Financial Advice for All Life's Creeks

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Understanding Stock Investments: Common vs Preferred

Throughout your life, there will be many financial investments to plan for, like saving for college, your wedding, a home, starting a family, retirement, and end-of-life planning. Of course, if you want to live an exciting life that’s only the basics of survival in society; if you wish, you may also want to save up for financial investments for traveling, vacations, recreation, or even creating a small business.  
 
Creating budgets and planning for everything life could throw at you helps out a lot, however, sometimes the unexpected will happen which will possibly throw off your plans. It’s important to note that straying from your financial plans sometimes is okay! If there was one way to plan out every step of your financial life that prepares for every possible circumstance, everyone would be rich. 
 
However, it is important for even people in the lower financial percentile to do their best to create and follow a financial plan, as described here. If you’re having trouble creating a plan, there are plenty of free resources online and even paid professionals to help you out.  
 
Making a bit of extra money, like passive income, can always be beneficial. One way people like to accomplish this is to invest in stocks. When you invest in a stock, you are actually investing in a company to help them perform; they pay you back a higher percentage than what you invested, of course, but only if they become successful, so it’s quite a gamble.  
 
If you are interested in investing in stocks, you should research as much as you can about common vs preferred stock to improve your chances at making the right investments. A basic bit of information you can learn about right here is that there are two different types of stocks: common vs preferred stock. Common stock owners share company profits and also have the right to vote in company decisions. Preferred stock usually does not allow you to vote and involves less risk, but also less payout. 
 
There is plenty of knowledge to absorb to properly trade stocks, as well as plenty of ways to create a passive income. The first step, however, is to create your financial plan. 

Balancing Personal Concerns with DIY Investment Planning During Global Disasters

The recent economic turmoil in global markets has show how volatile the financial world can be. This volatility tends to increase dramatically during a global disaster or unexpected situation. During this time, it is easy to be concerned and wary of investing. However, there are several tips that should be followed that could help you to manage your personal concerns while also being a prudent investor during these challenging times. 
 
Allocate Based on Time Until Goal Deadline 
One tip that should always be followed when you are saving for a long-term goal, such as retirement or paying for a child’s education, is to manage your asset allocation based on the time until the goal deadline. If your goal is to prepare for retirement and you still have multiple decades until this date comes, you can be more aggressive and invest more heavily in stocks. However, if you are less than a decade away, more of your funds should be in low-risk bods. This will ensure you do not see your portfolio wiped out during a period of intense volatility. 
 
Do Not Panic Sell 
One of the biggest mistakes that people make during a period of turmoil is selling their assets too soon. When the market drops several days in a row and things appear rough, many people will end up selling to avoid further losses. However, when you do this, you are bound to miss out on the gains that follow a decline. While it comes with stress, you should avoid trying to time the market.  
 
Continue to Buy 
When the markets are declining, you should consider this to actually be an opportunity. In many cases, the value of the company that you are buying into will be much higher than the market capitalization during a recession. These declined stock prices will allow you to buy more shares, which eventually should increase back up in value.  
 
Take Advantage of Recession Benefits 
While there are a lot of challenges that come with recessions, there are some economic advantages as well. During a recession, you will often see a reduction in interest rates and prices on consumer goods. At this time, you should look to refinance your mortgage or see if you can get a good deal on the purchase of a car, electronics or furniture. Due to decreased demand, there are often great promotions that will save you a lot of money. 

Should You Rent Even When You Can Buy?

To buy or not to buy a house – it is one of the most pressing questions for many Americans today when the economy seems to be so vulnerable and unstable. There are a lot of potential homebuyers who have been saving for years to purchase a house but are suddenly wondering if it will be better to keep renting instead of buying a home. If you are one of them and you are struggling to make a decision, this article is for you. Let’s discuss when renting is a better idea than purchasing 
 
Maximum Flexibility is What You Want 
No one knows what the future holds for you, so it is important to stay flexible. If you are not sure how long you are going to stay in one place or you are searching for a job that might require you to move, then it is better to postpone your buying decision and keep renting. You might also decide to rent instead of buying if the economy in your current state or town is not clear. It is better to wait a little bit and see how the economic situation unfolds before investing money in a certain area.  
 
You do Not Want to Lose Money 
If you buy a house and then decide to sell it after couple of years, then you should be ready to lose money. To show you what we mean, here is an example. Let’s say you purchased a house in Miami for $200,000 and assume it appreciates about 5% in value. So you decide to sell it for $210,000. Unfortunately, you will not be able to receive the whole amount after the sale transaction because there are some closing costs you have to pay. They include a broker commission (about 5%), City Real Estate and State Transfer Tax, and some other closing fees. It total, it will be about 7% of the purchase price of the house, which is almost $15,000 in our case. So even if you are lucky enough to sell your house for $10,000 more than you purchased it for, you will lose $15,000. If you do not want to lose this amount, then renting is your best option for now.  
 
We understand that buying a house is a serious life decision, especially today. Therefore, we recommend you to consider all the pros and cons, and ask yourself the following questions:  

  • Are you planning to stay in this neighborhood, town, or state, or would you consider relocating in the future? 
  • Do you feel stable and safe enough to commit to a 30-year mortgage?  
  • Will you be able to sell this home without losing a lot of money? 

Do Health Savings Accounts Make Financial Sense?

A health savings account, or HSA, is a smart choice for anyone who has a high deductible insurance plan. The HSA is used to pay for out of pocket costs not covered by insurance. Money in the health savings account is contributed pre-tax and can grow tax-free in the health savings account. Money not used each year rolls over to the next year.  
 
Who Can Use a Health Savings Account? 
To qualify for a health savings account you must have a high deductible health insurance policy. The benefit of a high deductible policy is that it allows both you and your employer to pay lower premiums. You then use money from your HSA to cover healthcare costs not covered by your health insurance policy.  
 
You can pay for many medical, vision, and dental expenses with your healthcare savings account. Another benefit of health savings accounts is that others can contribute to your account, including your employer and even relatives. You can contribute money to the account pre-tax as well as post-tax. After-tax contributions can be deducted from your gross income, which will lower your tax bill.  
 
Any interest earned on your health savings account is tax-free, as is money spent from the account. Your HSA will follow you, meaning you get to keep the money that is in it when you change jobs or retire.  
 
Health savings accounts make sense for individuals with high deductible health insurance plans. You can use the money in your health savings account to pay for office visits, prescription medications, and many other healthcare-related expenses. Money that you have in your HSA is yours to keep indefinitely.  
 
It is important to note that if you withdraw money from your health savings account for expenses that are not healthcare-related you will be required to pay taxes as well as a penalty. If you make the withdrawal after the age of 65, you will owe taxes but not be required to pay the penalty.  
 
HSAs are a great way to make healthcare more affordable for several reasons. Not only does this create a dedicated account to pay for medical expenses, which often includes matching funds from your employer, but using a high deductible insurance plan lowers your monthly premium. 

Understanding Stock Investments by Style

Do you know what kind of investor you are? Most people are not even aware that there is more than one type, but there are. In fact, many investors don’t fall perfectly into one category or another, but they have some mixture of a few. Stock investments by style can be broken down in multiple ways as well, but the two most popular are value and growth stocks.  
 
Growth stocks
These are the stocks of companies that are growing at a rapid clip. Many investors are happy to pay more for these types of stocks because they are getting in on a company that has been accelerating rapidly. Paying up for that growth is what people will do. The companies represented in as growth stocks are likely to be names that the average person has heard of, and that makes them more comfortable to invest in for some people.  
 
Value Stocks
Investors sometimes go for value stocks because they prefer to play the market this way. These are the stocks of companies that are not necessarily growing as rapidly as the growth companies, but they have value to them because they have been beaten down too violently compared to what they are truly worth.  
 
Those stock investments by style are the two biggest options for people attempting to get started in the market. Most people gravitate towards one style of investing or another. Money can be made investing in either style, but a lot of the choice boils down to how comfortable a person is with a particular type of investment. It is often about getting to know yourself as best as possible. You will not succeed if you don’t learn which methods really work for you and why they do. Learn that, and you are all set. 

Understanding Stock Investments by Location

Stocks are often grouped up by the location of the companies that they represent. What this means is that the average investor may take a look at their portfolio and see which parts of the world they are invested in. Most people are pretty heavy on ownership of stocks within their native country, but it is often more helpful to spread the wealth around at least to some extent.  
 
Stock investments by location let an investor diversify his or her portfolio in such a way that an economic shock of some kind or another is not completely devastating to that portfolio in the long run. Today, investors can actually hyper-target their stock investments by location all the way down to particular countries that they wish to put their money to work in.  
 
There is a certain “king of the universe” feeling that may come with investing money in various parts of the world, but that is a good thing. One should work strongly to make sure their portfolio is well balanced and makes sense. There is little reason to work so hard at constructing the portfolio itself if one does not intend to build it into a diversified machine that works well in all conditions.  
 
Many people are highly thankful that they have spent time diversifying their portfolio when there is an economic shock of any kind in any part of the world. It is pretty easy to understand why. No one wishes to see their hard work and life savings go down the drain because they were too heavily concentrated in one area.  
 
The temptation to ploy money only into domestic investments is strong, but it is a temptation that must be avoided. There are far too many other options for a person to get involved with to waste money like this. Try to keep the money spread out and working at all times for you. 

Understanding Stock Investments by Industry

Newer investors should pay attention to a number of factors before putting their money to work. One of those factors are the stock investments by industry that they make. Should they load up on stocks from the technology sector because they hear the names of those companies batted around in the news? Does it make more sense to buy some consumer staples because they are more likely to interact with these brands on a regular basis? These are the questions to think about before making stock investments by industry.  
 
The industry of the stock is simply the type of business that the company is involved in. It can range from health care to manufacturing, from retail to semiconductors. There are a lot of industries that companies get categorized into, and it is vital to familiarize oneself with those industries so as to better understand which industries make the most sense for your portfolio.  
 
The most sensible piece of advice is to only invest in industries that you reasonably understand. In other words, don’t put your money to work in something that you cannot explain to a relative in just a few sentences. You are probably stepping beyond your bounds if you lay down money in something overly complicated.  
 
The particular industry that you put your investments in may be balanced based on the relative performance of that industry versus the others (i.e. buying industries that are selling cheaply at the moment), or it may be related to which industries you have the most personal knowledge of. Finally, some people decide to buy into industries based on their risk tolerance. For example, technology can be seen as a high-risk, high-reward kind of investment, but on the other end of the spectrum you have utilities which are considered very stable and reliable. Sometimes it is just about setting risk tolerance parameters and running with that. 

Understanding Stock Investments by Company Size

There is a universe of thousands of stocks available to choose from for your investment portfolio. The question must be asked about what kind of stocks to include in that portfolio. Should you put your money down on companies that are well-known to you and the rest of the world? Perhaps, but could you be missing out on some of the biggest gains on your investment.  
 
Stock Investments by Company Size  
Large capitalization (large cap) companies are those that are well-known to the world. They have a large capitalization because they have earned the trust and investment of the public over time. They have a lot of value to them because they are established companies and brands. They are considered the among the safest plays in the stock market because they already have a long track record of success. Many of these companies also pay a quarterly dividend to their loyal shareholders just for holding the stock. That can also be a valid reason to consider getting involved with them.  
 
The other side of the argument about investing is that sometimes the small-cap stocks make more sense. They can be used to find a smashing hit that others have yet to notice. Some of those smaller companies have not yet done enough to prove that they deserve big investments, but they can be just around the corner from major profitability. Those who invest early can get in on the ground floor of something huge. At the same time, the smaller companies also have a higher rate of failure than do the large ones. It is possible to lose it all on a bet on a smaller company. 
 
The risk tolerance of the individual investor is generally a good indicator of how they should make stock investments by company size. Many recommend putting the highest-risk investments out earlier on in life when there is more time to recoup the potential losses. As a person gets closer to retirement and requires more of their money, the shift to safer investments must occur at that point. 

Bond Investment Basics: Municipal Bonds

While there are several kinds of bonds, municipal bonds are among the most popular. A municipal bond is a government issued bond that is used to fun public services and planning, often being used to build roads and school, ports and airports and other forms of infrastructure. These bonds have recently been revitalized by new solutions utilizing technology to re-energize the system and make it more efficient. This has allowed for lower pricing and more accessibility for middle income investors where other binds might be too expensive. The trade of these bonds is far less restricted than generic stocks and are thus attractive to traders that wish to buy and sell their bonds more often, even as often buying and selling the same bond several times in a week.  
 
There are very clear and strict laws and regulations that cover how the money collected from the issuance of bonds and transactions are public and well-recorded, making these bonds attractive to the investor concerned with transparency and understanding of how their investment is being applied. They have competitive interest rates compared to similar alternatives, with an average interest rate somewhere around 4.5%. This consistency of return helps them to be a trusted and reliable place to invest over the long term.  
 
For the personal investor, municipal bonds are likely to always be a strong choice for investment, especially when the transparency of the issuer is of particular concern. 

Bond Investment Basics: Mortgage-Backed Bonds

Investing for the future is important for anyone. Whether your financial goal is to eventually retire, purchase a home, or to simply improve your financial position, considering all of your investment options is very important. One form of investment that you should consider are mortgage backed bonds.  
  
A mortgage backed bond is a unique form of investment that provides many advantages to investors. A mortgage backed bond is formed when a mortgage lender originates many different mortgages to people all over the country. They then are able to package these mortgages together and sell the loans back to a pool of investors.  
 
When you buy into one of these bonds, you are essentially buying a share of a pool of these mortgages. Investors are able to choose between a variety of different structures and pools of these bonds. The pools are structured based on the typical credit profile of the underlying mortgage. 
 
The mortgage-backed bonds provide a variety of unique advantages to investors. One of the advantages of these bonds is that it provides a rather low-risk investment option. While there were challenges with these bonds in the past, the nationwide mortgage default rate is rather low today. Plus, your investment is allocated across hundreds or thousands of loans, which diversifies your investment and offers an attractive risk profile. 
 
Another advantage of mortgage-backed bonds is that they offer a good investment return. Compared to other forms of bonds, the rates on a mortgage-backed security is higher and more attractive. This can make it a good addition to any investment portfolio. 

Bond Investment Basics: Foreign/International Bonds

Bonds and the yields that an investor gets from them are impacted by risk factors associated with those bonds. This is why the savviest investors look to foreign bonds as part of their portfolio. The foreign bonds allow them to diversify their portfolio and make the greatest return while at the same time minimizing the risk associated.  
 
International bonds come from companies overseas that need to raise money for some reason. Most companies in the world find themselves in need of capital at some point, and plenty of them turn to the public markets to get the capital they require. The fact that US investors might decide to buy some foreign bonds just make sense.  
 
Right now, the rates that one can get from US Treasury Bonds is not all that impressive. There are a lot of better rates out in the world of foreign bonds. The world is currently very unstable with a lot going on all at the same time. It is pretty advisable to try to grab some investments that can pay out some guaranteed rates during these questioning times. Bonds from overseas can be the perfect solution to the problem.  
 
The best thing to do at any time with a portfolio is to keep it diversified. This allows it to withstand the ups and downs of any market condition. The most successful investors have always spread their money out throughout the world. Bonds from another country are a key element to making it happen for the average US investor. 

Bond Investment Basics: High-Yield Corporate “Junk” Bonds

Michael Milken, known as the “Junk Bond King”, did some serious damage to the reputation of high-yield corporate bonds as an asset class. The investing public saw the collapse of a star like that as a sign that they should steer clear of this asset class entirely. While it is absolutely the case that no one should invest in high yield corporate bonds without excellent knowledge of what they are doing, it is not fair to say that they must always be avoided under all circumstances. That is just not accurate.  
 
Higher yield bonds pay a larger percentage rate in interest because they have a higher default rate than the average bond. In other words, they are higher risk but also higher reward. This is how investing works across the board. The individual who puts his or her money into high-yield corporate bonds is taking a chance on a company that has a spotty credit record from the past.  
 
Keep in mind the fact that a company offering a high-yield bond is not necessarily a company that is being poorly managed. Virtually all companies run into some financial difficulties at some point in time. A company issuing a high-yield bond may simply need to raise cash during a particularly difficult point in the cycle of the business. In that event, it is offering investors the opportunity of their lifetime to make some serious returns on their money.  
 
Every single person who invests in any asset should do their proper research and perhaps even consult with a financial adviser before making any moves. 

Bond Investment Basics: Investment-Grade Corporate Bonds

The Average Joe out on the street wants to invest his money in something that generates a reasonable return for him while letting him sleep easy at night. It is often easier said than done as so many investments available today don’t cut the standard either way. Investment-grade corporate bonds are one example of something that may be able to break through the glass and actually reach both objectives for an investor.  
 
Federal bonds used to be a great way to get a nice return without too much risk, but lately the market has pushed yields on these fair too low to make them worthwhile for most people. Corporate bonds still provide a decent yield in some circumstances. That can satisfy the need for a return on capital, but what will provide for the safety of that money? The answer is investment-grade corporate bonds.  
 
The term “investment-grade” in this case means that these bonds have been received by credit agencies and analysts and determined to be worthwhile of one’s investment. That is to say that their probability of default is below a certain threshold that makes them attractive. Not every single bond available in the world meets that description, but those rated investment grade have.  
 
These bonds are typically issued from public companies that are relatively well-known and consistently producing profits. That means that they are likely to continue to pay the yields that they have for some time, and they stand a good chance of making it through whatever storm could come their way. They make for a great investment for many, and they still provide some very solid returns in turbulent times. 

Bond Investment Basics: Non-Treasury Government Bonds

When planning your life out, it’ll be fun thinking of your dream career, your wedding with the one you love, and all the travel you want to do. Unfortunately, all of these life decisions cost money, as well as planning for things like starting a family, retirement, and your end-of-life plans. The good news is that you can start now with making a financial plan. It doesn’t have to be daunting, and missing a step of having to accommodate for unplanned occurrences are normal and should not bring you down. 
 
Financial planning involves figuring out how you are going to make money. Investments and other forms of passive income are a great way to guarantee extra money in the future to help you out in a pinch. Investing in government bonds can be a great start. There are different non-treasury government bonds to choose from, including the Federal National Mortgage Association, Government National Association, the Federal Home Loan Mortgage Corporation, and a few others. These bonds, also called agency bonds, are issued by federal agencies. Non-treasury government bonds differ from treasury bonds by not being full-faith-and-credit obligations of the government, and a minimal credit risk. However, the interest gained on these bonds are taxable.  
 
If deciding to invest in government bonds, it’s best to do plenty of research to make sure you are choosing the right one for your needs. Government bonds can result in a great pay-off in the future, so many people find it beneficial to invest sooner rather than later. 

Bond Investment Basics: U.S. Treasury Bonds

Bonds, especially U.S. Treasury Bonds, comprise a mainstay holding, along with stocks, cash equivalents and real estate, for many investors. But just what are bonds, and how do they differ from stocks? Let’s take a deeper look. 
 
Bonds are essentially IOU’s. The Issuer of the bond promises to give the entire principal investment back to the investor after a specified period of time, ranging from less than a year to up to 30 years. The bond issuer pays the investor periodic dividend income for the privilege of using the investor’s money. Many investors count on this periodic income to fund their expenses. 
 
Different government and corporate entities issue bonds. Because not all issuers are as creditworthy than others, bonds are independently rated regarding their safety. The United States government is a big issuer of bonds. Because the risk of government default is so low, U.S. Treasury bonds carry a high safety rating. 
 
There are several ways to invest in Treasuries. The simplest way is to buy individual bonds directly from the federal government, collect semi-annual dividends, and hold the bonds until they mature, at which time you’ll get your full investment back. Many investors buy bond mutual funds, where individuals participate in professionally managed portfolios of bonds. Be aware that if you invest in bond mutual funds, there is no guarantee that you’ll get your exact investment back. You may get more or less in return, depending largely on the trajectory of interest rates while you hold the bond fund. 

How to Invest in the Stock Market When You Don’t Have Money

Most people think the stock market is only for the wealthy. In fact, I felt the same way until recently. I thought I needed thousands of dollars to start investing. That’s what the movies tell us, right? Only people who have thousands of dollars lying around can reap the benefits of investing in stock.  

This myth holds many people back from making a responsible (and sometimes fun) financial decision. It’s understandable – why would you throw money into a black hole without knowing what will come out? Here’s the thing about that: You can make tiny, tiny investments if you want. Some stocks trade at just $5 a share. You won’t become a millionaire overnight with a small portfolio like that, but it’s a great way to start learning more about investing. Maybe, eventually, you’ll make larger investments, and then we can talk about becoming a millionaire.  

So, how do you invest in the stock market with limited discretionary funds? Here are a few tips. 

Work with What You Have 

The stock market will require you to save some money. Not necessarily thousands of dollars, but some. You don’t want to dip into emergency savings or cut your food budget in order to make a small investment. Keep your change for a few months and add it up. Cut a few subscription services out of your budget and see how much it comes to. You can invest on your own, with an app like Robinhood, with no minimum, but you’ll need to start somewhere.  

Ask Your Employer 

You know that 401(k) plan your employer helped set up? That’s the easiest way you can get into the stock market. It’s typically handled through the employer, and you can put investing on autopilot, but it’s a start. This is a great way to start investing with no money, and you can set up automatic payment transfers to ensure you’re contributing every month.  

Invest with an App 

Financial tech is making it easier to invest in the stock market without the help of a professional. These apps, known as micro investing apps, can help individuals invest small amounts of money in small stocks and index funds, growing wealth as passively or actively as you want. I’ve already mentioned Robinhood, but Stash Invest and Stockpile are similarly popular options.  

Don’t Give in to Excuses! 

Figuring out the stock market can be difficult, especially if you’re new to financial literacy. That said, this stuff is pretty easy once you get the hang of it. Start small and use it as a learning tool. Then, when you’re ready, make larger investments and see what happens! 

Quick Tips for Beginning Your Student Debt Payoff Journey

Close to 50 million Americans have some form of student loan debt, totaling close to $1.5 trillion at the end of 2018. For the first time in history, this debt is higher than credit card debt or auto loans. All of this is to say that if you have student debt, you’re far from alone – but that doesn’t mean you should ignore it. 

It can be easy to delay paying down debt. It might feel like you have so much to do that you’re unsure of where to go first. Confidence is key to any financial decision, and paying off debt is a huge, identity-shifting experience. That said, there are a few ways you can start the process, which will then turn into good habits. Eventually, you’ll achieve financial freedom.  

Start a Change Jar 

It sounds dumb, I know, but it’s a start. Set a jar out on your dresser and collect all your loose coins at the end of the day. That’ll eventually accumulate into something bigger, which you can then deposit at the bank. This is a great idea if you’re still in the grace period between graduation and debt repayment. Maintain this jar for those 6 months and use what you’ve collected to make your first loan payment. It’ll make the process seem easier and the payments themselves more attainable.  

Consolidate 

Interest is one of the biggest challenges to paying off student debt, but the less you pay in interest, the more you can put toward the balance itself. Consider consolidating your debt to achieve a lower rate. This will also make it easier to balance multiple payments, as you’ll have only one bill to deal with each month.  

Re-Work Your Budget 

It might not be fun, but you should prioritize your student loans every month (after household expenses, of course). Spend some time calculating your budget. If you can stand to cut a few dollars from going out expenses, or maybe food, put that money toward loans instead. There is always a cheaper way to shop. 

Cancel Unused Subscriptions 

There’s no sense in having a membership or subscription if you don’t use it, especially if you could use that money to pay off debt. Go through your bank statements to see how many subscriptions you have, then total them up. If you only use Netflix to watch a movie once every month, it might be time to cancel.  

What Determines a Mortgage Interest Rate?

As a matter of fact, it is universally accepted that the higher a person’s credit score is, the lower the risk that person poses to a lender and therefore the lower rates of interest that person will receive with credit. On the flip side of the coin, the lower a person’s credit score, the higher risk they pose and the higher interest rates will be for credit applications. 

The same rings true for all credit applications, whether it is for a car, credit card or mortgage. While different countries and credit agencies employ different credit ratings and scales to determine a person’s credit score, they all have the above risk to reward ratio in common with lenders credit terms. 

To find out the level of interest and monthly repayments on a particular mortgage for a certain individual, firstly a credit report should be ordered from one of the main credit agencies such as Equifax or Experian. Once the credit score has been determined, research on the Internet will uncover the typical APR rates from various lenders to people with similar credit scores. These, while not exact, will give a good indication of expected rates and terms. 

Using the FICO scoring model as an example; if a person’s credit score is between the 490 to 580 region, mortgage interest rates are likely to be about four points higher than the best rates available. At the 581 to 620 level, rates will improve to about 2.20 points higher than the best mortgage rates. From 621 to 660 there will be about a 1.5 point difference and then between 661 to 700 only a difference of 0.5 points, this lowers to 0.25 points at 701 to 760. At the maximum ‘prime’ section of the credit scale of 761 and above, the interest rate on a mortgage will be the best that is available on the market. Please note that the above figures are all approximate and to be used as a guideline only. 

Understanding a Deed in Lieu of Foreclosure

Should a person find themselves in financial difficulty for whatever reason, whether it be through redundancy, illness or another factor and they cannot maintain their mortgage repayments, that person may consider a ‘deed I lieu of foreclosure’ should they be unable to either sell their property or work out a plan to resolve the situation. 

If a deed in lieu of foreclosure is arranged, it negatively affects the borrower’s credit score by as little as 50 points to as much as 250 points depending on the credit bureau that it is reported to. This is a major deduction of a person’s credit rating similar to that of bankruptcy and will have short and long term consequences on the credit available in the future. When a deed in lieu of foreclosure is reflected on a credit report for seven years. The impact of the deed in lieu does diminish over time, however credit applications within the first two years especially could be difficult to come by and offer high interest if they are agreed. Once the deed in lieu is seven years old, the entry can be requested for removal by the client by notifying the relevant credit bureaus. 

A new mortgage is an unlikely scenario for a person with the deed in lieu of foreclosure within the first two to three years of the entry being added to the person’s credit report. However the credit file can still be repaired by keeping existing or new credit products in good stead. For example by making payments on time and not meeting or exceeding credit limits. By doing this in the duration of the initial two or three years since the deed in lieu, the probability of obtaining a new mortgage at that time will be higher and more favourable interest rates and terms will likely be offered. 

A deed in lieu of foreclosure could mean the single biggest significant drop on a person’s credit score. Even premier credit scores of 850 may reduce to a level of 600 should this happen and though a score of 600 would attract Subprime lending, due to the deed in lieu entry on the credit history, this could prevent lending altogether, even with an average credit score. 

Tips on How to Fix My Credit

Credit problems seem to flourish lately. Debt can be the bi-product of credit card spending or from online personal loans that were not paid back on time. While the act of fixing a person’s credit completely may not be realistic, there are important steps that can be taken to certainly improve the credit history and therefore credit score.

Below is a guide to help achieve this. By following these steps, over time, a person’s credit score will be improved without fail. It is important to realize however, that credit scores are not updated daily by the credit bureaus and any changes made to a person’s credit history may take at least thirty days to be amended. Patience is the key to fixing credit scores.

  • Review the credit report and ensure that there are no irrelevant entries that are negatively affecting the credit score. These may be old loan agreements that have been paid, wrong data such as the amount of a credit limit or even somebody else’s data mixed up with another’s. The credit bureaus need to be made aware of these to remove them from the credit file. This may increase a credit score quickly and is a simple process;
  • Ensure that on credit agreements with a maximum expenditure limit such as a credit card that the balance remains below 30% of the total credit available. Credit bureaus use the balance to help determine credit worthiness;
  • Ensure payments are made on time and in full for all credit agreements. Even one or two late payments can have a big impact on a credit score;
  • The following have the most negative effect on credit scores, they are in order of importance and should one still be on file when it can be removed – request it to be removed immediately; bankruptcy, foreclosure, repossession, loan defaults, court judgements, collections, past overdue payments, late repayments, credit rejections, credit enquiries;
  • If an individual has little or no credit, applying for more credit products will help build a better credit history. Therefore credit ratings will improve if these accounts are kept in good standing;
  • Ensure repayments are made on time by setting up a direct bank payment from a bank account. If there are available funds in the bank account, late repayment defaults will be avoided altogether;
  • Use a credit card regularly. If little history is built up credit scores will not improve. The best idea is to use a credit card for a small purchase and then pay off the balance in full each month;
  • Do not apply for too many credit applications in a small period of time. Each application will be noted on the credit file and will act in a negative manner;
  • Avoid too many credit card balance transfers, these may save a person money, however they will negatively affect a credit score;
  • Ensure that the individual is registered to vote at a certain address;
  • If possible try not to change address or job frequently;

It is important to realize that credit cannot be repaired if a person’s finances are in a negative state. If bills and repayments re still being missed then credit scores will not improve no matter whatever other action is being taken. Repairing credit history takes a considerable amount of time, so patience is required.

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