For most people, making a major purchase like a car or home requires getting a loan. Not to mention that many employers now check credit histories when evaluating job candidates.
Getting a loan requires having a good credit history, so that lenders can see you are not too much of a risk. This is especially true now that the lending bubble has burst and lenders are forced to go back to sensible lending practices. Many people may either have no credit, or may have tarnished credit and are not currently able to get a loan. There are ways to fix this though.
The first way is to get a co-signer for the loan. This lets someone with no or poor credit get the loan, however, the co-signer is legally responsible for the loan if the borrower doesn't pay, whether they ever use the collateral or not. Co-signing loans is more risky for the co-signer than anyone else, especially if they have a good credit score they wish to protect. Many relationships have been ruined with the co-sign method.
For those who don't want to ask their family or friends to co-sign, there are other ways to build up that credit score. None of them are instant like the co-sign, but they can help you to build your credit on your own without potentially ruining your relationships.
One method to establish or repair credit is to set up a savings account, and then getting a secured loan that is secured against the balance of the savings account. Generally the minimum for this type of loan will be around $2,000, but if you have a history with the bank, talking to a manager might get them to lower the minimum. Because the loan is secured against the balance of the savings account, the bank risks nothing, and also collects interest on the monthly payments. Note that you will not be able to withdraw your savings while you have a balance on your loan. Obviously it will take time to save up the $2,000 but it will be worth it if you finally have established your credit.There may be a temptation to pay the loan off right away, but that won't help your credit score, which is the whole point of doing it. Take at least a year to pay off the loan, and make sure every payment is on time or early. You'll pay a loan creation fee and interest every month, but it will be worth it when you have good credit. Installment loans also tend to carry more weight than revolving debts on credit reports.
Another method in the theme of using secured debt is the secured credit card. A secured credit card is one which you pay money up front that you wish to eventually spend via the card, and your available balance is updated with the monies you have sent in. The card issuer risks nothing since your payments are made before you are able to use the card. These cards are very easy to get and are great for starting or repairing a credit history. Again, you want to make sure you make all of your payments on time or early. There is usually a start-up fee for these cards, and some carry annual fees as well. Again, these fees are worth it if it helps you to get lower interest rates when you make a major purchase like a house.
Other tips for keeping your credit score high are to monitor your debt to income ratios, and also your total outstanding debt to credit limit on your revolving debts (credit cards). Keep these low to show that you can handle debt responsibly. Lastly, pay all your monthly bills on time every month. Its a great habit to have. Remember, its all about showing the lender that you are not a credit risk.
Wednesday
The Equity Scam
The Equity Scam
"Buy real estate now. Build equity!" We've all heard these statements by realtors, investment experts, and banks. You buy real estate now and over time you build equity in the property. But what is equity, really?
The simplest definition of equity is the difference between what someone owes on a piece of property and what it is worth. So, if a piece of property is worth $100,000 and the borrower (technically, the bank is the owner) owes $60,000, then the borrower has $40,000 of equity in that property. The borrower can then apply to a lending institution and get a loan on that equity, often up to the full amount of equity in the property.
So how is equity bad? Because it involves borrowing, and uses the home as a collateral. If the borrower defaults on this new debt for whatever reason, they are at risk of losing their home, even if they are current on their first mortgage. Also, if the borrower has to sell, they now have to sell at least at the price that covers both the first and second mortgage, which can be tough if the housing market is in decline, as so many homeowners have discovered over the last few years.
Some argue that equity is great because when you sell the home you have this lump sum of cash, but if the homeowner has sold their primary residence, they now need to find another place to live. Profits can quickly be eaten up in new mortgage and title fees for the new home, and by realtor fees in selling the old one.
This theory does work for those homeowners who decide to sell a large home and downsize into a smaller, less expensive home, but the average consumer wants to at least maintain their current standard of living. Banks know this.
Consumers who have overburdened themselves with credit card debt can often get a consolidation loan with a much lower interest rate by using home equity. The danger though is if the consumer hasn't learned any lesson, they run the risk of running up credit card debt again and again being overburdened. And banks know this.
The solution to this is for the consumer to develop good credit card habits by only using them when necessary, and by practicing sustainable purchasing habits. Only buying goods or services when they can pay for them in full up front is the best habit to have to stay out of credit card debt.
The one positive about equity is that it is there in case of a financial emergency, and knowing that can help relieve stress for many consumers. Far too often though, it is used unwisely, as in for purchasing cars or other depreciable goods, starting risky businesses, or paying for a child's college tuition (they have loans for that). Any time an equity loan is taken out, the borrower risks losing their home if they default.
If you must use an equity loan, use it wisely. Use it for an emergency. Don't listen to the banks, they want you to be borrowing forever. Focus on paying down your debt, not on adding more.
"Buy real estate now. Build equity!" We've all heard these statements by realtors, investment experts, and banks. You buy real estate now and over time you build equity in the property. But what is equity, really?
The simplest definition of equity is the difference between what someone owes on a piece of property and what it is worth. So, if a piece of property is worth $100,000 and the borrower (technically, the bank is the owner) owes $60,000, then the borrower has $40,000 of equity in that property. The borrower can then apply to a lending institution and get a loan on that equity, often up to the full amount of equity in the property.
So how is equity bad? Because it involves borrowing, and uses the home as a collateral. If the borrower defaults on this new debt for whatever reason, they are at risk of losing their home, even if they are current on their first mortgage. Also, if the borrower has to sell, they now have to sell at least at the price that covers both the first and second mortgage, which can be tough if the housing market is in decline, as so many homeowners have discovered over the last few years.
Some argue that equity is great because when you sell the home you have this lump sum of cash, but if the homeowner has sold their primary residence, they now need to find another place to live. Profits can quickly be eaten up in new mortgage and title fees for the new home, and by realtor fees in selling the old one.
This theory does work for those homeowners who decide to sell a large home and downsize into a smaller, less expensive home, but the average consumer wants to at least maintain their current standard of living. Banks know this.
Consumers who have overburdened themselves with credit card debt can often get a consolidation loan with a much lower interest rate by using home equity. The danger though is if the consumer hasn't learned any lesson, they run the risk of running up credit card debt again and again being overburdened. And banks know this.
The solution to this is for the consumer to develop good credit card habits by only using them when necessary, and by practicing sustainable purchasing habits. Only buying goods or services when they can pay for them in full up front is the best habit to have to stay out of credit card debt.
The one positive about equity is that it is there in case of a financial emergency, and knowing that can help relieve stress for many consumers. Far too often though, it is used unwisely, as in for purchasing cars or other depreciable goods, starting risky businesses, or paying for a child's college tuition (they have loans for that). Any time an equity loan is taken out, the borrower risks losing their home if they default.
If you must use an equity loan, use it wisely. Use it for an emergency. Don't listen to the banks, they want you to be borrowing forever. Focus on paying down your debt, not on adding more.
The Savings Scam
The experts tell us we should be saving for our retirement. They suggest we should have a savings account. Lets analyze this for just a moment, too see who it really benefits.
Current interest rates for savings accounts are at the lowest in history, at a paltry average of 1-2% This means for every $100 you give the bank to hold for you, you get back $1 or $2 PER YEAR. Meanwhile, the bank is lending out your money to others at 4% for prime mortgages, up to 12% for subprime, or risky, mortgages, and up to 30% for credit cards! The banks, even after all their expenses, are making huge profits off of your money, and rewarding you with only 1 or 2% PER YEAR. And some banks even have the nerve to CHARGE their customers for having an account with them.
JP Morgan Chase, for example, posted a $17.37 billion profit in 2010. $17 BILLION in profit, off of their customers' money. And how much of that profit is going back to the customers? That's right, none. Some of it will go to the shareholders, the majority of which are Wall St. and the Board of Directors. They thank you.
Current interest rates for savings accounts are at the lowest in history, at a paltry average of 1-2% This means for every $100 you give the bank to hold for you, you get back $1 or $2 PER YEAR. Meanwhile, the bank is lending out your money to others at 4% for prime mortgages, up to 12% for subprime, or risky, mortgages, and up to 30% for credit cards! The banks, even after all their expenses, are making huge profits off of your money, and rewarding you with only 1 or 2% PER YEAR. And some banks even have the nerve to CHARGE their customers for having an account with them.
JP Morgan Chase, for example, posted a $17.37 billion profit in 2010. $17 BILLION in profit, off of their customers' money. And how much of that profit is going back to the customers? That's right, none. Some of it will go to the shareholders, the majority of which are Wall St. and the Board of Directors. They thank you.
Lets look also at how long term savers get the short end of the deal, especially when interest rates are this low. The reason is inflation, which destroys any real growth savers might hope to see. If interest rates are between 1-2%, and core inflation is also at 2%, savers aren't realizing any real growth, and may even be losing real purchasing power in their savings. If interest rates for savings lag behind inflation rates, over the course of decades savers who thought they were doing the right thing are surprised to find out they don't have enough for retirement or making that big purchase.
So what can you do? One thing you can do is to deny the banks their easy source of capital. By closing our savings accounts, we let the banks know they need to offer more to get OUR money. Demanding higher rates and no fees puts you back in control as the consumer. If you don't like the idea of closing your account, you can at least do some research and find out which bank will offer you the highest return. Remember, its your money, not the bank's.
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