The Basics of Money and Credit

In this series, Our team shares their thoughts on the basics of Money and Credit. These topics are typically covered with new customers.

First, let’s start with the basics of credit.

What is Credit?

Credit is other people’s willingness to let you use their money that you will repay sometime in the future.  It is a privilege, not a right. By “other people,” we typically mean banks, credit unions, and credit card companies.

“Credit” can be used interchangeably with “loan.”

How do you earn credit?

To earn the trust of the lenders in the form of “credit, you need to demonstrate you can borrow money and pay back on time. Check out a good article by Nerd Wallet: How to Build Credit

What are the types of credit?

Categorized by how the credit is extended and how it is paid back, credit falls into the following three categories:

Installment Loan: require regular payments, usually monthly, until the principal is paid off. Car loans, student loans, and mortgage all fall in this category.

Revolving Credit: includes bank credit cards, store credit cards, and home equity line of credit. You are required to pay at least the minimum payment by the due date. You can pay the minimum amount, the full payment or anything in-between. You can keep using the credit as long as you pay the minimum and stay within the credit limit.

Service Credit: used for monthly utility bills, such as electricity, gas, and yes, your cell phone bills. You set up an account, use a service and get billed by the service provider.

What Are the Advantages of Credit

You can get instant gratification, “buy now and pay later”;
Usually, no interest is charged when credit card bills are paid in full by due date;
Credit cards are safer to carry around than large sum of cash around;
Keep record of how you spend money so you can analyze your spending habit;
Some credit cards offer “bonuses” such as cash back or frequent flyer miles.

What Are the Disadvantages of Credit

Interest costs can be very high. How high? 15-20% for unpaid credit card balance is very common.
If you only pay the minimum each month, then the pay-off period will extend to very long
Since you owe so much money to other people already, you may not have much buying power left in the future

What is a Credit Report?

Lenders do not take your word for it when they come to determine whether to extend credit to you; instead, they pull your “credit report”.  It is kind of like your “school report” but lists different things. It describes your past use of credit, such as being on time in paying back debt, types of credit accounts opened, number of loans applied for, and a number of outstanding balances.

Three companies, called credit bureaus, gather information about you and give it to lenders. These three companies are:

Equifax (www.equifax.com)
Experian (www.experian.com)
Trans Union (www.transunion.com)

You can order your credit report once a year to check for errors or see if your identity has been stolen. Following the directions that come with the report, you can fix the errors.

What are Credit Scores?

Sometimes referred as a FICO score, a credit score is a three-digit number that describes your trustworthiness, or your future bill-paying behavior. It ranges from 300 to 850.  Lenders look that the number and decide whether to give you a loan and on what terms if any (interest rate, down payments, etc.).

These factors affect your credit score:

Previous payment history
Amount money owed
Number of recent credit inquiries
Length of credit history

These are only a few of the money basics we go over with new clients. If you have any questions or need help in any of the areas we discussed here, please don’t hesitate to reach out for a Free Initial consultation with one of our counselors M-F 9am-5pm pst at 854-888-0321

Top 5 Reasons People Seek Credit Counseling

We have helped thousands of people overcome financial challenges through Credit Counseling and other programs. We are committed to educating our clients and the general public on ways to spend less, save more and work towards becoming financially fit. Over the years, we have had clients seek Credit Counseling for a wide variety of reasons, but certain life events keep coming up again and again. Here are the top five reasons people seek Credit Counseling and some things you can do if you find yourself in any of these common situations.

Loss of Income or Reduced Income- Few things are as stressful as losing a job or being told you have to take a pay cut to keep your job. You’ve built your lifestyle based on receiving a consistent income and suddenly it disappears or gets smaller. If you don’t have savings to fall back on, you’re immediately in financial crisis mode. Taking the following steps can help ensure you’re if you experience lost or reduced income:

Work toward having 6 months of living expenses in an emergency savings account
Keep your resume up-to-date and maintain contacts with potential employers
Develop a marketable skill that will allow you to temporarily freelance if neededUnexpected Expenses- Whether it’s a major home repair, car repair or even something fun, like being asked to stand up at a friend’s wedding, unexpected expenses are a part of life. If you’re not ready for them, they can throw your finances into a tailspin that’s hard to get out of. But even though you can’t predict the future, you can take steps now that will make unexpected expenses less shocking:
Set money aside in an emergency savings account
Plan a budget that includes fixed, variable and periodic expenses
Stay current with home and auto maintenance to avoid large repairs

Overspending- Whether as a result of relying on credit cards to pay for everyday expenses, spending more than you earn or carrying balances on multiple, high-interest rate credit cards, overspending is a cause for concern. When credit card debt becomes unmanageable, your life can feel like it’s spinning out of control. Here are some ways you can help control the urge to overspend:

Try your best to live a cash-only lifestyle; don’t carry credit cards with you
If you do have to charge something, pay the balance in full the following month to avoid paying interest.
Steer clear of retail store credit cards and other credit cards that charge interest rates of 20% or more

Illness in the Family- Serious illness and high medical bills that accompany it are incredibly stressful for any family. While there’s no way to predict when an accident or illness with strike, there are some things you can do to lessen the impact when they occur:

Work toward having at least 6 months of living expenses in an emergency savings account (see a pattern here?)
Ensure all health insurance premiums are paid on time so there’s no lapse in coverage
Try to live a healthy lifestyle and practice preventive care

Divorce or Separation- Since money issues are one of the leading causes of marital strife, it’s no surprise things can get quite complicated when working out the financial details of a divorce or separation. Here are a few tips that can help you get through this difficult time:

Find a lawyer you’re comfortable with and who answers questions quickly
Seek the support of friends and family members who have been through a similar situation
Check your credit report for errors regularly to ensure it’s not reflecting your spouse’s debts

Click here for more information on credit and debt services!

Closing Costs: What You Need to Know

If you’re buying your first home — or it’s been awhile since your last real estate transaction — you might need a refresher on what closings costs are and how they work. Saving for a down payment is often discussed when purchasing a home, while closing costs can get overlooked; but they are an equally important part of any real estate transaction. Keep reading to learn what closing costs are and how they work.
What are closing costs?
The closing point of the transaction is when the property title is transferred from the seller to the buyer. Closing costs are the fees associated with the end of a real estate transaction. Closing costs will vary based on the state in which you live and the property you purchase; they generally make up 3% to 6% of the home’s total purchase price. Closing costs may include, but are by no means limited to: a loan origination fee, escrow deposit, attorney’s fees, title insurance, and inspection & appraisal fees, to name just a few.Who pays the closing costs?
Typically, the home buyer is responsible for paying the closing costs. However, in some cases you may be able to get the seller to contribute up to 6% of the sale price as a closing cost credit. This is a tax-deductible expense for the seller, so it’s definitely worth proposing it during negotiations as one of the terms of the deal.
What if I can’t afford the closing costs?
Many mortgage lenders will allow you to roll your closing costs into your mortgage loan. The drawback here is that you will end up paying interest on the closing costs, so it will cost you more in the long run.
Does anyone get a break on closing costs?
There may be discounts or other closing cost benefits for active duty military personnel, military veterans and members of certain labor unions. These benefits vary from state-to-state, so you’ll want to do your research and make sure your REALTOR® and mortgage lender are up-to-speed on your special circumstances so they can help you find out what you qualify for.
Anything else I should know about closing costs?
Don’t let the thought of closing costs discourage you from your goal of owning a home; they’re just one part of a much larger transaction. If you’d like to purchase a home but are not sure you’re ready financially, Our Pre-Purchase Housing Counseling can help you answer some important questions and outline the necessary steps to help you reach your goal of home ownership.

How to Help Loved Ones with Money Problems

When family or close friends are in trouble, it’s natural to have a desire to help. However, when dealing with finances, you should take a few precautions before jumping in. For instance, do you know lending money isn’t always the right option? The tips below will help you evaluate different scenarios and develop the appropriate course of action:

Don’t Cross Boundaries – Has your loved one reached out to you for assistance, or are you assuming he or she needs assistance? If family members or friends haven’t asked for help, they may not want or need it. They may prefer to climb out of a difficult situation themselves. If you feel assistance is necessary, consider bringing up the topic indirectly. For example, you can comment on a news story about debt or housing troubles, or you can mention a few financial tips you recently received from a friend.

Determine Whether Assisting is the Right Move – It’s not necessary to bail friends and family out of all financial problems. In some cases, it can even be a hindrance. First look at the cause of money troubles. Did your teen run up a credit card splurging at the mall, or has an unexpected injury led to a pile of medical bills? Determine whether there’s a vital lesson that needs to be learned. If the money problems are the result of poor choices, the individual may need to take the time and effort to pay off the bill themselves in order to prevent it from happening again. If financial difficulties were caused by outside sources, such as job layoffs, a financial boost may be beneficial.

Evaluate Your Options – Lending money is one option, but it’s not the only option. You may be able to help your loved ones help themselves. For instance, you can babysit children or clean the house while your loved one works an extra shift or side job. You can also help family and friends develop a workable budget or find professional assistance. Credit counseling is a free service from non-profit organizations like Take Charge America that educates consumers about their options for overcoming debt and saving for the future.

Gift, But Don’t Enable – Gifting money is appropriate if you are willing, in a financial position to do so, and the gift doesn’t enable poor behaviors or make the borrower dependent on you for more cash in the future. Everyone deserves the right to become independent. Gifts that make someone dependent on another can seriously strain personal relationships and ultimately cause more harm than good.

Lend Money with Caution – If you believe lending money is the best option, proceed with caution. First take an honest assessment of your finances to determine whether you’re in a position to lend. Then, put it in writing.

Are You Ready to Buy a Home?

Owning a home remains one of the components of living the American Dream. But as the recent housing crisis illustrates, jumping into homeownership without being adequately prepared for everything it entails can be the start of a financial downfall. Owning a home is about much more than having a down payment and being able to pay the mortgage every month. Here are several things to consider to help you determine if you are ready to buy a home.

Your Current Financial State — You need to take a deep dive into your finances before deciding to buy a home. First and foremost, you must have enough money saved for a down payment and be earning enough to cover the monthly mortgage payment. You also need to check your credit score and review your credit report to ensure it is accurate. If you’re already carrying a high debt load, you will want to pay off a good portion of it before applying for a mortgage. If you’re not sure where you stand financially, Home Ready counseling is a great place to start.

Your Financial Future — While we can never predict the future, you should have some idea in mind of what your financial future holds. Is your job secure? Are you receiving regular raises or bonuses? Do you have a “plan B” in mind if you were to lose your job or were asked to relocate? Do you have emergency savings to cover your living expenses for 3-6 months? These are all questions you need to ask yourself before making the commitment to buy a home.

Ongoing Costs and Maintenance — If you’re used to renting an apartment, you’re responsible for paying your rent every month and that’s it. When you own your home, you’re responsible for everything that has to do with the property including yard maintenance, home repair, property taxes and homeowner’s insurance. Not only is owning a home potentially more costly, it’s also a bigger time commitment. Ask yourself if you’re really ready for the additional responsibilities before taking on the lifestyle of a homeowner

How Long You Plan to Stay — There was a time when conventional wisdom dictated that staying in a home two years was long enough to recoup your initial investment and make a profit, but that has changed. Experts now recommend staying in a home for a minimum of 3-5 years before considering selling. Of course, there’s no way to accurately predict how the housing market will fluctuate year-to-year, but if you’re someone with wanderlust who gets bored easily, buying a home may not be for you.

Turned Down for a Mortgage? Prepare to Apply Again.

More prospective homebuyers are eager to enter the market as the economy improves. Yet in this post-recession world, many borrowers are finding it difficult to navigate stricter lending requirements and successfully reapply for a loan after being turned down.
If you’ve been turned down for a mortgage and want to know how to prepare to apply again, start with these tips.Evaluate Your Cash Flow: One of the primary roadblocks to obtaining a mortgage is cash flow. At a minimum, you need a 3-percent down payment and about $1,500 for closing costs. You’ll also need to take moving and ongoing maintenance costs in account, including utility deposits, appliances, a lawn mower, home furnishings and other miscellaneous expenses. As a general rule, prospective homebuyers should have at least $10,000 saved before shopping for a home.
Build Your Credit: Many young people today haven’t used credit, aside from student loans, so lenders have difficulty assessing their ability to pay back the home loan. Borrowers who fall into this category need to focus on building a positive credit history with three trade lines, such as a credit card, auto loan and signature loan, for at least two years before attempting to reapply.
Avoid a “House Poor” Lifestyle: Many consumers assume if they can qualify for a loan, they can afford a house; but that’s not always the case. With lenders approving 31 percent of gross salary for a house payment and 43 percent for all debt service, it’s easy to buy a house one can’t afford. It’s important to remember the mortgage is only part of the financial commitment of owning a home. You should also consider ongoing costs, such as commuting, utilities, HOA fees, landscaping and general home maintenance. It’s wise to limit house payments to 28 percent of gross income, and all debt service to no more than 34 percent.

Beyond the Mortgage – Additional Costs of Homeownership

In addition to a monthly mortgage payment, owning your own home involves a number of additional costs and expenses you need to plan for in your budget. Some of them will be recurring expenses, others you won’t see coming – but you’ll need to be prepared for them nonetheless.
Recurring Expenses
Utilities – If you’re moving into a larger space than you’re used to, remember it means your utility bills will be larger as well, particularly the heating and cooling costs. If your utility company offers it, consider going on a plan that “equalizes” your bills over the course of the year so you’re always paying close to the same amount. It will make budgeting for utility expenses much easier.HOA – If you live in a neighborhood with a homeowner’s association, there will be monthly or annual HOA membership fees. There may also be fines assessed if you violate HOA rules, so be sure to learn what they are and stick to them to avoid paying the price.
Homeowners Insurance – Homeowners insurance protects your home, its contents, and other assets in case of fire, theft, accident or other disaster (certain geographical areas may require additional coverage for events such as floods or earthquakes).
Your homeowners insurance should cover the cost of rebuilding and refurnishing your home. Most policies allow you to pay annually or month-to-month. You may be able to save a bit by paying for a full year up-front. Plus, you won’t run the risk of coverage lapsing due to a missed monthly premium payment.
Property Taxes – If it’s not already included in your house payment, you will receive an annual bill for property tax, which is determined by the county in which you live, and based on the assessed value of your home. It’s a good idea to save a little bit throughout the year to go toward your property taxes, so you don’t have to come up with the full amount all at once.
Long-Term Expenses
Routine Maintenance and Repairs – Every homeowner must plan to perform routine repairs and maintenance. These expenses increase as homes age, but even new homes require regular upkeep to ensure they increase in value over time. In fact, neglecting basic home repair and maintenance can actually cause homes to decrease in value.
On average, homeowners spend one to four percent of the total value of their homes on maintenance and repair each year. Some years you’ll spend more, some less, but you’ll always spend something.
We recommend setting up a savings account devoted to home maintenance and contributing to it regularly to ensure you have the funds ready when you need them.
Emergency Repairs – In addition to routine maintenance, every homeowner will eventually face a major repair or replacement, such as an air conditioning unit or hot water heater. This is when having emergency savings ready comes in really handy.
We recommend establishing an emergency savings account (separate from the home maintenance account) that’s strictly reserved for catastrophic events, including major home repairs. By having emergency savings as a safety net, you can avoid going into debt by having to charge a big-ticket item.

Reverse Mortgage 101: Debunking Common Myths

With so many scams targeted at the elderly, many people wonder whether reverse mortgages are a legitimate option for generating cash or simply another scheme that exploits seniors.
Simply said, a reverse mortgage or Home Equity Conversion Mortgage (HECM) enables homeowners 62 years and older to convert part of their home equity into tax-free cash. It may prove a good solution for seniors whose savings accounts are dwindling or who simply need a little extra income each month.
If you or someone you love is considering this option, read on for Take Charge America’s top six reverse mortgage myths:

Myth: Reverse mortgages are exactly the same as home equity loans. The only similarity between a reverse mortgage and home equity loan is that both use the home’s equity as collateral. With a traditional home equity loan, borrowers make regular monthly payments toward the principal and interest. With a reverse mortgage, the loan isn’t due until you sell the home, live away from the home for 12 consecutive months, fail to pay property taxes or insurance, or pass away.
Myth: Your heirs will not inherit your home. Your estate will inherit your home, but there will be a lien on the title, which will include the financial proceeds from the reverse mortgage plus interest.
Myth: You may be forced out of your home. Actually, this loan was designed to help seniors continue living in their own homes for the rest of their lives. In fact, you will never be evicted or foreclosed upon unless you fail to pay property taxes and insurance or let your home fall into disrepair.
Myth: You can lose Medicare and Social Security. Not true. Reverse mortgages have no impact on Medicare and Social Security, though needs-based programs like Medicaid may be affected. To keep Medicaid benefits, you will need to manage your monthly withdrawal to ensure your income does not exceed Medicaid limits.
Myth: Reverse mortgages are costly. Yes and no. With a reverse mortgage and any other home loan, you are required to pay origination fees and closing costs. Depending on the type of loan you select, you may also be required to pay upfront mortgage insurance. That said, your heirs will never have to repay more than the home is worth, even if your loan balance is higher than the appraised value.
Myth: A reverse mortgage is a last-ditch option. Actually, reverse mortgages are best used as part of a comprehensive financial plan – not a last resort for seniors who can’t make ends meet. Under the right circumstances, this type of loan will supplement your income to allow you to live more comfortably in your golden years.

Before obtaining a reverse mortgage, the U.S. Department of Housing and Urban Development requires seniors to undergo reverse mortgage counseling from an approved third-party organization like Take Charge America. Certified HECM counselors guide seniors through the process, loan terms, financial and tax implications, and alternatives.

Precautions for Co-signers on Home Loans

Lenders require a co-signer when a consumer doesn’t qualify for a loan, either due to a lack of credit history or poor credit history. A co-signer is an individual who meets the loan requirements and agrees to cover the loan payments if the borrower requesting the loan is unable to make them.
The decision to co-sign a loan – or to ask a loved one to co-sign for you – shouldn’t be taken lightly. You must carefully weigh the pros and cons and take an honest assessment of your ability to pay back the loan in the future.
According to the Federal Trade Commission, numerous lender studies show as many as three out of four co-signers are ultimately asked to repay the loan. Co-signers who fail to examine the fine print may be stunned when they’re stuck with the bill. Not only can this cause a serious financial hit, it can strain personal relationships.Prior to co-signing any agreements, consumers need to educate themselves on the facts and potential consequences.
Did you know?

Once you co-sign a loan, there’s no going back. Co-signers cannot pull out of the loan midway through the term. They must take unexpected events into account, such as divorce or job loss, before signing.
Co-signing a loan for someone else may prevent you from obtaining credit for yourself. Lenders consider co-signed loans as one of the borrower’s credit obligations, even if they aren’t making the payments. The liability can prevent co-signers from qualifying for another loan or credit card.
If you co-sign a loan, you may be required to pay more than the loan amount. If a borrower skips one or more payments, late fees and collection costs can also be forwarded to the co-signer. Additionally, the co-signer may need to pay attorney fees if legal action is required.
Lenders can garnish the wages of co-signers. If the borrower and co-signer cannot repay a loan, the lender can sue the co-signer to garnish wages and even property in order to satisfy the repayment.
Co-signers can lose their property if the loan defaults. If a co-signer secures a loan with property, such as a home or vehicle, the co-signer risks losing those items if he/she is unable to make payments when required.

If you do choose to co-sign a loan for a family member or friend, there are steps you can take to limit potential problems. Keep copies of all paperwork on hand in case disputes arise, and ask the lender to notify you in writing if the borrower ever skips a payment. This move can prevent a trail of extra fees.
Co-signer rights can vary state-to-state, so make sure you research what you’re entitled to ahead of time, and what you’re not.

Do’s and Don’ts for Using Home Equity

Equity is the difference between a home’s fair market value and the outstanding mortgage balance. When the housing market crashed in the fall of 2007 and into 2008, many homeowners across the nation lost much, if not all, of the equity in their homes because the fair market value of their property’s dropped significantly.
Homeowners who do have equity in their homes have the option to borrow money against the equity they have built up with a loan or line of credit. In both cases, the house serves as collateral, which means the creditor may seize the home and sell it if the homeowner can no longer make the payments. Tapping into your home equity can be detrimental if you enter into the contract without fully understanding the repercussions.While risky, there are some instances when a home equity loan makes good financial sense, especially if you have a large amount of equity. To help you sort out the confusion, we’ve provided some common home equity do’s and don’ts:

DON’T use home equity to purchase unnecessary luxuries. Home equity shouldn’t be used for luxury items like a fancy car, boat, big screen TV or a vacation. The fleeting moments of joy aren’t worth putting your family’s security at risk.
DO use home equity for improvements or additions that add value to your home. Ideally, home equity is an asset and should be used for other assets. A home equity loan can be effective if it’s used for home improvements that maintain or increase the resale value of the home. It may also be appropriate to use home equity to purchase income-producing property or an investment that’s expected to generate a higher return than the cost of the loan.
DON’T tap home equity if you plan to sell in the near future. In order to sell your home, all debts on the house need to be paid off. It could be a poor move to tap home equity for improvements if you aren’t able to pay off the loan or line of credit prior to your desired sell date.
DO consider home equity to cover expenses from unexpected events. If you do not have emergency savings, your home equity can provide financial relief related to unexpected events, such as an injury preventing you from working. However, it’s ideal to have an emergency fund with at least three to six months worth of living expenses in a savings account. If you don’t have an emergency fund, we suggest you start making regular contributions now. Many consumers start with a $25 contribution each month, and then increase their contributions as their income allows it.
DON’T take out excessive equity. If you decide to use your home equity, don’t take out more money than absolutely necessary. This will help eliminate the temptation to spend the funds on unnecessary luxuries. Also keep in mind that a home equity loan or line of credit decreases the amount of equity you have in your home. If you have taken out too much equity and the real estate market drops, you can end up losing all the equity in your home. Further, if you have negative equity, the lender may demand immediate payment of the loan.
DO consider home equity for use in retirement. Retired homeowners who have paid off their mortgage can sell their home and cash out the equity by downsizing. Further, homeowners 62 and older have the option of reverse mortgages, which basically means the bank will give your equity back to you while you’re still living in it. The homeowner does not need to repay the mortgage for as long as he/she lives in that house.