Financial Topics Archives | Page 351 of 823

Aug

2024

How Will Student Loan Forgiveness Be Paid For?

By Melissa Brock | Going to College, Student Loans | Comments Off

The question of how student loan forgiveness would be funded doesn’t have a clear-cut answer, and ideas about how it would be paid for can be heavily influenced by a person’s political leanings. One recent survey found that the majority of Democrats support canceling some or all student debt, while most Republicans oppose any cancelation. Read on to learn more about this important issue.

Who Pays for Student Loan Forgiveness?

There’s no easy answer in terms of how plans to cut student debt would be funded. Government finance is complex. Typically, the federal government would need to foot the bill for student loan forgiveness, and the government would have two options to pay for it: cut spending or raise taxes. Making the situation more complicated is the fact that forgiven loans may have already earned a profit, which could make reconciling the impact of writing off this debt even harder.

In addition, viewpoints on student loan debt are often divided by political affiliation. Democrats are more likely to support debt cancellation and hold the government and lenders responsible for the high levels of student debt. Republicans, on the other hand, usually are against the idea of student loan forgiveness and often feel the borrowers themselves should shoulder some of the blame for the situation.

Spending Cuts and/or Higher Taxes

If some or all student loans were to be forgiven, here’s a closer look at some potential paths:

• Cutting spending, which can be challenging. Some financial and legal experts worry that cuts would wind up hurting education resources, such as universal pre-K and higher education initiatives. These could be trimmed to save money.

• Raising taxes, which could involve increasing individual income tax rates or reducing tax deductions, such as mortgage interest, charitable contributions, medical expenses, IRA contributions, and more. The government could also opt to raise taxes on corporations and the wealthy.

• A combination plan of the two methods: some tax cuts along with some tax hikes.

Neither Is Necessary

Another point of view to consider: Some pundits say that the cancellation of federal student loan debt won’t cost the government anything. They point to the fact that student loans were paid for by taxpayers when the funds were first disbursed.

They also hold that, over time, payments by borrowers of student loans to the Department of Education have almost been equal to the amount of money loaned out. In that way, they see the situation of forgiving loans as being close to break-even. One review found that the government collected about $85 billion a year in payments on about $95 billion a year in loans paid out. In terms of government spending, they believe forgiveness would not result in a major shortfall.

Proponents of this theory also say that records reveal that the Department of Education has been profiting on student loans over the years, and that gain can also be seen as an asset against which canceled federal loans can be compared.

Obviously, this is a complex issue with many different viewpoints regarding the best path forward.

💡 Quick tip: Some student loan refinance lenders offer no fees, saving borrowers money.

The Current State of Student Loan Forgiveness

It can be helpful to keep in mind the recent events surrounding student loan forgiveness.

• The Biden administration announced a $441 billion federal student loan debt relief program for borrowers who earned less than $125,000 ($250,000 for married couples) in 2022. This was blocked by the Supreme Court in 2023.

In the wake of this decision, the Biden administration proposed new initiatives in April 2024 to forgive $7.4 billion in student debt, including waiving:

• Accrued and capitalized interest for certain borrowers

• Debt for those eligible for the Saving on a Valuable Education (SAVE) Plan, in the event of a closed school discharge, and other forgiveness programs

• Student loan debt for those who entered loan repayment 20 years ago

• Debt for those who enrolled in programs or institutions that provided low financial value

• Debt for those who experience repayment hardship

In May, the U.S. Department of Education announced cancellation of $7.7 billion for certain borrowers under Public Service Loan Forgiveness Program (PSLF) and through the SAVE Plan, which offers borrowers a shortened forgiveness period. However, court orders recently halted the SAVE program after several states sued.

Where Does All the Canceled Debt Go?

It’s hard to say where all the canceled student debt would go, and it’s also difficult to forecast how much forgiving debt would cost the government, if anything. The government would at least have to adjust its revenue projections, even when the original principal has been paid off with interest.

One important note: Canceled student debt can have a positive impact on borrowers. It gives them more disposable income, which they can use in ways that stimulate the economy, from buying more consumer goods to taking out more mortgages.

Will My Taxes Increase if Student Loans Are Forgiven?

Many believe that federal student loan forgiveness, as planned, could transfer debt from borrowers who took out student loans to taxpayers, according to the U.S. House Budget Committee. This is a viewpoint that tends to be held by Republicans who are opposed to forgiveness for various reasons.

The Budget Committee has stated that approximately 87% of adults without student loans will wind up paying for the 13% of borrowers who borrowed for college and 56% of the student loan debt for graduate degree borrowers.

Currently, some estimates say that $1 trillion in federal student loan cancellation would mean an additional $2,500 tax bill for most Americans.

Another angle to consider: If borrowers’ debt is forgiven, it could be taxable. Borrowers would receive IRS Form 1099-C in this instance, and might need advice from a professional tax preparer.

Recommended: Guide to Student Loan Forgiveness

Will Private Student Loans Be Forgiven?

The Biden administration’s student loan forgiveness plans would not cancel private student loans, which come from private companies, including online banks. The forgiveness plans only apply to those with federal student loans, or loans that come from the U.S. Department of Education.

Unlike federal student loans, which borrowers apply for using the Free Application for Federal Student Aid (FAFSA), you can apply directly to the lender for a private loan. Unlike in the case of federal loans, you may need to undergo a credit check and may encounter less flexible repayment plans with private student loans.

However, private loan lenders may offer some benefits that are similar to those of federal student loans, including deferment (when borrowers can temporarily stop making payments and interest may not accrue), forbearance (when borrowers can temporarily stop making payments or make smaller payments and where interest does accrue), or unemployment protection.

It’s wise to check carefully with your lender to find out their exact policies.

Alternative Options for Paying Off Student Loans

Since the future of forgiveness is largely uncertain, borrowers can consider other ways to pay off student loan debt. They can take advantage of several alternative options, including putting extra toward principal, considering other repayment plans, making lump sum payments, and additional methods.

Here are several possible options:

• Put extra toward the principal: Putting extra cash toward your principal student loan can result in a faster payoff than by simply making your usual monthly payment. Putting an extra $100 toward your principal every month, for example, can make a difference. You will typically not pay prepayment penalties on private or federal loans, which is a charge that penalizes you from paying off your student loans early.

• Make lump-sum payments: If you have a lump sum, like a tax refund, a bonus, or other windfall money, you can put that toward your debt instead of spending it. If you can find extra money regularly (such as a couple of times a year), that could help you pay off your student loans. A side hustle can also help you make lump-sum payments as well.

You might also consider using the debt snowball method of taking care of your loans, which means you put money toward your smallest loan balance, then progress to larger loan balances after that.

• Check with your employer: Your employer may offer a student loan repayment benefit. Learn whether your employer will help pay for qualified educational expenses, including your student loan balance.

• Budget your money: Living on a budget is a great way to ensure you make on-time student loan payments. Though you’re shielded from penalties on late payments through September 2024 through an on-ramp period, it’s still good practice to avoid late payments so you don’t risk default later.

• Refinance or consolidate student loans: Refinancing means changing one or more loans to private student loans with a new interest rate, term, and monthly payment. Securing a lower interest rate means you’ll pay less interest over time. However, it’s important to be aware that refinancing federal student loans in this way means you will forfeit the right to certain benefits and protections, such as deferment. Also, if you refinance for a longer term, you may well pay more interest over the life of the loan.

• Consolidating federal student loans: This means pooling one or more federal student loans into a Direct Consolidation Loan with one monthly payment with one interest rate. You may save money over time when you consolidate, but check to be sure.

• Repayment plans: Several repayment plan options exist for both federal and private student loans. For example, with federal loans, you may look into several income-driven repayment plans, such as the SAVE, Pay As You Earn (PAYE), income-based repayment (IBR), and Income-Contingent Repayment (ICR) plans as repayment options. Check with your loan servicer to determine which makes sense for you, whether you have a mix of federal and private loans or just federal loans.

The Takeaway

There are different opinions about how federal student loan forgiveness will be paid for, if and when it’s enacted. Viewpoints often align with a person’s political beliefs, with Democrats tending to favor loan cancelation and Republicans being against it.

Regardless of the future of student loan forgiveness, there may still be options to help you manage your student debt, such as budgeting, considering alternate repayment plans, or refinancing.

Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.

With SoFi, refinancing is fast, easy, and all online. We offer competitive fixed and variable rates.

FAQ

How will student loan forgiveness be funded?

Some experts claim that the government would need to cut spending or raise taxes to fund student loan forgiveness.

What impact will student loan forgiveness have on borrowers?

Pending legal blocks, borrowers could see some of their student loans disappear, providing relief for millions of borrowers. It’s also important to understand that student loan forgiveness may be subject to tax. You’d receive Form 1099-C to document it; consider checking with a tax professional to learn more about how tax applies in your situation.

What are the potential drawbacks of student loan forgiveness?

In addition to the potential for taxpayers to shoulder the debt, other downsides of debt forgiveness might include the forgiven amount being taxed, cuts to government educational spending, and overspending and increased debt for students who find themselves with more disposable income.

Photo credit: iStock/Drazen Zigic

SoFi Student Loan Refinance
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Aug

2024

What Does Unlimited Cash Back Mean? Is It Worth It?

By Sarah Li Cain | Credit, credit card, Financial Independence | Comments Off

What unlimited cash-back means is you can earn uncapped rewards using the card — in other words, your earning potential isn’t limited to a certain amount. While this might sound too good to pass up, there are both pros and cons to consider to determine whether unlimited cash back is worth it for you.

What Is Cash Back?

Cash back is a type of reward that a credit card issuer may offer through its rewards credit cards. Depending on the terms, cardholders can earn a certain percentage back on qualifying purchases (cash advances typically don’t qualify). For instance, you may be able to earn 2% cash back on purchases at gas stations, or 3% back at grocery stores.

Some cards may put caps on how much cash back you can earn. As an example, a card may limit cardholders to 2% cash back for up to $5,000 in purchases in a calendar year. While cardholders may still be able to earn cash back after they’ve hit their certain earnings threshold, they may earn rewards at a lower rate thereafter.

What Is Unlimited Cash Back?

Unlimited cash back means that your credit card offers cash-back rewards with no caps or limits on how much you can earn. In most cases, you can earn cash back on all of your purchases, though some cards may only offer unlimited cash back on certain spending categories.

For most credit cards, your cash-back rewards don’t expire as long as you keep your card open. This means that if you continue racking up rewards, you may be able to redeem your accumulated cash-back rewards for a sizable statement credit or other perk.

How Unlimited Cash Back Credit Cards Work

How credit cards work that offer unlimited cash back is that they allow cardholders to earn cash back on their purchases with no earning cap. In other words, there is no limit as to how much you can earn on qualifying purchases with these types of credit cards.

As you earn these rewards, you can redeem them in several ways. This includes as a statement credit or actual cash via a check or bank transfer.

In general, you’ll need good or excellent credit (meaning a score of 670 or above) to qualify for an unlimited cash back card. That being said, there are also cash back credit cards with less stringent credit card requirements, meaning you may be able to qualify even if you have a fair credit score or limited credit history. In general, however, the higher your score, the better the rewards tend to be.

Pros and Cons of Unlimited Cash Back

Before signing up for an unlimited cash back credit card, consider the advantages and disadvantages first.

Pros	Cons
Can earn money back on purchases, with no caps on earnable rewards	Generally need at least good credit to qualify for top rewards programs
Don’t have to worry about hitting spending thresholds or other caps	May need to pay an annual fee
Simple and straightforward to earn and redeem rewards	Like other rewards credit cards, may have a higher APR (annual percentage rate) than standard credit cards
Can help to build credit with responsible usage	Not as lucrative of a rewards option for frequent travelers

Is Unlimited Cash Back Worth It?

Getting an unlimited cash back credit card might be worth it if you’re confident you can maximize its rewards. For instance, if you continually make purchases in higher rewards categories, you can save some serious cash due to the rewards earnings. Ideally, you’d be able to earn enough rewards to entirely offset the annual fee, if your card has one.

An unlimited cash back card may not be a great fit if you continually carry a balance on your credit card, given what a credit card is and how you’ll accrue interest. Your interest rate will likely be higher than the cash back rate you’ll earn, which means carrying a balance could cancel out rewards earnings.

Another reason to think twice about an unlimited cash back card is if you’re a frequent traveler. A travel rewards program may be a better choice since you can earn free flights, hotel rooms, and even cash back. Plus, you might earn more lucrative rewards on travel-related spending than a cash back card would offer.

Recommended: How to Avoid Interest On A Credit Card

Categories of Unlimited Cash Back Credit Cards You Can Choose From

There are several ways credit cards give you cash back, including flat rate and through different spending categories.

Flat Rate

Flat-rate rewards allow you to earn the same cash-back rate across all purchases made using a credit card. For instance, you might earn 3% cash back on all purchases made with the card. Some may issue you a certain percentage cash back when you make a purchase, and then another amount you pay off your credit card bill. Regardless, your specific spending category won’t matter for earning with a flat-rate rewards card.

Rotating Categories

Your credit card may offer several spending categories each quarter that you can select from to earn cash back. For instance, you might be able to choose to get 5% cash back on purchases at gas stations or office supply stores for the first quarter. After the quarter is over, you can choose a different spending category.

While rotating categories can allow you to maximize your rewards-earning potential, this setup does require some strategizing. You’ll need to stay on top of choosing a new category each quarter. Plus, you’ll then have to make sure you adequately take advantage of spending within that category.

Fixed Spending Categories

Instead of choosing different categories every quarter, some credit cards offer fixed cash-back earnings for various spending categories. For instance, a card may allow you to earn 3% cash back for purchases at grocery stores, and 1% cash back on all other purchases.

While fixed spending categories require much less planning ahead for, you will want to ensure the card you sign up for credit card rewards you in a category you regularly spend in. Otherwise, you could end up forgoing valuable rewards.

Maximizing Unlimited Cash Back Earnings

If you want to make the most of earning unlimited cash back, here are some general credit card rules to keep in mind:

Select the Right Card

It’s a good idea to do your research and find a card that matches your spending habits. For example, if you use your credit card a lot at gas stations, it might not be the best choice to sign up for a card that doesn’t offer cash back rewards for this category.

Time Your Spending

If you sign up for a credit card with a sign up bonus, consider timing your card opening with a major purchase you’d been planning. Doing so will help ensure that you meet the minimum spend requirements in order to earn the bonus.

Or, if your credit card is about to have extra earnings for a rotating category, you might think about waiting until that time to make a planned purchase.

Note Spending Categories

After signing up for a card, pay attention to how much cash back you’ll earn in different categories if it’s not a flat rate card. That way, you can be sure to use that card exclusively for certain spending categories, or make sure you sign up for rotating categories well within the deadline.

Review Credit Card Terms

Looking over your credit card terms can help to ensure that you know what does and doesn’t count toward earnings. You might also discover through your card’s terms that you can earn enhanced rewards by taking certain actions, such as holding a certain amount of money in an associated bank account.

The Takeaway

A cash-back credit card is a great way to earn rewards that doesn’t necessarily require a complicated redemption process. Even better is when the card doesn’t place limits on the amount of cash-back rewards you can earn, which is the meaning of unlimited cash back.

Still, you’ll need to make sure you avoid carrying a balance and take steps to maximize your rewards to ensure you don’t negate your cash-back rewards earnings.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

How does unlimited cash back work?

If you have a credit card with unlimited cash back, that means there are no limits on the amount of rewards you can earn through qualifying purchases.

Is unlimited cash back better than points?

Whether cash back or points is better really depends on your preferences. Cash back is straightforward to track and redeem. Meanwhile, points may translate to a greater range of redemption opportunities, including for travel-related purchases. However, the value of points can vary depending on the card and the way the points are redeemed.

Photo credit: iStock/AsiaVision

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOCC-Q324-031

Aug

2024

How to Take Advantage of Credit Card Limited-Time Offers

By Becca Stanek | Credit, Financial Independence | Comments Off

Limited-time credit card offers require you to take action within a certain time frame to maximize cash back, travel miles, and other perks in return for charging everyday purchases. Setting reminders and taking other steps can allow you to enjoy these credit card offers to the fullest. Learn more about how these programs work.

How Do Credit Card Bonus Offers Work?

To understand how credit card bonus offers work, it’s helpful to first understand the basics of reward credit cards. Whether it’s a cash back card, travel credit card, or some other type of rewards card, these credit cards allow cardholders to earn back a small percentage of the value of their purchases. Account holders may get their rewards in the form of cash back, credit card points, or airline miles.

With credit card bonus offers, credit card issuers layer limited-time offers atop the regular benefits. Some common types of credit card promotions follow.

Welcome Bonuses

Designed to help make a specific credit card more appealing, welcome bonuses can fuel purchases in the first weeks or months after signing up for a new card. How welcome bonuses work varies from card to card, but they generally provide increased reward earnings either up to a certain expenditure limit or for hitting a minimum spend.

The rewards may come in the form of flat-rate cash back or points, a better rewards rate, or another limited-time perk, depending on the type of credit card. For example, a card might provide a bonus for cardholders who charge at least $1,000 within the first three months of receiving their credit card. Another offer might double the rewards rate for a set time period, up to a maximum rewards dollar value. In some cases, cardholders might receive a welcome bonus simply for signing up.

Lower APR

The annual percentage rate, or APR, is the rate of interest that is applied to credit card balances and transactions like cash advances. Some credit card promotions offer a lower — or even 0% — APR for a limited time.

These promotional periods may last anywhere from six months to 21 months. After that point, your APR will return to your standard rate, which is determined based on factors like creditworthiness and the type of credit card.

Recommended: How to Avoid Interest On a Credit Card

Other Limited-Time Offers

While welcome bonuses are nice, credit card promotions don’t always dry up after the introductory period. Some credit cards may offer additional periodic promotions, such as increased credit card rewards earnings during a specific time period or offers for spending at a particular retailer or partner.

Look out for promotional emails or notifications on your statement or online account to stay aware of such offers.

What Offers are Available to Me?

If you’re not sure what new credit card bonus offers are currently available to you, it’s easy to check. Simply log onto your credit card account and click over to the rewards portal. That should give you a view of the credit card promotions currently on offer, though you’ll want to log on frequently to see the latest offerings.

You might also be able to opt in to communications from your credit card company about current promotional offers. Check your settings on your communication preferences to ensure you’re not missing out on these emails if you’d like to receive them.

Which Limited-Time Offer Should You Choose?

Any credit card promotion that keeps more money in the cardholder’s wallet is likely an attractive one. But some offers are better suited to certain financial situations.

If You Have a Big Purchase Coming Up

Whether it’s booking a big vacation, paying for a wedding or new appliances, or covering some other big-ticket outlay, timing a big purchase with a credit card promotion period can be beneficial.

It might be a stretch for some individuals to max out a welcome offer that requires $4,000 or more in spending within the first few months. But if a big planned expense is on the horizon, it could be a good time to take advantage of a welcome offer that requires a little more spending than usual. (Just make sure to pay off the balance to avoid interest charges and/or reward penalties.)

Recommended: What Is a Charge Card?

If You’re Carrying a Balance With a High APR

Although the best strategy to avoid paying interest on credit card charges is to pay off purchases in full by the statement date (a great way to use a credit card responsibly), that may not always be possible. For those who are trying to pay down a balance, taking advantage of a 0% APR offer (or switching to a balance transfer credit card) may reduce or eliminate interest costs and help with paying down credit card debt.

If You Want To Optimize Everyday Purchases

The best type of credit card promotion for getting the most back from everyday purchases really depends on both the spender and the card. For instance, a credit card that provides a welcome bonus of 30,000 airline miles might be a great deal — but only for individuals who travel.

As such, finding the best credit card promotion for regular, everyday spending means taking the time to look at your usual spending habits. Then, compare limited-time credit card offers to find the best personal fit, whether that’s credit card miles or cash-back rewards, or another form of credit card bonus.

Tips for Taking Advantage of Bonus Offers

If you’re hoping to cash in on credit cards bonus offers, here are some key tips to keep in mind.

Do Your Homework

There can be many credit card promotions to choose from, with more limited-time offers popping up all the time. Before choosing a new credit card, it’s always a good idea to do some comparison shopping, considering factors such as annual fees, the APR, and the specifics of any rewards programs.

For those who track their spending, these records can be helpful for gauging actual expenditures across categories in order to estimate the potential benefits of various cards.

Keep Track of Expiration Dates

The important thing to remember about limited-time offers? They expire.

You may want to set up reminders for when offers will end. That way, you’ll remember to meet any minimum spending requirements or get in last-minute purchases before bonus rates end.

Avoid Carrying a Balance

Most credit card purchases don’t incur interest — if the cardholder pays off the full balance by the statement due date. Carrying a balance means interest charges, which are usually applied going back to the date of purchase. This can quickly add up and potentially outweigh the benefits of any credit card promotions.

Furthermore, before only paying the minimum, it’s a good idea to check the terms and conditions, which will tell you specifics of how a credit card works. That way, you can ensure the promotion still applies for those who carry a balance.

Think Before Canceling a Card After an Offer Expires

With so many attractive credit card offers on the market, it might seem like a good idea to open and close accounts in order to keep claiming new promotions. However, this practice, known as credit card churning, may not be the best strategy for those concerned about their credit score.

For starters, each new credit card application results in a hard inquiry to check the applicant’s credit score. Each time a lender conducts such a check, it results in a slight reduction in credit score — which can last up to a year (and will remain on one’s credit report for up to two years). Applying for many cards to claim multiple offers can add up.

Furthermore, as much as 30% of your credit score is informed by your overall credit utilization rate, or how much you owe on all your revolving accounts, such as credit cards, compared with your total available credit.

Canceling cards reduces the total amount of credit you have available — and if it’s a card with a big credit limit, cancellation can have a significant impact on your credit utilization ratio. If your credit utilization goes up when you close a credit card account, your credit score could go down.

Will I Get Approved Immediately?

Even if you find the perfect promotional credit card offer, remember that there’s no guarantee that you’re going to get approved for it. Particularly if reaping the bonus credit bonus offer requires applying for a new card, know that there’s never a guarantee of approval.

Rewards credit cards generally require at least a good credit score (meaning 670 or higher) to qualify for. If your score is too low or there are any credit report concerns, that could impact your approval odds.

Application-related issues could interfere with how fast you’re approved, too. For instance, if there’s an issue verifying your income or you’ve inadvertently turned in an incomplete application, it might take a bit longer for the credit card company to make a decision.

The Takeaway

Whether it’s a welcome bonus, a low APR introductory rate, or a periodic promotion, credit card bonus offers can amplify rewards for those who know how to take advantage of them. To choose the right credit card promotion for your financial situation, it’s important to know the options and how they work. For instance, you might opt for a welcome bonus if you know a big purchase is coming up, whereas a 0% APR promo might be better if you’re working to pay down a credit card balance.

FAQ

What time of year do the best credit card offers come out?

Typically, the best credit card offers come out at the end of the year, between October and December. This may be timed to the holiday shopping season, when people are often spending more with credit and looking for deals.

How do you take advantage of multiple credit cards?

If you have multiple credit cards, it’s wise to follow the guidelines of keeping balances low and ideally paying them off in full every month. In addition, you may want to stagger the times at which you apply for cards since each will trigger a hard credit inquiry, which in turn lowers your credit score temporarily by five or so points a pop.

How do I use my credit card to my advantage?

You can use a credit card to your advantage by finding offers with sign-up bonuses, rewards, or low interest rates that suit your needs. Once you have a new card, it’s wise to pay the balance in full every month to avoid interest charges, keep your credit utilization ratio low, and take other steps to use your credit responsibly.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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Aug

2024

Guide to Buying Real Estate With a Credit Card

By Jennifer Calonia | Credit, credit card, Home Ownership | Comments Off

Investing in real estate can be a lucrative endeavor. But if you don’t have hundreds of thousands of dollars saved in cash to put toward a property, using a credit card to secure a real estate investment might be an option.

There are ways to execute this investment approach. However, there are also serious caveats to consider before moving forward with using a credit card to invest in real estate.

Can You Buy Real Estate With a Credit Card?

You can’t purchase a physical real estate property outright with a credit card the way you would when using a credit card to buy lunch or a new television. One reason for this is because a typical consumer credit card likely doesn’t offer a credit line large enough to cover the entire home price.

Even if you do qualify for a credit line to cover all or a significant portion of the home price, you’ll face another challenge. The title company or real estate agency that’s facilitating the deal requires that payment is provided using bank-certified funds — such as a cashier’s check, certified bank check, or wire transfer — to finalize your investment transaction. Given what a credit card is, it won’t meet those standards.

How to Finance Real Estate Investments With a Credit Card

While you can’t swipe your credit card to purchase real estate, there are ways that you can leverage your credit card to help fund your real estate investments.

Through a Cash Advance

If you have a high enough credit limit, a viable way to buy real estate with a credit card is by getting a cash advance against your card. By doing this, the funds you borrow from your credit card will become quickly available for use on a real estate investment, which might be helpful if you’re buying real estate in a hot market.

Keep in mind that fees typically apply for cash advances. Typically, you’ll pay a fee in the range 3% to 5% of the transaction amount, depending on your particular card.

Also know that cash advances typically come with interest rates that are higher than the card’s standard annual percentage rate (APR). Plus, interest begins to accrue immediately rather than at the end of the grace period like it does on regular credit card purchases.

Recommended: What Is the Average Credit Card Limit?

For Related Real Estate Costs

Some investors also use credit cards to invest in real estate by using their card for renovation project expenses. If you purchased a low-cost investment property and want to update it for passive rental income, for example, you might be able to invest in your property by putting charges for contractors and materials on your credit card.

By Using Credit Card Rewards

Another unconventional approach to buying real estate with credit cards is directly redeeming earned rewards as cash. Cash redemption values are typically lower compared to redeeming rewards toward travel, for example, but this approach can still unearth the capital you need to invest in your next property.

This strategy is particularly effective if you’ve already amassed years of rewards through a business credit card, and are willing to pool earned rewards from your personal credit card rewards programs, too.

Recommended: Can You Buy Crypto With a Credit Card?

Advantages of Using a Credit Card to Invest in Real Estate

Although buying real estate with a credit card is an unconventional approach, there are some benefits in doing so. In particular, the advantages include that:

• You can invest faster: If you don’t have a lump sum of cash savings ready, it might take years to save up enough capital to get your foot into real estate investing. Using a credit card to invest in real estate can help you realize your investment goals faster.

• You’ll have fewer costs at closing: Since you’re not financing through a mortgage lender, there are fewer fees to worry about. Unlike when buying a home as your primary residence through a mortgage loan, costs like origination fees, appraisals, and escrow fees aren’t a required part of a real estate investment transaction done in cash.

• You might earn rewards in the process: Most card issuers don’t let you earn credit card rewards from cash advances. However, you can accelerate your rewards earnings by using your card for spending associated with your property investment. For example, materials and contractor costs for renovation projects, like a kitchen update or a room addition, can help you rack up rewards faster.

Downsides of Using a Credit Card to Buy Real Estate

There are major disadvantages to using a credit card to invest in real estate. If you’re considering how to buy rental property with credit cards, keep in mind the following drawbacks:

• You’ll have a hard time using credit cards directly to invest in real estate: A notable downside to buying real estate with credit cards is that you’ll likely be unable to throw a credit card onto the table to close a real estate transaction. You’ll have to undergo the extra step of getting a credit card cash advance. But be aware that card issuers might set a lower available limit for cash advances and will impose a higher APR. Plus, you’ll pay cash advance fees.

• You’ll face high interest rates: If you have to draw a cash advance against your credit card to buy real estate, you’ll face expensive APRs, compared to other financing sources, like a personal loan. According to the latest Federal Reserve data, the average credit card rate across all accounts with balances is currently 22.76%. By comparison, the average personal loan rate is 12.36%.

• You’re taking on a lot of risk: How credit cards work is that they let you purchase goods and services, even if you don’t have the cash to cover the full amount, immediately. The caveat, however, is that you’ll need to repay the amount either in a lump sum when your statement is due or over time.

If you successfully buy real estate with a credit card, you’re legally liable for that debt and must repay it based on the rate and terms of your credit card agreement. This holds true regardless of whether your investment turns a profit. Plus, if you choose to pay back the funds you borrowed over many months, you’ll incur exorbitant interest charges in addition to the principal balance.

Recommended: How to Avoid Interest On a Credit Card

Factors to Consider Before Using Your Credit Card to Invest in Real Estate

After assessing the pros and cons of investing in real estate using a credit card, also consider the following factors that might impact your investment:

• Whether you’ll need additional funding sources: If your credit card doesn’t provide a sufficient amount for your real estate investment, you’ll need to seek funds elsewhere.

• What the local real estate market is like: Whether your goal is buying a property to flip and sell or buying rental real estate, do your homework. This includes finding a desirable neighborhood and a suitable property, as well as assessing renovation projects and other repairs necessary to set your investment up for profitability.

• If you can repay your credit card bill: At best, consider your credit card as a short-term loan tool. Plan to put profits you’ve earned toward paying down your debt ASAP.

Alternatives to Buying Real Estate With Credit Cards

If you don’t have hard cash stowed away for your next real estate investment, but aren’t ready to leverage your credit cards for the investment, you have a couple of other options:

• Personal loans: A personal loan is another financing option, particularly if you have strong credit. It offers a higher borrowing limit and longer repayment timeline compared to a credit card. Also, as mentioned earlier, personal loan interest rates are generally lower than credit card APRs.

• Personal savings: Another option is using cash and avoiding credit cards and other methods of borrowing altogether. If you have personal savings that you can tap into or are willing to hold off on investing in real estate until you’ve built up enough savings, you can potentially avoid costly finance charges.

The Takeaway

Tread carefully when using a credit card (i.e. borrowed money) to fund any investment, including real estate. Adhering to important credit card rules — like staying on top of your credit utilization and paying your credit card statements in full — can help you avoid going into debt for your investment.

FAQ

How can I buy rental property with a credit card?

If done strategically, you can use a credit card to finance a rental property either through a credit card cash advance or by using the credit card to pay for renovations on an investment property flip.

Can I use a business credit card to buy real estate?

Yes, you may be able to use a business credit card to invest in real estate. Doing so separates the debt from your personal credit profile, so the high credit utilization on the business credit card doesn’t affect your personal credit score.

Is it a good idea to buy real estate with a credit card?

Whether buying real estate with credit cards is a good idea depends on your investment risk tolerance. A credit card might work as a short-term funding option, but plan on repaying the debt with your profits quickly to avoid an underwater investment.

Photo credit: iStock/SDI Productions

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Aug

2024

Credit Hardship Program: What It Is & How It Works

By Jennifer Calonia | Credit, credit card | Comments Off

If you’re experiencing a temporary financial setback and have fallen behind on your credit card debt, you’re not alone. According to Federal Reserve Economic Data, credit card delinquency rates increased 10.7% in the first quarter of this year.

Having to repay credit card bills when you’re struggling financially — whether due to an emergency expense or a job loss — can be a challenging burden. In this difficult situation, it’s worth contacting your credit card company to see if it has a credit card hardship program.

What Is a Credit Card Hardship Program?

A credit card hardship program, sometimes referred to as a credit card assistance program, is a repayment plan that’s created based on your hardship circumstances. (This type of modified repayment option was commonly offered by credit card issuers for customers who were financially affected by COVID-19, for example.)

However, credit card issuers aren’t required by law to offer hardship assistance programs, and not all card companies provide this option. Those that do might offer a variety of ways to temporarily ease your repayment burden, if you’re eligible. For instance, it might adjust your credit card payment due date, waive late fees that have accrued, lower your interest rate, or reduce your minimum payment required over a period of time.

Again, these changes are temporary and only designed to get you caught up on your outstanding credit card balance. Once you’ve completed the program, your original terms will be enforced if your account is still active.

Who Is a Credit Card Hardship Program For?

Credit card hardship programs are for consumers who are experiencing an unexpected hardship. Generally, the hardship directly or indirectly impacts the consumer’s ability to make on-time credit card minimum payments.

For example, hardship assistance plans might be offered to those who are unexpectedly facing:

• An income reduction

• Job loss

• Death of a primary earner

• Natural disaster

• Divorce

• Severe illness

• Other emergency

Eligibility for credit card hardship programs varies among credit card companies. Generally, at the very least you’ll need to provide proof of the hardship; however, credit issuers don’t publicly share much information about eligibility since it’s approved on a case-by-case basis.

How to Apply for a Credit Card Hardship Program

If your credit card company offers a hardship program, prepare for your conversation by taking a few steps.

1. Review Your Budget

For starters, evaluate where your finances stand today. Compare your non-negotiable bills, like rent or your mortgage payments, a child’s tuition, groceries, gas, etc., against your monthly income.

Determine how much you can comfortably put toward your credit card payments. Make sure the amount is realistic since you’ll want to make positive strides toward your hardship program, if it’s available to you.

Write out your budget and the amount you’ve determined that you can reasonably afford to make toward your credit card bill each month. Have this information ready for your phone call with your card issuer in the next step.

2. Call Your Issuer

Contact your credit card company by calling the phone number listed on the back of your card. Explain your hardship situation and note that it will impact your ability to repay your outstanding credit card balance. Ask them if they offer a temporary credit card assistance or hardship program.

3. Agree Only to Terms You Can Afford

If they offer this option, this next step is your opportunity to negotiate the terms of your hardship plan. Ultimately, the company would likely rather work alongside you to get repaid, rather than risk you delaying credit card payments and later defaulting on your debt.

Make sure that any terms they initially offer are what you can realistically manage financially. If it still feels too costly, tell them that those terms don’t work for you and ask for further relief. It’s important to make sure to only agree to what’s realistic, given the consequences of credit card late payment.

If you arrive at a credit card hardship plan that you can confidently complete, get all of the terms in writing and read the agreement carefully before signing.

Factors to Consider Before Agreeing to a Credit Card Hardship Plan

One significant impact that credit card assistance programs typically have is a freeze on your credit card activity — meaning using the credit card is no longer an option. Although a credit card freeze doesn’t negatively impact your credit score, that’s spending power that you’ll immediately lose. Though, given your financial hardship, it’s a practical requirement until you can regain your footing.

Some credit card companies might even require that you close your card account entirely while participating in the program. This is what can impact your credit score the most.

Further, closing your account reduces yourcredit utilization ratio, which is the percentage of credit you’ve used compared to your available credit line. According to the Consumer Financial Protection Bureau, it’s best to keep this ratio below 30%. However, if you suddenly have a reduced overall credit line due to a closed account, your credit utilization ratio will increase.

Additionally, a closed credit card can lower your score since you’re losing the benefits of a matured credit card account. ForFICO® credit scores, for example, the average age of all of your credit accounts makes up 15% of your score.

Finally, closing your account can also impact the mix of credit in your credit profile, especially if you’re losing your only revolving account, which is what a credit card is. Having a mix of installment (e.g. car loans, mortgages, etc.) and revolving credit (e.g. credit cards) comprises 10% of your FICO score.

Pros and Cons of Credit Card Hardship Program

There are a handful of benefits associated with a credit card hardship program. However, you should also consider the drawbacks before moving forward.

Advantages of a Credit Card Hardship Plan	Disadvantages of a Credit Card Hardship Plan
Might help build credit long-term by potentially avoiding default	May end up losing access to your credit line
Positive hardships payments are reported to credit bureaus	Might adversely affect your score in the short-term
Allows you to rework repayment features so they’re manageable	Requires proof of hardship and possibly additional paperwork to get a plan
Offers temporary financial relief

Alternatives to Credit Card Hardship Programs

If a credit card assistance program isn’t right for you, there are a few other options for getting through financial hardship.

Balance Transfer Credit Card

If your credit is still in good standing and your account isn’t delinquent yet, consider a balance transfer card. It lets you transfer one or more credit card balances onto a low- or temporarily 0% APR card. A balance transfer fee might apply.

Debt Consolidation Loan

This option lets you combine multiple debts — installment and revolving — into a new installment loan. Ideally, the debt consolidation loan offers a much lower APR with one simple payment to help you chip away at payments. Fees might apply.

If you’re struggling with other payments as well, you could consider another type of loan — a hardship loan. While this could help you continue to make your rent or mortgage payments or stay on top of other necessary daily living expenses, be mindful before assuming additional debt.

Recommended: When Are Credit Card Payments Due?

Debt Management Plan

Debt management plans are typically offered through credit counseling organizations. A credit counselor facilitates an agreement with your creditors on a payment plan.

Generally, a debt management plan requires you to make monthly payments to the counseling service, which will then make payments to your creditors on your behalf. It’s best to work with a nonprofit organization, such as the National Foundation for Credit Counseling.

The Takeaway

If you anticipate falling behind on your credit card payment, a credit card hardship program may help you avoid spiraling debt and future default. Remember, you still owe the debt, but it’s worth talking to your credit card issuer to see how it can help you through this difficult period.
After successfully completing a credit card hardship program — and regaining financial stability — your card issuer might offer to unfreeze your credit card account, based on your hardship agreement.

FAQ

Do credit card hardship programs affect your credit?

Credit card hardship programs, in and of themselves, don’t directly affect your credit. However, the requirements to participate in a hardship program, like closing the impacted account during the hardship plan, or other credit reporting might have an adverse effect on your credit score.

Does credit card debt count as a hardship?

No, credit card debt doesn’t typically qualify as a hardship. Uncontrollable factors like a major illness or injury, disability, sudden unemployment, loss of your household’s primary earner due to divorce or death, or other significant unexpected expenses typically fall under hardship.

What are my options if I can’t pay my credit card?

If you can’t pay the minimum amount due on your credit card bill, contact your card issuer to learn more about your repayment options. Based on your unique situation, it might offer a manageable path forward to repay your debt, whether that’s simply changing your monthly due date or putting you on a credit card hardship program.

Can you ask for forgiveness of credit card debt?

You might be able to secure debt forgiveness on the total outstanding credit card debt that you owe through your card issuer. Some credit card companies might be willing to settle the debt at a lower amount, which you’ll need to pay in a lump sum. The remainder of the debt is then “written off.”

Photo credit: iStock/PeopleImages

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