before you pay off any debt, find out if there’s a prepayment penalty. If so, do some math to figure out which is more, paying the loan on time (and dealing with the interest) or the fee. That way, you can make the right move.

3. You Should Create an Emergency Fund First

Paying off debt means you’ll have more room in your budget usually. However, if you don’t have cash set aside for an emergency, should the unthinkable occur, you might have to turn to debt to handle the situation. That can essentially put you back at square one, which may be incredibly frustrating.

Ideally, you want to have some money set aside for emergencies before you focus on paying more than the minimum on your debt. It gives you a financial cushion, and that’s important for your financial well-being.

4. You May Want to Invest Instead

It’s true that being debt-free can give you a lot of peace of mind, but that doesn’t mean it’s always the smartest financial move. If you’re dealing with low-interest debts, taking any money you were planning to send as extra payments and investing it instead may actually be the better financial choice.

Securing a return that’s higher than the interest rate you’re paying lets you come out ahead. As a result, it can be smart to think twice before working to conquer a low-interest debt ahead of schedule.

5. Some Debt Repayment Strategies Are Better Than Others

How you approach paying off your debt matters. It impacts how much interest you ultimately pay, so it’s important to choose the right method if you want to come out ahead.

If you focus on your highest interest debt first, you’ll pay less in interest overall. It’s the ideal way for getting the most out of your money and can make your total debt repayment plan shorter.

However, some people need the boost of a quick win. If that’s you, then you may want to start with the lowest balance debt. Just be aware that this approach means you could pay more in interest as you work through the full plan.

Can you think of anything else people should know about paying off debt? Share your thoughts in the comments below.

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How Much Does Credit Karma Spend Giving You Free Credit Scores and Reports?

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Credit Karma truly changed the game a few years ago when they began to offer free credit reports. They also give you your credit score for free. Prior to this, you had very few options for accessing this important information. Now, thanks to their innovation, you can easily access your credit report and scores for free in several locations. But if they do this for free, then how is it that Credit Karma makes their money?

Credit Karma Changed the Game

Not too many years ago it was relatively challenging to access your own credit information. The credit companies seemed to obfuscate this information. It all felt like a big mystery to many consumers.

Of course, you could get your free annual credit report from each of the three major reporting agencies. However, you could only do that once per year. While accessing your free credit score felt a little bit easier, it was still a challenge.

It’s all different today. When you log in to your credit card accounts online, you often immediately see your FICO credit score. You can also easily access it, as well as your free credit report, from a number of sources. Credit Karma played a key factor in changing the world in this way. It’s been to the benefit of consumers who are now increasingly empowered to take control of their own finances thanks to the access they now have to this information.

Is It Really Free?

One of the big questions that people immediately ask is whether or not it’s truly free to get your credit report and credit score through the company. It is.

The reason people are wary is because historically “free” hasn’t actually meant entirely free. Other companies before Credit Karma offered “free credit reports.” However, you had to sign up for credit monitoring services with them. Technically, you could join a free trial, get your credit score and then cancel before you paid anything. However, canceling was often challenging, if you remembered to do it at all. Therefore, you ended up paying for the credit score after all. (Well, you paid for credit monitoring, but since you didn’t want it in the first place, you paid for what you did want, which was the “free” credit score.)

Credit Karma simply does not operate this way. You don’t have to give them any money. You don’t even have to give them a credit card that they could potentially charge money to. You enter your information and they give you your credit report and credit score for free.

If It’s All Free, How Does Credit Karma Make Money?

This company is a terrific example of the difference between a finance company and a finance company. Finance companies make their money primarily in dealing with money. Fintech companies, on the other hand, emphasize the “tech.” They offer innovative Internet-based solutions to problems. They provide tools that help with your finances. This is how they make their money (through a variety of channels.)

Credit Karma Got Capital Investment

First of all, when it was a young company, it operated like a tech company. In other words, it got venture capital. For example, in 2014, Google Capital gave the company $85 million in order to roll out new products. One of the key new products at that time was the ability to offer free credit reports. (They had already been offering free credit scores for six years.)

According to the VentureBeat article announcing that deal, Credit Karma pays out tens of millions of dollars annually to access those credit reports/scores. And yet, they (and their investors) believed that it would be financially worth it to make that investment.

Speaking of their investors, Google Capital wasn’t the only company to fund Credit Karma. Investopedia reports that they received nearly $900 million from eight rounds of funding over the years, although the most recent round was in 2018.

Credit Karma Makes Money Off of Advertising Products

Like many websites, this one has ads on the site. Moreover, they offer a variety of products and services to their customers. You don’t simply go on the website, get your credit score, and leave. Instead, you have the opportunity to access a wide variety of different services and tools that can improve your credit. If you use them correctly, it’s a win-win. You improve your credit score and the company gets a small fee any time that you utilize the services advertised on their site.

Like with so many other websites, if you click through to something that interests you on the site, you have the opportunity to purchase it. If you do, Credit Karma makes a little bit of money. The company has more than 100 million registered users, over 35 million of which are active monthly users. Those little bits add up for the company. So, for example, if you see a credit card offer on Credit Karma that you like, and you click over to it and decide to apply, then Credit Karma benefits. But you didn’t pay anything.

Intuit Purchased Credit Karma

Credit Karma has continued to do well over the years indicating that users appreciate what they have to offer. One of the things that they started to offer more recently was tax preparation services. So, it’s no wonder that Intuit – known in particular for owning TurboTax – took notice. In 2020, they announced that they will be purchasing Credit Karma for more than $7 billion. It’s their largest acquisition ever, meaning that they certainly think that there’s financial profitability here.

Interesting, Intuit also owns Mint. Mint and Credit Karma offer many of the same services. Both are personal finance companies that offer free credit scores through an app-based / web-based service. That said, Mint tends to focus heavily on assisting you with understanding and improving your credit. Credit Karma does something similar but emphasizes the free credit report and other services such as tax prep. It will be interesting to see over time how the time are similar and different now that they’re both under the Intuit umbrella. That said, currently Intuit plans to continue to have Credit Karma operate as a standalone service.

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Is the Credit Karma Free Credit Report a Scam?

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Credit Karma recently made the announcement they would offer their users free credit reports on top of the free credit scores they already give. The question many people have when they hear about something like the free credit report is, “What’s the catch?” and, “Is it a scam?” The good news is the offer isn’t a scam, and for the most part, there aren’t any catches involved with getting it.

Is the free credit report really free?

Many companies that offer “free” credit reports technically come with no cost, but there’s a catch. In order to see the report, you have to give your credit card and sign up for a free month of credit monitoring with the company. If you cancel the credit monitoring before the month free trial is up, then you don’t get charged for anything. If you accidentally forget, your credit card ends up being charged. The FCC also reports that canceling can difficult, and it is not always done the first time you request it to be removed. So while the report is technically free, there’s a catch that can cost you money down the line.

Credit Karma set up their no-cost credit report offer the way they did with their no-cost credit score. There is no need to give your credit card to be able to see the report. They are able to do this because of the way they make money. Other sites make their money by selling the credit monitoring services, but Credit Karma makes its money through offering services where they get a commission if you sign up. These credit scores and credit reports don’t come cheap, as the company spends tens of millions of dollars to get them, but they make enough on the advertising to their users to more than make up for these costs.

Is it a real credit report?

There are some who take issue with the free credit scores from sites like Credit Karma, Credit Sesame and Quizzle. They question the efficacy because they aren’t FICO scores. There’s a debate as to whether this really matters or not, but it’s a concern to some people. They want to know if the credit report is from the credit reporting agencies, or if it’s some type of other credit score. Good news: The reports are legitimate.

In this instance, the credit reports given are from TransUnion and Equifax, and it’s the credit report you would get if you bought it directly from them. While it is a real report, it’s only one of the three main credit reports available. You do not have access to your Experian credit report from the site, although you can get your Experian report directly from them free of charge. You can also get your credit report for all three agencies at no cost once a year (plus in some other specific circumstances) from AnnualCreditReport.com (you can see how the Credit Karma and AnnualCreditReport offers compare here).

How Does This Help?

When you are looking for financing (or anything else regarding your credit), it is nice to have a leg up. Now, not all lenders disclose which reporting agency they check. Additionally, if you need a mortgage, they often take all three and average them. So, having the info helps you stay on track, but you will never know exactly what the bank sees until they show you personally.

How often can I see my credit report?

Many people wonder if the credit report is a one-shot deal. That is, once you’ve seen it one time, then you can no longer see it again to see if it has changed in the future. The answer it no. In fact, you can access your updated report as frequently as once every week if you desire. Although, many creditors only update the reporting agencies about once every month.

Conclusions

The Credit Karma free credit report is not a scam, or a bait and switch program. The only catch is that in order to get it, you will be given a lot of advertising offers which you can choose to accept or decline. You won’t have to give your credit card to access the report, but you do have to give them sensitive financial information. It comes with some risks, but nothing out of the ordinary for a credit reporting site.

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If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started. If you want to be able to customize your blog on your own domain and need hosting service, we recommend trying BlueHost. They offer powerful hosting services for $3.95/month!

Reasons Not to Co-Sign on Your Grandchildren’s Student Loans

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Reasons Not to Co-Sign on Your Grandchildren’s Student Loans

You want to be a good grandparent. Therefore, you might have thought about whether or not you should co-sign grandchildren’s student loans. Or perhaps they’ve already asked you to co-sign, and you’re trying to make a decision about it. While it’s certainly a nice idea, it might not be the best thing for either of you. Here are ten reasons not to co-sign grandchildren’s student loans.

1. It Encourages Private Loans

Federal student loans don’t typically require a co-signer. Notably, these are usually the best available student loans. Therefore, your grandchild should be trying to get those federal loans first. More often than not, those loans will cover college costs. If you quickly agree to co-sign grandchildren’s student loans, then you’re encouraging them to get private loans, which they might not need at all.

2. It Discourages Hard Work

In addition to federal student loans, there are a lot of other ways for your grandchildren to fund college. Options include:

  • Applying for grants and scholarships.
  • Working part-time including on-campus jobs to supplement loans.
  • Working full-time for a year or two to save up for college.
  • Choosing a less expensive college or hacking their education.

When you readily agree to sign their loans, you take the hard work out of it for them. You don’t give them the opportunity to figure out different options. This can be a disservice to them down the line when they have to think their way creatively out of other financial challenges, but haven’t had the practice in doing so.

3. It Affects Grandparents’ Credit

When you co-sign a loan, you guarantee that the borrower will repay that loan. That shows up on your own credit report. It impacts your ability to borrow money. Therefore, you want to think very carefully before you co-sign your grandchildren’s student loans.

After all, your grandchildren are still young adults. They likely aren’t that responsible with their money yet. It wouldn’t be unheard of for them to make late payments or to skip payments altogether. You’ve worked your whole life to establish your credit history. Do you want them to ruin it for you now?

Remember, also, that even if they make all of the payments on time, the loan may still impact your credit score. It adds to your total overall debt.

4. You Can’t Afford It

Of course, you want to help your grandchildren go to college. However, can you truly afford to help them? If you can afford to help them outright, then it’s better to gift or loan the money to them directly. If you can’t afford to do that, then you probably also can’t afford to co-sign grandchildren’s student loans. After all, that’s the same thing as taking out that loan for yourself. Can you afford that at this late stage in your life? Are you truly comfortable with that? Would you do it to go back to school yourself?

5. It Can Circumvent the Parent-Child Relationship

If your child needs someone to co-sign their student loans for them, then they might first look to their parents (your children or children-in-law). If their parents said no, there could be a good reason. If you turn around and say, “well I’ll do it” then you might be circumventing the parents’ efforts. Depending on your family situation, dynamics, and configuration, this could be an important reason not to co-sign grandchildren’s student loans.

6. Parents Have Better Loan Options than Grandparents

If the grandchildren’s parents are involved in their lives and willing to help, it’s better for them to explore loan options before you do. That’s because there are some terrific loans set up for the parents of college students. PLUS loans are the obvious example. These options aren’t typically available to grandparents. If your family is going to support the younger generation through college, a grandparent as co-signer is really a last resort.

7. Your Grandchild Is Only One Family Member

Everyone is facing tough financial times right now. That means any one of your family members might need financial help. If you put all of your eggs in one basket by co-signing on a grandchild’s student loans, then you might not be able to assist other family members as needed. Your other grandchildren, your children, your siblings, and your own parents, if they’re still alive, may all need financial help. Where do you want to put your money?

8. It Puts Your Health at Risk

Dallas News reports on statistics from the Consumer Financial Protection Bureau that show that co-signing on a grandchild’s student loans often puts the grandparent into a precarious financial position. They are more likely than others in the same age group to skip medicine and doctor’s visits. And yet, if debt causes stress, they made need those doctor visits more than ever before. If you aren’t in a financial position to lend money directly to your grandchildren then chances are that you shouldn’t co-sign grandchildren’s student loans either.

9. It Will Likely Affect Your Retirement

Investopedia reports that older people with student loan debt often end up working later instead of retiring when they originally planned. Moreover, about one-third of baby boomers report that they’ve either delayed accruing retirement income or taken out retirement income early due to those loans. It’s important to think about your own financial future first. Your grandchild has many years left to figure theirs out. But do you?

10. It May Change Your Relationship

When you think about co-signing for the loan, you imagine your grandchild’s gratitude. You are happy to help them out. But it’s important to recognize that this might not be the reality. Your grandchild might drop out of college. They might default on the loan. They might not be as grateful to you as you would think. All of this can have a drastic negative impact on the relationship that you have with your grandchild.

And what if you have more than one grandchild? Are you going to co-sign for all of them? If not, how does that impact your relationship with each grandchild? These are questions to take lightly. Your familial relationships are important. There are other ways for your grandchildren to fund college. There aren’t other grandchildren for you to have relationships with.

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Can Foreigners Take Out Loans in the US?

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If you are a citizen of another country who is living in the United States then you might want to know about foreigners loans. That’s especially true right now when coronavirus may have limited your options both for traveling back to your home country and for working to earn an income in the US. Can you get a loan as a foreigner living here? Yes.

Foreigners Loans Are Possible

Although it’s not necessarily as easy to get a loan as a foreigner than it is for a United States citizen to get a loan, foreigners loans do exist. In fact, many types of loans are available to people here regardless of citizenship status. Loans are often based on income and credit history with less, if any, attention to citizenship.

Limitations and Considerations on Foreigners Loans

Here are some of the things that you should know about foreigners loans as compared to getting a loan when you’re a United States citizen:

  • You may be more likely to need a co-signer.
  • The longer you’ve been in the country, the easier it will often be to get foreigner loans.
  • The longer you’re going to live and work in the country, the easier it will be to qualify for a loan.
  • Foreigners with diplomatic immunity may find it harder to get loans.
  • Interest rates might be higher for foreigners.
  • It’s often easier to get mortgages and auto loans than to get personal loans. Mortgages generally require a green card or a valid work visa.

How to Get a Loan as a Non-Citizen in the US

If you’re living in the United States, here are some things that you can do to improve your chances of qualifying for a loan:

  • Apply for a loan with a company such as Stilt that looks at more than just your credit score when considering whether or not to accept you as a borrower. Similarly, you might look for lenders that specifically choose to work with immigrants. Just be careful that you double-check their business history so that you don’t get scammed.
  • Put together a set of documents showing your credit history in your own country. Add to this any documents you have showing your payment history in the United States (such as rent payment history.) Use this information to supplement your loan applications.
  • Request an Individual Taxpayer Identification Number (ITIN). This will help you apply for loans even if you don’t have a Social Security Number. Moreover, you can look for lenders that specifically work with people who have an ITIN.
  • Transfer money from your foreign bank accounts into a United States bank account. This is particularly important for large loans, such as mortgages. Many lenders prefer to see that you have access to funds here in the United States.

Of course, if you do end up qualifying for a loan in the United States, make sure to be a good borrower. Make on-time payments every month. This will help you get additional foreigners loans in future.

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If you enjoy reading our blog posts and would like to try your hand at blogging, we have good news for you; you can do exactly that on Saving Advice. Just click here to get started. If you want to be able to customize your blog on your own domain and need hosting service, we recommend trying BlueHost. They offer powerful hosting services for $3.95/month!