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Category Archives: Credit Management

Six Credit Myths

Hello! The Financial Tip of the Week is back just in time for the cool fall Missouri weather.

There have been some changes at the Personal Financial Planning department at the University of Missouri:

Dr. Robert Weagley, Associate Professor, retired last fall, but he had stayed as chair of the Personal Financial Planning department for one year. After many, many long years of serving the students of the university and the people of Missouri, he has moved on to other pursuits including visiting grandchildren. He can still be reached at his MU email, weagleyr@missouri.edu.

Dr. Michael Guillemette, Assistant Professor, will be moving on to Texas Tech University at the beginning of 2017. He taught many of the personal finance courses in the Personal Financial Planning Department and published much research during his tenure here at MU.

With these changes in personnel, MU has career opportunities!

Here is the link to apply for the Assistant Professor position: https://goo.gl/QozR4c

Here is the link to apply for the department chair position: https://goo.gl/ucew2M

Now, since this is a financial tip, we didn’t want to end it before actually providing a tip. So below, please find six myths about credit. See you next week!

Six Credit Myths

A credit score is a number based on your past credit history used by banks, lenders, landlords, employers and many others to try and predict your future reliability. Your credit score matters, but it’s not always clear what hurts or helps your score. Here are six common myths about credit scores and the related truth.

  1. Myth: Having no credit history is the same as good credit.
    FALSE! While having no credit history is better than having bad credit history, it’s not the same as having a solid track record managing credit. You have to use credit to influence your credit score, and it may be tough to establish credit without a credit history and an established relationship with a financial institution.
  2. Myth: You need to carry a balance in order to improve your credit score.
    FALSE! Carrying a balance from month to month does not improve your score, but it will cause you to pay interest. You can establish credit just as well by paying your charges off each billing cycle.
  3. Myth: Your income is used to calculate your credit score.
    FALSE! Your income is not listed on your credit report and isn’t used to calculate a credit score. However, a lender may ask for proof of income to verify that you can repay a loan.
  4. Myth: You need to pay to view your credit report.
    FALSE! AnnualCreditReport.com provides a free annual credit report from each of the three credit reporting agencies. The site even has it’s own jingle (just make sure you’re only visiting annualcreditreport.com and not falling for other similar catchy ads that later require you to pay for something).
  5. Myth: Paying off and closing an account can help improve your score.
    Partly FALSE! Paying down your debt can help your credit score, but actually closing the credit account can change your percentage of available credit (amount borrowed/total amount available to be borrowed). Lenders prefer to lend to individuals that are not using much of their credit, and they also like to see long credit histories.
  6. Myth: The amount of money you owe alone determines your credit score.
    FALSE! As mentioned in the previous example, lenders review how much of your total credit you have borrowed as a percentage of what you could borrow. This part of the credit score involves your “utilization ratio”, and lower is better. If you are using most of the credit available to you, then lenders may be wary of lending you more money. For example, let’s say you have a credit card with a limit of $1000 and you owe $900. If that same card had a credit limit of $2000 and you still owed the same $900, you’d have a lower ratio (which contributes to a higher credit score).

A New Student Loan REPAYE-ment Plan

You would be forgiven if you missed the news about a new Federal Student Loan repayment plan that went into effect mid-December last year.  After all, for some that time is finals week, others it’s Christmas break, there is shopping and family gatherings and all sorts of other things begging for our attention.  Hopefully, nearly a month and a half into 2016, you are back into the normal groove and feeling receptive toward some newish and potentially helpful student loan news.

December 17th 2015 was the date that a new repayment plan went into effect for federal student loan borrowers.  The new plan is called REPAYE, and can be considered a close relative to the existing PAYE income driven payment plan.  Each plan share similarities, but also have major differences which should be taken into consideration when trying to decide between the two.
Pay as You Earn vs. Revised Pay as You Earn
Let’s begin with the similarities.  They are both income driven plans, meaning, your income and household size are used to determine how much you will have to pay each month.  Income is evaluated on a yearly basis to determine if a new payment amount should be used.

They can be used to repay Direct Subsidized & Unsubsidized, Direct PLUS loans made to students, and Direct Consolidation Loans that do not contain PLUS loans to parents.  If you’re not sure what type of loans you have, visit www.NSLDS.ed.gov, select the “Financial Aid Review”, and login to review what types of loans you have.

If the loans are not repaid in the maximum repayment periods, a borrower may be held liable for the tax consequences of unpaid debt due to loan forgiveness, but both repayment plans are eligible for use when working towards the 10 year Public Service Loan Forgiveness (PSLF) plan.

Now let’s explore the differences between the two.
Firstly, the REPAYE plan does not require a financial hardship.  Anyone can apply and take advantage of the benefits.  Borrowers also do not have to be “new borrowers”, a classification based on the date the first Direct loans were received.  It doesn’t matter when your loans were received, you are eligible for the REPAYE plan.

Undergraduate and Graduate borrowers also get different maximum repayment periods.  Undergraduate, like with the PAYE plan, can take as long as 20 years to repay the loans.  Graduate borrowers however, get an additional 5 years, bringing the maximum repayment period up to 25 years.  As mentioned before, failure to pay off the loans in the maximum repayment periods will result in loan “forgiveness”, and taxation on the forgiven amount.

In the REPAYE plan, the “amount of your payment is 10% of your discretionary income” (see below for an explanation of discretionary income).  This is different from the PAYE plan, where the “maximum amount of your payment is 10% of your discretionary income”.  You may have noticed the lack of the word “maximum” in the REPAYE plan description.  Good on you, because that’s one of the key differences between these two plans.  Under the older PAYE plan your payments are capped, and you would never have a payment larger than the amount of a payment for the 10 year Standard Repayment Plan, no matter how much your income increased.  Under the REPAYE plan, there is no such cap.  Meaning, if your income increases significantly over the life of the loan (20-25 years), your payments will continue to grow.  The upside to that is, as you approach the end of the repayment period, you will likely have less debt to be forgiven than under the PAYE plan, and therefore a smaller tax liability.

Another difference, and arguably a disadvantage for married borrowers, is that REPAYE considers spousal income regardless if taxes are filed jointly or separately.  Since spousal income is always taken into consideration, this could increase a borrowers overall discretionary income, increasing the monthly payment amount.

And there you have it, a brief breakdown of the new REPAYE Federal Student Loan Repayment Plan, and how it differs from its cousin the PAYE plan.  I would encourage you to continue reading below for a quick breakdown on how discretionary income is calculated.  For more information about Income Driven Plans, please visit:
https://studentaid.ed.gov/sa/repay-loans/understand/plans

https://studentaid.ed.gov/sa/sites/default/files/income-driven-repayment-q-and-a.pdf
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What is discretionary income you ask?  It’s your Adjusted Gross Income (AGI – Found on your 1040 tax form) minus, 1.5 times the Federal Poverty Level for your Household size.

Household Size Poverty Level
1 $11,880
2 $16,020
3 $20,160
4 $24,300

Source: https://aspe.hhs.gov/poverty-guidelines

So, if your AGI is $18,000, and you are a single person without dependents (household size of 1), your discretionary income formula looks like this:
18,000 – 1.5*(11,880) = 18,000 – 17,820 = $180 discretionary income
Which makes for a very small monthly payment because, 10% of $180 is $18, and your monthly payment is $18/12 = $1.50.  Yes, one dollar and fifty cents is your estimated monthly payment, under the REPAYE plan with $18,000 annual AGI and a household size of one.
Something to consider about a payment this small is that interest will continue to accumulate as you go through the life of the loan, meaning the balance owed will increase significantly over what was originally borrowed.  If the loan can’t be repaid within the maximum allotted time, the tax liability due to loan forgiveness could be substantial.

Bank Overdraft Protection Services

By Trish Savage, M.S., AFC® University of Missouri Extension Family Financial Education Specialist

Do you use an overdraft protection service from your bank or credit union? If so, you are one of the many consumers who do. Overdraft protection is an option most banks and credit unions offer to their clients so transactions (demands for withdrawal) will be processed and vendors will be paid even when there is an overdraft.

An overdraft occurs when the demand for payment arrives at your bank after you have written a check, have an electronic automatic bill payment processed, requested an ATM withdrawal or submitted a debit card transaction and there are insufficient funds in your bank account to cover the amount. Overdrafts can be very expensive because both vendor and bank can charge fees for transactions when there are insufficient funds.

The best way to prevent costly overdraft charges is to manage your cash flow. Simply put: know your account balance and spend accordingly. But, “life happens” and situations can arise when your funds don’t cover your spending. As with any product or service, buyer beware is a healthy approach for consumers. Bank regulators and the Consumer Financial Protection Bureau (cfpb) have been noticing the increase use and cost of these services. According to the cfpb “overdraft and insufficient funds fees generate over half of bank profits as the fees charged to consumers are high compared to the cost for the banks”. When a bank covers the amount that you are short instead of returning the check or declining the debit, basically, you make a short term loan (with fees and interest charged). Before signing up for an overdraft protection service, find out the bank’s specific options and fees as they usually have multiple ways to cover overdrafts, some more costly than others.

Tips for replacing the need for overdraft protection:

• create a spending plan based on your cash flow
• balance your checking account and view your accounts online for up-to-date balance
• start an Emergency fund for those unexpected financial demands
• arrange for email or text alerts to warn of possible overdraft
• arrange automatic deposit from income sources or use mobile bank deposits

Check out these articles for further information on overdraft protection services:

Is it Better to Use a Debit Card or a Credit Card for Purchases? Consider the Differences in Customer Liability Before Deciding

By Jesse B. Jurgenson

Whether it is better to use a debit card linked directly to a consumer’s checking account or a traditional credit card for most purchases is a common question that I have received over the last decade. It has mostly came from individuals whose concern lies not as much with their ability to pay for the purchases (low or interrupted income) as it does with a desire to make the most of the present consumer protection laws and continue down the path to meet their own long-term financial goals.

Assuming that you are one of the estimated 62% of the population who do not carry a balance on a credit card by paying the amount owed in full each and every month by the due date[1] and show financial maturity by not spending beyond your true financial ability, choosing between using a debit card or a credit card for most purchases may come down to a “what is in it for me?” question.

Some benefits of using a debit/ATM card are:

  • Saving yourself from yourself. A debit card increases the chances you will stay within budget since you are limited by the balance available in your account which lowers the risk of accumulating debt.
  • Access to your own money. Easily get cash from cash machines or cash back from purchases.
  • A built-in password. Having a Personal Identification Number (PIN) is an extra layer of security if the debit card is lost or stolen.
  • Ease of transactions. Debit cards are certainly safer and more convenient than carrying cash or checks and are accepted at a large majority of retailers.

A few benefits of using a traditional credit card are:

  • Credit reporting. Credit card activity is commonly reported to the credit bureaus and work to build a positive credit history (assuming you make at least the minimum payment by the due date) which will come in handy when you look to borrow money for larger purchases such as a house or a new-to-you vehicle. Generally speaking, debit card activity is not reported to the credit reporting agencies.
  • Universal acceptance. On top of being accepted at a large majority of merchants, certain transactions such as renting a car or hotel room require a credit card rather than a debit card to protect the merchant against damage you may cause to the vehicle or room.
  • Rewards and perks. Many credit cards offer benefits that you don’t see with debit cards such as cash back, airline miles, extended warranties, rental car insurance, travel insurance, purchase protection, roadside assistance, specific store discounts, or exclusive coupons.

However, there is one other difference between the two payment options that you may also want to consider. The concern over identity theft, unauthorized purchases, and retailer errors have garnered national and worldwide news recently with the massive payment data breaches from corporations such as Target[2] and The Home Depot[3]. Having shopped at both of those retailers during the suspected vulnerable times, I decided it was best for me to be proactive in protecting myself. I requested a new account number from my financial institution in addition to performing due diligence on my monthly statement. I was fortunate to not run into any issues, but what if an unauthorized payment had been made on my account and I had not noticed? Let us explore how the existing consumer protection laws, the Fair Credit Billing Act (FCBA)[4] and the Electronic Funds Transfer Act (EFTA)[5] may factor into making a decision to use the product that is best for you and your household.

Credit Card Loss or Fraudulent Charges[6]

Under the FCBA, your liability for unauthorized use of your credit card tops out at $50. However, if you report the loss before your credit card is used, the FCBA says you are not responsible for any charges you didn’t authorize. If your credit card number is stolen, but not the card, you are not liable for unauthorized use. This means that if the thief uses your card by phone or the Internet, you have no liability[7].

Call the card issuer as soon as you realize your card has been lost or stolen. Many companies have toll-free numbers and 24 hour service to deal with this. Once you report the loss or theft, the law says you have no additional responsibility for charges you didn’t make[8]; in any case, your liability for each card lost or stolen is $50. If you suspect that the card was used fraudulently, you may have to sign a statement under oath that you didn’t make the purchases in question

ATM or Debit Card Loss or Fraudulent Transfers

If you report an ATM or debit card missing before someone uses it, the EFTA says you are not responsible for any unauthorized transactions. If someone uses your ATM or debit card before you report it lost or stolen, your liability depends on how quickly you report it:

If you report: Your maximum loss:
Before any unauthorized charges are made. $0
Within 2 business days after you learn about the loss or theft. $50
More than 2 business days after you learn about the loss or theft, but less than 60 calendar days after your statement is sent to you, $500
More than 60 calendar days after your statement is sent to you. All the money taken from
your ATM/debit card account, and possibly more; for example, money in accounts linked to your debit account.

If someone makes unauthorized transactions with your debit card number, but your card is not lost, you are not liable for those transactions if you report them within 60 days of your statement being sent to you. If you can convince the bank that your notification failure was due to extenuating circumstances, it must extend the notification timeline for a “reasonable period6.”

Under the EFTA, a bank has 10 business days to investigate the matter (20 business days if your account is new) and report back to you with its results. If the bank needs additional time, it may, under certain circumstances, temporarily give you some or all of the disputed amount until it finishes its investigation[9].

Summary

The consumer protections currently provided by the EFTA and FCBA are very similar for both credit cards and ATM/debit cards as long as an individual notices the disputed item and informs their bank, credit union, or credit card issuer within a very short amount of time. Where we start to see a difference are when someone may not be spending the time to inspect their account transactions. The potential for unlimited loss is present with an ATM/debit card where that potential is not present with a credit card transaction. If you are an individual who uses a debit card for most purchases and does not keep a careful watch over their account transactions on a regular basis, you are increasing your risk of potentially losing money to errors and fraud.

Guest contributor Jesse Jurgenson is an AFCPE Accredited Financial Counselor and past Financial Counseling Supervisor with an NFCC certified non-profit family service organization. He is also a current Ph.D. student and Graduate Instructor in the Personal Financial Planning Department. 

Financial Tips for College Students

by Ryan H. Law

Today’s Tip is a re-posting of an article that I like to review at the beginning of each semester. For those just subscribing to the Financial Tip this will be a good overview of financial steps, while for those who have been with us longer it will be a good chance to review the items and see how you are doing.

Many college students are on their own for the first time and, for many of them, that includes being on their own financially. They are expected to earn money and manage their own finances along with their busy college schedules and social lives. Taking a few simple steps now to plan and properly manage your personal finances will lead to much more positive outcomes down the road.

Here are some financial tips for college students beginning the new semester:

  • Buy used textbooks or e-books when possible and compare textbook prices online.
  • Don’t be tricked by credit card offers that come with a bag of candy, free shirt or free pizza.
  • Before signing a lease, be sure you understand the entire contract. Many people will be signing leases now for fall semester, but before you sign it take some time and read over it carefully. Your lease is a legal document that is binding!
  • Educate yourself about student loans – know what types of loans you have, how much you owe, your interest rate, and what your monthly payment will be. For information on your federal loans, visit:  http://www.nslds.ed.gov.
  • Before turning to private loans to help pay for your education, visit your financial aid adviser to be sure you have exhausted all federal loan opportunities.
  • Stay away from payday loans – they carry very high interest rates and can trap you in debt for years.
  • Shop around for a bank account.  Different banks and credit unions offer a wide variety of products – from free checking to low rates on loans. You also want to consider convenience – it is helpful if there is an ATM or branch on campus or close to where you live.
  • Learn how to budget your money, including any refund checks you get from financial aid.
  • Don’t carry your social security card in your wallet, and don’t give your Social Security number to people that don’t need it. The only thing thieves need to steal your identity is your Social Security number.
  • Watch your eating out, entertainment and clothes spending carefully.
  • Track spending to help avoid buying more than you can afford.
  • Time is your best friend when it comes to saving for retirement – start saving now if you have a job and can invest a little for retirement.
  • Become financially literate – if possible take a class in personal finance and learn how to manage your money. For students at the University of Missouri the Personal Financial Planning department (http://pfp.missouri.edu) has classes that will help you learn how to budget, manage your credit and debt, invest, manage risk, and much more. It’s a great complement to any major as you will use the knowledge gained throughout your life.

Ryan H. Law, M.S., CFP®, AFC®

Personal Financial Planning Department
Office for Financial Success Director
University of Missouri Center on Economic Education Director