“Leveling” our Expenses

The key to successful budgeting could be making your expenses as predictable as possible by switching to level pay.

Make Your Expenses Predictable

I regularly teach in my Budgeting (“Spending Plan”) classes that our goal should be to turn as many of our Variable and Periodic expenses into Fixed (or “level”) expenses as possible.

A Fixed expense is one that occurs every single month at the same cost. Examples are rent or mortgage, car payments, 401(k) contributions, monthly bus passes and daycare center bills.

A Variable expense occurs every month also, but the amount varies. Electricity, heating, gasoline, and groceries are among the most common variable expenses in our household budgets.

A Periodic expense, obviously, occurs less than monthly, irregularly or just once in a lifetime. Typical of this type of expense are medical-related charges, vacations, car or home repair, taxes, and most insurance premiums.

Because we are so used to our Fixed expenses, we typically do not spend that money. We know, subconsciously even, that we have to set a certain amount of money aside for our rent/mortgage or our car payment. Ideally, if we could turn all of our expenses into Fixed expenses, we would be better able to manage our money.

Here are a couple of easy ways to convert a Variable and a Periodic expense into Fixed expenses:

  1. Utilities: Most electricity and gas utility companies offer their customers the option of making the same payment every month. They simply average monthly payment for the past twelve months. Some customers have tried to tell me that this is a more expensive option, but that is a myth.
  2. Insurance Premiums: Most insurance premiums are designed to be billed every 6 or 12 months. However, most may now be paid on a monthly basis. Be aware, though, that there is often a $1 to $5 monthly processing fee accompanying the monthly payment option.

Wouldn’t it be nice if our local grocery store or gas station would allow us to be on level pay at their establishment? Alas, I have not heard of such opportunities yet. Instead, it is up to us individually to put ourselves on level pay. This is called, of course, budgeting. We set aside a specific amount each month for our regular expenses.

Pay yourself regularly in order to be financially prepared for replacing appliances when they dieIt is up to us, as well, to look ahead and plan for periodic expenses. Your fridge may be working now, but if it’s already 12 years old, you probably ought to begin saving for your next one soon (“This Old House” has a nice list of average life expectancies of household appliances: click here). If you think it might cost you $1,100 to replace it, divide the expected expense by the number of months you probably have before it needs to be replaced, and you’ll find out what your Appliance Replacement level pay to yourself should be:  $1,100 ÷ 24 months = $46 we should be putting into our savings each month for our next fridge.

We should be doing the same calculations for our furniture (think couches, beds, tables, etc.), appliances, vehicle(s), etc…

In this way, we are “leveling” our Fixed, Variable, AND Periodic expenses so that we’re able to pay for supposedly “unexpected” expenses in cash, by check, or using our debit card, thus avoiding the additional expense of paying interest to store creditors and credit card companies.

Please feel free to share how you’ve converted some of your own Variable and Periodic expenses into Fixed expenses.

Best wishes for continued improvement in your own personal finances!

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Reality Check – Credit is Used for More than Just Loans

 Maintaining credit is important for more reasons than accessing credit cards.

Cash is King. Why Should I Maintain Credit?

Cut credit cards from your budget

Don’t charge your groceries

The titles of articles such as these are clever, intriguing and seemingly sensible, so why do I have a problem with financial experts (even if he or she is nationally recognized) who preach total abstinence from credit cards across the board?

At a class I taught this past week for individuals going through bankruptcy, I fielded a question that touches upon this very subject. A couple attending the class had been pushed into bankruptcy for several reasons, some of which were somewhat out of their control and others which were within their control. To get a grip on those issues within their control, they had decided to pay $100 to take a financial education course at their church. The creator of these classes preaches life without credit cards.

National Financial Education Center Explains Ups and Downs of Going Cash OnlyAt first glance, the concept seems completely financially responsible: get rid of credit cards, especially if they have been a past temptation to overspend and live above one’s means. So how do you answer someone, like the couple in my class who accepted that principle but are also hoping to purchase a home in the next couple of years, who asks me, “so how can we build our credit without credit cards?”

You see, they want to buy a home in the next few years, and they realize that they’re going to need a decent credit rating in order to qualify for an affordable mortgage. So I ask again, how can they build their credit without credit cards? After all, FICO estimates that about 50,000,000 adults in the US don’t have enough information on their credit reports to generate a credit score.

Here’s my answer, without giving an oversimplified “yes” or “no” answer: you can build your credit rating without credit cards, but you must remember that your credit score is based upon credit-related information on your credit report, and your credit report only contains information relevant to your credit usage and debts. Your credit is NOT based on your income, your checking or savings account balances, or your debit card usage.

In other words, if you don’t use credit, you won’t have a credit history. I’m sorry to say it, but it’s true. You cannot build credit without using credit in some form.

Here are the types of credit that exist:

  1. Revolving Credit: Accounts like credit cards that allow you to make charges, pay some off each month, make more charges, etc. These are the most influential types of credit accounts on your credit report.
  2. Installment Credit: Accounts with fixed pay-off dates and generally fixed monthly payments, such as car loans and student loans.
  3. Mortgage Credit: Accounts that look like installment loans but that are tied to real estate.
  4. Home Equity Credit: Accounts that function like revolving lines of credit but are tied to real estate, like mortgage credit.
  5. Service Credit: Accounts for services such as electricity, gas, or other utilities where we receive the service and are then billed for our usage. Note: phone accounts that are paid in advance are not considered service credit accounts. Also, most service credit accounts are not automatically reported to the credit bureaus that keep track of your credit history.

That’s it! If you don’t have any of these accounts listed on your credit report, you have “no file.” That means that FICO can’t find enough information to generate a standard credit score for you.

You have two options:

  1. Build your credit report wisely, starting with retail (think department stores), gas, or tire store cards or lines of credit that are generally easier to qualify for. However, using credit wisely means you pay off any balance IN FULL EVERY MONTH. After a period of time (perhaps 12 months or so), you might consider applying for a major credit card through your bank or credit union. If you’re tempted to use the card inappropriately (not paying it off in full every month), then cut it up.
  2. Ask your potential lender if they subscribe to the FICO Expanded Score. FICO is able to create a “credit score” on a large percentage of those with no traditional FICO score by accessing information on bank accounts, purchase payment plans, and property and public records. However, you will likely find it much more difficult (if not impossible) to qualify for a mortgage loan through most lenders based solely upon the Expanded FICO.

In the end, credit is about personal financial responsibility. Living without credit may be the financially responsible thing to do. However, it leaves no record or proof for potential lenders to convince them that you are likely to repay their loan to you.

And I haven’t even mentioned yet (since each would be a topic for another day) that your credit report and score are used for various reasons other than just qualifying for a loan. Here are some of the more prominent among those who are using your credit score to make decisions:

  • Many auto, home, and life insurance companies (your score affects your premium)
  • Property management companies and many landlords
  • More and more employers (during the hiring process)
  • Utility companies (determining your security deposit)
  • Cell phone companies

So while I am, in theory, a fan of the “credit card-less” household, I don’t see it as practical for many if not most households. Since it takes two or three years of responsible credit usage to build a strong credit history, you may particularly want to focus on building your credit if you’re looking at buying a home, applying for a job, getting a cell phone account, or renting a home or apartment any time soon.

Otherwise, by all means, go cash only!

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Managing Personal Finances at Tax Time

 

preparing-taxes-at-desk

Recommendations for what to do with your personal finances at income tax time

For a country whose independence move started with a tax revolt, tax time in America typically splits our citizenry into three dominant camps of taxpayers, with only a small but vocal minority complaining about having to pay additional taxes. These three groups include those who have to submit a payment to the IRS at tax time, those who receive a tax refund/credit, and those whose taxes due or tax refund is so small that it is inconsequential.

GROUP 1: The first group tends to be our most vocal. They come from a long line of Americans who detest taxes. Whether they are small business owners who find themselves owing more taxes than expected, whether they started a new, higher paying job the previous year and did not adjust their W-4 accordingly, whether they were on unemployment and elected not to have taxes taken out each week, or perhaps they had a child turn 17 last year, leading to the loss of their child tax credit, this group finds that they owe Uncle Sam and, likely, their state coffers a large income tax payment. Although constituting well over 10 million taxpayers, this group is probably the smallest of the three.

CONSIDERATIONS: You have a couple options to minimize the pain of coming up with a large income tax check in the future. First, and most obvious, is to adjust your W-4 in order to increase the amount of income tax paid with each paycheck. Yes, this means a smaller paycheck, but it also means less pain each payday. Use the IRS Withholding Calculator to figure out what your ideal W-4 might look like. The second option is actually NOT a good option. Some people believe that they can set up their W-4 so that NO income tax is withheld and that they will just pay their entire income tax at once. As the justification goes, it is better to keep the tax in their own account and let it accrue interest until Uncle Same requires it. The problem is that we have a “pay-as-you-go” income tax system, and the IRS wants you to pay taxes with each paycheck. There are exceptions to this rule, but otherwise, you may be penalized if you do not pay as you earn.

GROUP 2: This group includes those who have some well-organized finances or who have submitted a well thought out W-4 to their employer. This group is the least vocal and least animated at this time of year. If, after completing their tax return, they owe some money, it is usually pretty mild. If they are due a refund, it is similarly relatively small.

CONSIDERATIONS: First, stay the course. You have done well to adjust your tax payment to fit your paycheck. Take comfort in two facts: 1) you do not have to come up with a huge tax payment in the spring, and 2) you are maximizing your purchasing power by keeping as much money in your paycheck each month as possible. If we did have another recommendation, it would be similar to the one we share with everyone: make sure that you are paying yourself first with each paycheck. Before you pay bills or make your car payment or go grocery shopping, put money into a savings fund. Otherwise, it will never happen. Plus, if you are among the 40% of Americans who are building their savings funds regularly, come tax time, you will not feel envious of the next group because you will already have something pretty cool in your savings account: a cushion!

GROUP 3: The largest group includes the 8 out of 10 American tax filers who will receive an income tax refund or credit from generous ol’ Uncle Sam. The large majority of households ranging from low-income all the way through households with $200k of annual income get a tax refund. As any CPA worth his or her salt can tell you, the downside to this scenario is that the government is collecting more of your spending money throughout the year, holding onto it, and returning it to you the following spring WITHOUT interest. “So?” you ask. “My savings account earns so little interest that the government might as well hang onto it for me.” This reasoning fails to account for inflation. Averaging around 3.4% annually over the past century (though around 2% over the past decade), inflation eats away at your purchasing power. Consequently, if you allow the government to hold, for example, $100 of income tax for a year, by the time you get it back next year, you will be able to purchase less than 98% of whatever you could have purchased when you earned the money.
That said, given the fact that 60% of Americans contribute nothing regularly to their savings fund, this small loss of purchasing power is a small price to pay for providing 80% of American taxpaying households with a once-a-year savings fund distribution.

CONSIDERATIONS: If you know that you would struggle to contribute to a savings account if you paid fewer taxes and got more money in your paycheck, then it is understandable to look forward to a tax refund each year. That said, we still recommend that you consider adjusting your withholding so that you get more in your paycheck but still have the benefit of receiving a respectable refund next year. Either work with your CPA or check out the IRS Withholding Calculator to figure out the best withholding for your goals.

If, on the other hand, you insist on getting that huge income tax refund every spring, we recommend that you consider using it according to a plan, such as:

• Spend 30% of it on needs (e.g. replacing a broken washing machine)
• Spend 25% of it on paying down debts
• Put 20% of it toward short-term goals (e.g. vacations or an emergency fun)
• Invest 15% of it in your long-term security (e.g. 401k or a future down payment on a home)
• Spend 10% of it on something fun

Regardless of which group you find yourself in this year, it may change next year. Stay aware of how changes in your income or household will affect your income taxes and make an informed decision about whether to withhold more than recommended.

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Spring Cleaning Your Finances

Get your finances in order during this year's Spring cleaning!

Get Your Finances Organized As You Spring Clean

Spring is here with flowers and sunshine! With Spring fever in full swing, and as we clean up our homes and yards, we should clean up our finances too! The changing season is a good time to evaluate budgets and spending plans to become financially efficient.

Whether you have a lot of debt, just owe a small amount or anywhere in between; let’s spring clean! Let’s get rid of those services we don’t use, pay off our debt and get our savings going.

Services We Just Don’t Use

I know you are thinking: “This isn’t me, I don’t have any services I don’t use”.  I almost believe you. I thought the same thing about myself. Here is how I found my service that is no longer needed: Search for it. Start by gathering all of your bills. Yes, every single one. Now pretend you are NOT you. Pretend you are an auditor who is going to find a useless expense and question everything, be honest with yourself. If you haven’t used it in the last 3 months, do you need it? Are there charges from vendors that are not required for the account? Do you lease a modem for your internet service? How much does it cost to buy one? Here are a few more items to consider:

  • Are you using that membership you pay for each month or each year?
  • Do you need all those cable channels or do you need cable at all?
  • Are you reading the magazines you get? It’s better to cancel now than forget and be automatically renewed.
  • Closely review your phone bill. Do you have services you don’t use?
  • Are you sure you’re getting the best insurance rates? It might be time to shop around.

Create a Financial Overview

Now is a great time to get to know your numbers. Find your paper statements or check your accounts online to see where your checking, savings, retirement accounts, loans, and credit card debt stand. It may help manage your stress to have one place where you can update all your balances and can see progress toward your goals. You will also be able to see where you can make improvements. Once you’ve listed all this information, set a date every month to do another financial checkup.

Pay off our debt

Before you can pay off debt, you’ll need to organize and prioritize it. How should you go about doing this?

Remember in elementary school, there was a fourth-grade bully, Sam, who picked on the first graders? We would tell him, “Hey! Pick on someone your own size!”  Of course, he wouldn’t pick on someone his own size, because that wasn’t easy.

What does this have to do with debt? Well, we can take a lesson from Sam the Bully (Yes we remember you all these years later) about paying off debt. If you ask an accountant about how to prioritize paying debt off, a typical answer would be to pay off whatever account has the highest interest rate. Financially that would make the largest impact. There is just one problem… A lot of the time the account with the highest interest rate may have the highest balance. We need motivation. If no immediate results are perceived we can become discouraged. So, pick on the little guy! Yes, we need to become Sam the Bully and take on the small balances. It’s easy and when you take even just one out, you will be free of an obligation! You can then use the money from that account to pay other accounts faster. This will motivate you to continue and maybe even further motivate you to find more ways in your budget to take down the little guys faster! After one is down, work your way up!

Start saving now!

It seems counterproductive to save money if you’re in debt. You pay interest on the balance of the accounts and any money sitting in a savings account if applied, would lower your interest expense. Why have a savings at all? Because the unexpected will happen! The unexpected will appear suddenly with all its ugliness. We have to plan for it today! If you have no savings and an unexpected expense comes up, you may pay a lot more to finance it than if you saved for it. If you have no savings now, try to get to $100 as quickly as possible and keep it in an account that’s easy to manage and track. Then continue to build your savings to $500 on up.

If you’re in debt you’ll want to get to 1 to 3 months of expected expenses. This will help if you ever lose your income. After you are financially free, save 3 to 6 months for an emergency savings. Also, keep this in mind: For every $10,000 a year you make, it will take one month longer to find another job at a similar pay rate. If you make $50,000 a year you should plan to be job hunting for at least 5 months.

Get in the habit of saving. If your budget is so tight that you can’t afford to save, save $1. By getting yourself in that habit, once things change, you will be saving more. It’s hard to break a habit. Start saving today! 

What is next?

So you’ve reviewed your accounts for unused services, have a solid plan to pay off your debt and are on the road to a reasonable savings goal. Financial spring cleaning is done! You are free to enjoy some lemonade and appreciate the spring flowers!

Then start planning for the next season- summer vacation and increased air conditioning costs. If you continue to review your finances regularly, you can be assured that nothing is getting swept under the rug!

David Cay

AFCPE Accredited Credit Counselor

15 years experience

 

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6 Ways to Protect Your Personal Information

Take these precautions to safeguard your personal information and prevent identity theft.

How to Prevent Identity Theft

Way back when it was the norm to live off the grid and companies, like households, were only connected by phone calls, faxes, and hard copy data, identity theft wasn’t an everyday concern. Now from the time we wake up to the time we go to bed, we navigate multiple instances in which our personal information is exposed and could be exploited. Here are 7 of those cases and the precautions you can take to further protect your personal information and identity.

Take Caution with Contest Entries

Not all contest entries, whether online or event-related, come with risk. The best way to go about participating is to limit the amount of information you include. A contest may reasonably ask for a name, contact number, and email address if these are the means by which they will contact you. Some companies hope to also receive a mailing address, which is personal information you shouldn’t feel the need to share, especially if you don’t want to end up on a sales list.

If including an email address, make sure you give one that’s separate from where you receive bills and bank statements. Before submitting any of your information, make sure the company has stated in writing that they will not sell your information or use it for something other than the intended purpose. As an added precaution, gather company contact information and screenshot or take an extra entry form with you for your records.

Share Less on Your Office Forms

Don't give out your personal information until your health office or potential employer asks for it.Providing information to dental, medical or other health offices may not seem like an unsafe practice. In some cases, your social security number may be required before medical procedures or to connect your insurance for billing. However, if you are paying out of pocket or are not familiar with the staff, providing personal information could put you at risk. How many eyes will see it and can you trust them all? Ever met a less than professional receptionist or billing specialist? Me too. You can always ask, “why is this information needed?” and “what will happen if I don’t provide it?” The office staff is far less likely to question or pressure you to provide it than you think.

Now, consider other ways you can apply this. Do you need to share your social security number in your first round of an employment application? You may not be offered the position and yet your sensitive information could be sitting in a stack of unprotected papers or kept in a database for who knows how long. How many people in that company will see it unnecessarily? The less you share your information, the better.

Protect Physical Property

Mail

Gone are the days that you can take your unopened “junk” mail and throw it in the trash. Even pieces of information such as the last four digits of your bank account or the combination of your full name and address can put you in financial danger. Thieves are diligent in collecting little bits knowing that this will allow them to steal your tax refund, take out loans, or open credit cards, bank accounts, or utility service, just to name a few. Fight back with a one-two process of blacking out personal information, then shredding it before adding it to the garbage.

Other steps you can take include removing your mail from your mailbox in a timely manner and being sure sensitive mail is always kept out of sight from guests in your home. You may even want to keep it under lock and key.

Social Security Cards

The same goes for social security cards. They are one of the most important pieces of information related to your identity. Someone could potentially impersonate you in order to take out thousands in student loans or receive government benefits. The extent of damage a criminal can do with your social security number will not be quick, easy, or painless to fix. The physical card should only be carried in your wallet when a situation such as new employment requires it. Make sure when Human Resources or medical billing requires it, that it is returned with urgency. In all other cases, it’s best if stored in a locked cabinet or drawer.

When it comes to both your social security card and number, carefully consider who among your loved ones can be trusted with your information. It’s very unusual to share it with family other than your parents, who have likely held these records safe for you until you reached adulthood. At some point, you should acquire all these records, especially if you have reason to believe these individuals may be using your information in a harmful or self-serving way. It’s also advisable not to share your number with a significant other until married or unified legally.

ATM and Computer Safety

Be aware of how predators target your personal information at ATMs and on your computer.

While the EMV (Europay, Mastercard, and Visa) chip in your debit and credit cards may help you feel more secure when swiping at checkout, in other ways you are no less at risk. Creditcards.com reports that since the introduction of the chip technology in 2015, theft in which a card is not present (CNP) has almost doubled.

As mentioned previously, individuals can steal your information simply by seeing your physical card. A criminal is more likely to use technological means to glean what they need to take advantage of your finances. You must be cautious in any instance that might leave you vulnerable. This includes using ATMs at the bank or gas station, linking bank account information to subscription services or online shopping sites. Theft attempts in the form of phishing emails are likely sent to your email address every day.

Check out the following articles for specific tips on how to use ATMs and computers safely:

Protecting Your Identity
Protect Yourself from Card Skimming

Phone Safety

While you may be use to getting fishy marketing calls, it may surprise you that according to the Federal Trade Commission, phone calls account for the highest amount of identity theft complaints. Mail and email related complaints were miniscule by comparison.

Over the years, these phone scams have come in a few varieties. Most recently, criminals have been impersonating the IRS and try to convince you to pay an owed balance immediately. In a similar scheme, someone may call telling you a relative is in trouble and you will need to send money to bail them out. In both cases, never relinquish banking account or social security numbers. Additionally, do not confirm any information they seem to already possess. Furthermore, don’t make a payment through any other suggested method.

If you feel the call may be legitimate, ask for the company’s name and location and end the call politely. Visit their website such as that of the IRS and call the number listed to address the issue in question.

A unique version of these scams consists of the caller asking questions that would require you to state your name or answer “yes.” The criminals can then turn around and use these recordings as voice authorization. Scrutinize the caller’s every word. When in doubt, hang up.

For an in-depth list of phone scams, visit the FTC website:

Phone Scams

Mobile Phone and Tablet Apps

You may not be a teenager or millennial, but it’s likely you have multiple apps on your phone. It may be email or GPS, or maybe Photos linked to your Google account. As harmless as these standard apps seem, without proper precautions, they can be a peephole giving predators a view of your information. For this reason, turn off your data connection when you are not using it, set passwords and screen timeouts for your phone and apps, and deny location tracking when you can.

In the article above, “Protecting Your Identity,” you’ll learn more than one reason why it’s important to avoid connecting your phone to WIFI networks in public places such as Starbucks or an airport. This can make your personal information accessible to anyone within a certain distance.

Lastly, as helpful as personal finance apps can be, do your research before signing up. What do the reviews say about how well they’ve protected others information? Is the company backed by a government agency? What liability do they claim in preventing theft? What level of security do they provide? Again, the rule of thumb is the less you share your information, the better. So, if a finance app is the way you want to go, limit how many you use and the extent to which they can manage your financial information.

The sad truth is that as more and more data turns digital and more processes are automated, identity theft will continue to rise every year. Be diligent in educating yourself on trends in identity theft and you’ll stay one step ahead.

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FICO Explained

Read about the 5 factors that influence a FICO score.

What Is a FICO?

When it comes to credit scores (also generically referred to as a credit rating), most Americans know that they are important and that they can have a major impact on our financial lives. However, very few know what goes into a credit score or just how influential it can be.

First of all, the term, “credit score” does NOT refer to a SINGLE scoring system. In the US, there are over a thousand credit scoring models in existence, created and used by hundreds of creditors and consumer reporting agencies. However, the most common credit scoring model (used in about 80% of all credit-based decisions) was developed by Fair Isaac Corporation (FICO for short).

Founded back in 1956 by Bill Fair and Earl Isaac, FICO manages products that help creditors to predict the rate at which an individual will default on a loan. An individual’s FICO score does not determine how much money he or she may borrow.

Rather, it provides a numeric rating of the risk to the creditor that the borrower is. The score ranges from 300 (extreme risk) to 850 (very low risk). Consider that most consumers with scores below 750 will end up paying higher interest rates than those who have worked to keep their scores above 750.

The score is based solely upon the information included in the individual’s credit report.
The five most important factors in a FICO score are as follows:

1. Payment History: This section considers your pattern of on-time and/or late payments. The more recent the activity the more influential the activity is, i.e. a pattern of recent on-time payments is more influential than late payments from 5 years ago.

2. Balance-to-Limit Ratio: This section compares your current debt balances to your potential debt (total credit limit) at a card-by-card and an aggregate level. This is also called “Usage.”

3. Length of Credit: This section considers how old the accounts are that are listed on your report, both on an individual level and overall average. You may consider closing a credit account from time to time. Be aware that closing any card that helps to establish your length of credit history may lower your credit score.

4. Pursuit of New Credit (Inquiries): This portion considers how much new credit you have recently applied for. If you apply for more than a couple lines of credit each year, the credit scoring model essentially wonders why you’re needing so much credit.

5. Credit Mix (Types of Credit): This section takes into consideration the variety of credit lines you have opened and/or used recently, including credit cards, retail store cards, mortgage loans, auto and other installment loans, consumer finance accounts, etc. Some variation in credit is preferred.

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How Student Loans Affect Taxes

 

Properly including student loans on your taxes could increase your refund.

Is College Tuition Tax Deductible?

It’s tax time- again! You’re probably feeling pretty confident about how to complete your return since it’s not your first time around the block. Of course, you hate to kiss your money goodbye when you feel that now, as a young student, is when you need it the most. However, if you have recently added educational expenses to your budget then you’ll be including more on your return this year than just employment information. Doing so may reduce the amount of taxes you owe.

First, know that how you file your taxes affects aspects of your student loans and what school expenses you’re responsible for. Conversely, your school expenses and student loans affect the amount of taxable income you need to claim on your tax return. Sounds confusing already, doesn’t it? To help you navigate these vital details, I’ve asked our Student Loan Specialist, Ciaria Colson, and CEO of Happy Tax, Mario Costanz to supply the answers you may not have known you needed.

What kind of tax breaks does the IRS have for education?

Colson: “There are tax breaks for education expenses and interest paid on student loans. Education expenses and interest amounts paid on student loans during the prior year can be reported when filing taxes.”

If my employer helps pay my student loans, do I have to record this as income?

Colson: “Yes, it is my understanding that if an employer pays student loans on their employee’s behalf, a certain portion of the amount paid is taxable by the IRS against the employee.”

Is there a minimum of expenses or interest paid that I must meet in order to claim these amounts on my taxes?

Colson: “[Some] questions may be best answered by a tax professional.”

– Good advice, Ciaria! Luckily, Founder of Happy Tax, Mario Costanz stepped up to the plate. He has been a part of the Tax and Finance industries for over 15 years and has operated over 100 tax preparation offices. This was his answer:

Costanz: “There is no minimum amount of educational expenses that you must incur in order to claim the student loan interest deduction, but there is an income cap. You can deduct your student loan interest only if your modified adjusted gross income is less than $80,000 ($165,000 if married filing jointly).”

Is there a maximum amount the government will deduct?

Costanz: “You can only deduct up to $2,500 in student loan interest even if you do qualify, so borrowing too much isn’t a good idea. You can’t deduct loans taken out for reasons other than paying qualified education expenses, and you can’t deduct student loans from a related person or made under a qualified employer plan. Only the loans that you personally took out for qualified education expenses can be deducted.”

I’ve heard of deductibles when it comes to insurance, what does deductible mean in tax terms?

Colson: “Deductible means that an amount is deducted from the person’s income thus reducing the amount of income subjected to being taxed. This can help in increasing the overall refund.”

Can I claim an interest deduction for part of the year even if I am in default?

Colson: “This is possible. If payments have been paid towards student loans at any point in the year, any interest that was paid will have the amount reflected on your 1098-E interest statement and can be claimed during filing.”

Defaulting on your student loans can reduce your tax refund

 

How else might default affect my tax return?

Colson: “If student loans are in default (no payments made after 270 days), tax refunds can be offset. This means the Department of Education can collect the entire amount of the refund to apply towards the debt.”

If I received student loan forgiveness this year, does it need to be mentioned on my tax return?

Colson: “Most student loan forgiveness programs require the amount forgiven (indicated on a 1099-C) to be reported as income and therefore is taxable by the IRS.”

How can my tax status affect my student loan payment?

Colson: “The tax filing status of an individual can directly affect their student loan payments if an Income-Driven repayment plan is chosen. When filing married jointly, the combined adjusted gross income of both spouses is used by the US Department of Education to determine the payment on any income-driven repayment plans. This causes a very large increase in payment when compared to a payment for an individual filing married separately or single.”

What are some other ways someone with student loans might save on their taxes?

Costanz: “Nearly 80 percent of all taxpayers will see a lower tax bill next year thanks to the Tax Cuts and Jobs Act, but whether and how much you save depends on your particular facts and circumstances. The standard deduction nearly doubles from 2017 to $12,000 for individual filers ($24,000 for married people filing jointly), but his only applies if you typically don’t itemize your deductions. So, if your charitable giving, mortgage interest, student loan interest, and other deductions don’t add up to $12,000, it no longer makes sense to itemize. The recent tax reform law is the first of its kind in nearly 30 years, and it impacts just about everybody. As a result, it’s more important than ever to make sure you have sound tax advice.”

There are many things to know when it comes to tax law. If you have been preparing your own taxes for the past few years, but have questions or curiosities about your educational expenses on this year taxes, it may be time to sit down with a tax professional.

Before attending your appointment, be sure to write out a list of possible questions you might have. Then, don’t be afraid to get those answered along with any others that might come up in your appointment. Use that time with the professional to understand why you are filing a certain way; divulge all expenses you face throughout the year, and ask for ways you might reduce your tax liability in the future.

You may want to ask family and friends for recommendations on tax preparers or Certified Public Accountants. Costanz also offers his company’s mobile app, “Happy Tax,” that can connect you to licensed CPAs in your area who are ready to reconcile your school expenses, student loans, and tax situation to your benefit.

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Improving Your Credit Score

How To Improve Your Credit Score in 2018

This guide will help you know what a credit report and score is, how to review your credit report, tips on how you can improve your score and information regarding how to dispute discrepancies you may find on your credit profile.

We encourage you to read every section as they provide useful information. However, if you are looking for a specific answer, follow the links below:

Building A Better Credit Report

Tips for Strengthening Your Credit Score

Basics of Maintaining or Rebuilding Your Credit

What is a credit report and how is it used?

How are we, the average Joe or Jane on the street, supposed to build (or rebuild) our credit when no one teaches what’s on our credit report to begin with? Well, here’s the answer:

  • Contact information (no impact on credit score): It simply includes the names, addresses, employers, and, sometimes, marital statuses under which you have applied for credit in the past.
  • Credit & Trade Lines: Details on the various lines of credit the consumer has had in the past 7-10 years, including balances, terms and their history of on-time payments.
  • Public Records: List of court actions, including bankruptcies, judgments, tax liens and possibly evictions over the past 7-10 years
  • Inquiries: List of creditors and businesses that have looked at your credit in the past 2 years. Those you authorize as part of an application for credit may impact your score (slightly), while others do not.
  • Personal Statement (no impact on credit score): Up to 99 words the consumer may add to their own report. We generally suggest this only be used to clarify report errors.

Think of your credit report as your own personal file that holds information about your where you reside, what type of debt you owe on and what your payment history is with your lenders. Your credit report file will also include whether or not you’ve filed bankruptcy and if you’ve been sued to collect on a debt you owe. If you have mortgage or automobile payments those will show on your credit report as well.

Creditors, lenders, employers, insurance companies or property management firms may purchase a copy of your credit report in order to determine your creditworthiness. They will look for positive items such as an established credit history, high balance to available credit ratios (do you have access to credit but keep the balances down?), on time bill payment, what types of credit do you use and have you recently applied for new credit?

Importance of Credit Scores

What is credit?  It is the ability to borrow based on the promise of repayment.  Lately, everything seems to be based on a person’s credit score.  Here are a few ways credit scores affect the price you pay for the following items:

  • Personal Life Insurance: Having a bad credit score can drop you to the lower tiers causing you to pay a higher premium, though your health is still the most influential factor.
  • Auto and Home Insurance: Poor credit can mean you are denied insurance completely or you will pay more.  Before obtaining insurance from a company, ask them, “What percent of the premium will my credit score account for?”
  • Employment: The trend is growing for companies to pull a credit report along with a background check.  They want a stable employee.  They are not allowed to ask you why you have a bad score, but you are allowed to tell them.  Be prepared to discuss it.  Employers can pull credit to promote or transfer an employee as well.  Be open and willing to explain what happened.
  • Housing: Property management companies will likely pull your credit report to determine approval or denial, though many do not take into account any medical collections.  The larger the company the stricter they typically are.  Small locally owned companies tend to get to know the individual.
  • Loans: The higher the score, the better the interest rates you pay for standard bank loans (auto, home, signature).  If your score is too low (mid to low 500s), you may be denied a loan completely or receive an interest rate in the high teens to twenties.

Check your credit report every year to check for fraud or misreporting that may be affecting your credit score.  While 8 in 10 credit reports contain some sort of error, one in four contains such an error significant to cause you to be denied credit in spite of any other positive information.

As you can see, building and maintaining a good credit score can positively affect a major part of your life.

Have You Pulled Your Credit Report Lately?

Information found on credit reports and that three-digit number called a credit score have become such integral decision factors in our lives.  Do you feel as though you are now judged by your credit report and credit score more than ever?

We have the opportunity—and the right—to see our credit reports and ensure that they are accurate, which is especially important before you apply for a loan. Here are some steps to taking advantage of the FACT Act to monitor your own credit:

  • Pull your credit regularly at www.AnnualCreditReport.com.  We are entitled to one credit report from each of the three bureaus every 12 months.  That translates into three credit reports per year for FREE!  If you really want to stay on top of your credit monitoring, pull one report every four months rather than pulling all three at once.
  • Keep in mind that we are able to dispute inaccurate information.  If you see something that just doesn’t look right, dispute it with the credit bureaus by going directly to their websites or by writing to them.  If the item is negative, but it is indeed accurate, it will have to stay on the credit report until it is due to come off (generally 7 years for negative information).
  • Anything a credit repair company can do legally, you can do for yourself.  Just as you can pay someone to cook your meals, clean your house, and mow your lawn, you can also pay somebody to “clean up” your credit.  Save yourself some (or a lot of) money by writing your own dispute letters.
  • Keep a paper trail.  One advantage of sending a dispute by mail is that you can include copies of supporting documentation and send them by certified mail.  Always write down who you talk to when you talked to them, and any other pertinent information each time you speak with a creditor.  It’s easy to get lost in large organizations with multiple international call centers.

Steps You Can Take to Build a Better Personal Credit Report:

First things first, get a copy of your credit report and study it. Look at the same information that others are looking at when determining your creditworthiness.

If something looks out of place make a note of it and begin fact-checking. You may find a discrepancy on your report and will want to take the appropriate steps to resolve the issue.

How to Dispute Discrepancies on Your Credit Report

There are a couple ways to go about filing a dispute with a consumer reporting agency. The recommended way is to contact the credit bureaus that have the error using the dispute option on their website:

Disputing the error online is the quickest and easiest way. See the pages linked above for more information.

You can also choose to place a phone call or write a letter disputing the information on your report with the appropriate credit bureau. You will want to specifically identify each issue you’ve found and include copies of supporting documents. Do not send the originals. Also, make sure you keep a copy of your dispute letter as well.

The second step would be to tell the creditor or entity that has reported information incorrectly within your file. Similar to step one, only send copies of supporting documents and make a copy of the letter and documents for you to keep.

If you have any questions, would like to discuss your financial challenges, or are just looking for advice, please call us at your convenience. As always, we are here to help and look forward to hearing from you.

Once you’ve ensured that the information is correct on your report you will want to review the primary factors that are used in determining your creditworthiness.

  • Do you have collection debt that needs to be resolved?
  • Do you pay your bills on time?
  • Do you owe a high percentage of your credit limit on your accounts?

Those items all have a fairly heavy impact on your credit profile.

Begin setting goals and prepare a plan that allows you to resolve any issues identified. Perhaps you’ve found an old collection debt that you can make a priority to repay or maybe you’ve seen your balances maxing out. Regardless of the specific issue, set goals to remedy them as soon as possible. This is also a good opportunity to create a household budget and set immediate, short and long-term goals.

Correcting Credit Report Errors from Defunct Creditors

Having taught nearly 500 personal finance classes since 2004 to over 8,000 individuals, it’s not often that I get a question about course topics that I haven’t heard before. I love it when I do, though, and that’s exactly what happened last week at a local housing authority. Here is the question:

What can I do if the title loan company to which I once owed money but have paid off in full has gone out of business but is still listed on my credit report with money owing? At first, it sounded completely new, but in the end, much of the method for dealing with this situation goes back to the typical process of correcting one’s credit report. Here are the suggestions that we, as a class, came up with:

  • First, dispute the credit report error online through each of the three national credit bureaus.
  • If that doesn’t work, call the company using the phone number listed on the credit report. Attempt to correct the problem directly with the title loan company’s representative.
  • If these attempts fail, try looking up the company on the state’s Secretary of State’s business entity search website. The business listing should include, even if the company has gone out of business, an owner or board member to contact (likely a mailing address). Make contact with a request for information on how to address accounting errors.

These same suggestions apply to similar situations involving other defunct creditors listed on one’s credit report, including, for example, debt collectors, banks and credit unions.

If you run into any issues along the way or just need advice on where to begin or what to do next you are more than welcome to contact Debt Reduction Services at 1-877-688-3328 and speak to a Certified Consumer Credit Counselor. They can help you with your budget as well as help you identify areas that you can potentially save money. Be wary of credit repair or debt settlement as you don’t want to find your situation become worse by working with the wrong company.

For more information on how to improve your credit report visit consumer.ftc.gov for an abundance of resources that are aimed at protecting you, the consumer, as well as improving your overall financial picture.

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meter showing poor fair good and great credit score10 Tips for Strengthening Your Credit Score

The Guiding Principle behind each of the following tips is to manage and use your credit wisely: pay your debts according to the terms you have signed and avoid excessive debt. Read through the following tips for ideas on how you can personally increase your score and better your credit standing.

Tip #1: Pay all of your bills on time and in full every month. If you have secure access to the internet, consider paying your bills online to avoid mail delivery delays.

Tip #2: Get current on your credit accounts. If you’ve missed or been late on payments, find a way to get caught up. It will take six months of on-time payments, but negative effects of late or missed payments decrease over time.

Tip #3: Pay down the total balances owed on your credit accounts. Don’t just transfer money from one card to another. Make it a goal to avoid purchasing anything on a credit card you won’t pay off with the next credit card statement.

Tip #4: Don’t close accounts in good standing as a “quick fix.” Information from any account, whether closed or open, remains on your credit report for 7 years.

Tip #5: Don’t be afraid of Credit Counseling. In 1998, FICO dropped credit counseling as a factor influencing the credit scoring model, in part because we’ve learned that individuals actually become less of a credit risk when they receive credit counseling. (Michael Staten. Georgetown University. March 2002).

Tip #6: Avoid applying for a lot of new credit accounts within a short period, particularly if you have little or no credit history. See next tip.

Tip #7: Stay in contact with your creditor when troubles arise with an account. Work in good faith to pay as agreed, or consider arranging a modified payment plan. Accounts in collections or charged off will negatively affect your score for at least 7 years. When you struggle to make even the minimum payments, contact a reputable credit counseling organization such as Debt Reduction Services.

Tip #8: Know your credit limit and stay away from it. “Maxing out” your credit cards can hurt your credit score.

Tip #9: Live within an established budget and replace poor spending habits with disciplined spending. Balance your checkbook regularly to avoid bouncing checks.

Tip #10: Check your credit report at least annually for mistakes and inaccuracies. Go to www.AnnualCreditReport.com to print and download your free report for each of the three national credit reporting agencies. If you want your credit score as well, you will be required to pay for it. Though, you may have access to it through your bank’s online tools. Checking your own credit report in this way will not harm your credit.

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Using a Credit Card

Eight Additional Steps to Rebuild Your Credit Score

How to Rebuild Your Credit Rating

While on our Debt Consolidation Program, some may feel that building or repairing their credit without a major credit card is an insurmountable challenge. Others may not have any credit established or very poor credit and are looking where to begin to improve their situation.

The following are some simple steps that can contribute to better credit ratings. * The list is not exhaustive nor are the suggestions guaranteed to help you (state and federal regulators require that disclosure).

Watch our Director of Education, Todd Christensen, explain how you may begin building or rebuilding your credit score in the video below:

Free and Easy Steps Can Help a Little

1. Ask a family member with good credit to add you as an authorized user to their current credit card account(s). You do not even have to use the card (or even ever see it). It has no impact on the family member’s rating, and their good account activity can help your own standing before creditors. Keep in mind, though, that the family member is responsible for any charges made on the authorized user’s card.

2. String of Light BulbsSome states allow utility companies to report your history of payments to the credit bureaus. You do have to ask, though, and the utility companies are not necessarily required to report, so ask nicely… with sugar and a cherry on top. Also, be sure the utilities account is in your name.

3. Maintain checking and savings accounts: While not the case before 2004, banking practices (like bouncing checks) can now affect an individual’s credit score.

4. Consider having a parent or family member co-sign with you for unavoidable loans, such as a car. Be careful, though, not to compromise their finances. If you don’t pay, they will be held responsible.

Simple and No-cost or Low-cost Steps

Tire Stores and (Re)Building Credit5. Generally, I suggest that you do not apply for more than one or two new accounts each year, but to start, you might consider a tire/brake store that has its own finance department. Gas station cards are other possible places to start. They tend to be a little more liberal in their application approvals, but they compensate for this risk by charging higher interest rates. If you need to purchase tires for your vehicle anyway, save up the cash, apply for the loan at the tire store, and then pay off the loan almost immediately. Some well-meaning so-called experts will tell you that you should not pay off the loan because you need to establish a history of on-time payments. To maximize your credit rating, this may be true, but you do not need to maximize your rating; you just need to build it. If maximizing is your chosen way, it means you’ll end up paying interest, so to minimize interest payments try this. Once your account is approved, register with the lender for an online account, link it to your bank account, pay off all but $50 or so, and then make $15 or so payments until the account is at $0. This will give you 6 or more months of payment history while also minimizing the interest you are charged.

Department Store Front

6. Retail store cards are also generally easier to qualify for. Just do not make purchases for the sake of building your credit. Make purchases that you would have made anyway. Let’s say you were going to make a $50 purchase there and that you already had the money saved in your checking account or in cash in your purse or wallet. When applying for an account, they might give you a discount on your first purchase. Don’t go crazy. Keep the purchase the same as what you would have purchased without the discount. Then, after being approved, do not even leave the line. Inform the cashier that you would like to pay off your account balance right then and there. This way, you leave the store with a new open account in good standing with no balance and a payment history. If you waited to pay until the bill came in the mail, chances are you would have spent that money elsewhere and would then be in trouble trying to come up with the minimum amount due.

More Expensive but Effective Steps

7. Finding a secured credit card (not a regular debit card) through a bank or credit union can help, although they usually come with high annual fees (sometimes even monthly fees). One benefit of a secured card is that you begin developing disciplined credit habits. Just make sure that you get it in writing that the card company will report your credit usage history to all three consumer reporting agencies.

Credit Building Loan Agreement8. Some banks and credit unions offer credit-building loans of $500 to $2,000. They typically require proof of employment. After approving your application, they place all or part of the loan into a secured savings account that you cannot access until you have paid the entire balance due. While the secured savings account earns interest ( a pittance), you are likely paying 8% to 15% or even more on the loan. Still, that’s better than the corner finance store that will charge 20% to 30% or more and makes it as difficult as possible to pay off the loan.

How to Improve Your Credit Score – PDF

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Don’t Forget the Basics

Regardless of the above steps, the fundamentals of building (or rebuilding) credit remain in place:

  • Make at least your minimum payments on time
  • Pay down (or even better, off) your balance every month
  • Don’t apply for too many accounts within a short period of time (1 to 2 a year is reasonable)
  • Get current on accounts that are late
  • Do not close accounts that are in good standing

These do not account for all possible ways to build or rebuild credit, but they provide a generally good strategy. If you have some ways of your own, please feel free to share.

Disclaimer: Score and modeling may vary from lender to lender. Because of the complicated nature of the statistical models and abundance of information on credit reports, these tips cannot be considered guarantees to improving your credit score.

Update 1/29/2018

Do You Have Questions About How You Can Improve Your Credit Report and Score?

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We routinely check our articles and blog posts for new comments and make it a priority to respond quickly.

So if you need more information on improving your credit standing or have any other questions about your personal finances, please feel free to comment below and we’ll get back on and answer as fast as we can!

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Prioritizing Your Expenses

Setting a budget will help prioritize expenses and spending.

How to Prioritize Expenses

Without considering which expenses are or should be our priority, we can easily allow any bill delivered to our Inbox or Mailbox to take precedence in our financial decisions. Rather, by controlling our spending and prioritizing our expenses, we can banish from our finances those purchases that do not contribute to our identified measurements of financial success (a.k.a. written goals).

I suggest that we organize and prioritize our expenses by using my quadrant system outlined below:

  • List all of the expenses we have each month as well as those we have had in the past 3 months.
  • Categorize the expenses into needs or wants. Write “1” next to any need while we write “2” next to a want. A need includes “physical survival” expenses as well as those required to sustain a minimal level of expected lifestyle.
  • Categorize our expenses (both needs and wants) as either an obligation (a recurring and/or contracted bill, usually with a set due date) or a discretionary expense (a purchase we are free to make any time or not at all). Write “A” next to our obligations and “B” next to our Discretionary Expenses.
  • Make a 4-quadrant Payment Priority Chart by drawing a vertical line straight down the middle of a piece of paper and then drawing a horizontal light straight across the middle of the same paper (essentially, a cross). Label the top left quadrant as 1A, the top right quadrant as 1B, the bottom left quadrant as 2A and the bottom right quadrant as 2B.
  • Looking at our list of expenses, write them into their corresponding quadrants. Within each quadrant (especially 2A and 2B), priority our expenses from the most important to the least important.
  • Continue until all of our monthly expenses have been added to our chart. It may look something like this:

Prioritizing expenses can organize your finances and reduce stress

We now have a visual plan of attack for paying our bills. Any expense in the 1A quadrant (top left) must get paid, absolutely, every month. Anything in the 1B quadrant (top right) should get paid also, but we can be flexible as to when it gets paid. Anything in the 2A quadrant (bottom left) should also be paid regularly, though we should aim to keep the number of expenses in this quadrant to a minimum. Finally, the 2B quadrant (bottom right) will contain expenses that we can remove from our budget whenever we are having a financially rough month.

Have a Great Week!

Todd Christensen

Director of Education, Debt Reduction Services

Do You Have Questions About How to Prioritize Your Expenses?

Comment Below and We’ll Answer as Quickly as We Can!

We regularly check our articles and blog posts for comments and make it a priority to respond as fast as we can.

So if you need more information on prioritizing your expenses or have other questions about your personal finances, please feel free to comment below and we’ll get back on and answer as fast as we can!

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