Monday, 30 June 2014

Cathford Group Credit Inc: What's Up With My 401(k) Loan Payments?

Dear Dr. Don,

I work for a large telecommunications company with a 401(k) managed by a major financial services corporation. I have taken out several loans over the years and currently have three loans outstanding. The bimonthly loan payment amounts are taken directly out of my paycheck. I'm wondering why it takes up to four business days for my loan payments to be posted. With thousands of other people in my position, who's getting this loan interest?

Thank you,

-Ramiro Remits

Dear Ramiro,

Generally, the money segregated from an individual's compensation to repay a loan is held by the employer or the trust for their retirement plan.

While the money held by the employer is generally not invested, employers are under strict time constraints to have the benefit allocated to the trust for the participant as soon as it's practical.

Depending on the employer and the payroll process, it can take a few days for the data to be transmitted to the plan's trustee and record-keeper. The file is processed and reviewed to ensure no errors exist. The loan repayments are funded to the trust by the employer within two days, depending on the employer's method of funding the contribution. By the end of the following day, the trustee has segregated the loan repayments and sent the payments to the participant's account, investing the money as directed. Any investment gains earned while the money is held in trust goes to the benefit of the plan participants, like you.

I suggest you stop worrying about this delay. Plan administrators are quite aware of the rules and tend to abide by them. This is especially true of large firms. The concern, however, shouldn't have any impact on loan interest expense, assuming that the interest is paid in arrears. In other words, this month's payment pays last month's interest expense, causing only a minor, if any, impact at all on your investment earnings.

Get more news, money-saving tips and expert advice by visiting Cathford Group Credit Inc.

Sunday, 29 June 2014

Cathford Group Credit Inc: Don't Let Bad Credit Card Habits Tank Your Homeownership Plans

It's a good time to think about the ins and outs of buying a house. One factor that can have a big ripple effect on your ability to qualify for a mortgage is your credit card habits.

Not sure how plastic plays a role in your homeownership plans? Let's dig into the details.

What mortgage lenders are looking at
Before discussing how your credit card habits could affect your ability to get a home loan, it's important to understand what mortgage lenders are looking at when you apply for a home loan:

·         Your income. You'll need to demonstrate that you have an income substantial enough to make your monthly mortgage payments. To verify this, you'll probably need to provide tax returns and pay stubs.
·         Your credit report and score. In general, your score will need to be above 640 to get a mortgage. The higher your score, the better your financing terms will be.
·         Your job history. Lenders want to see a steady employment history. If you're self-employed, you might need to jump through some extra hoops to secure financing.
·         Your overall wealth. Your assets (retirement accounts, property you own, etc.) will be taken into account on your mortgage application.
·         Your other financial obligations (your debt-to-income ratio). Banks generally like to see a debt-to-income ratio of 36% or lower. That indicates that your monthly obligations probably aren't eating into your ability to make mortgage payments.

Your credit card habits play a big role in your ability to buy a home
It might not be immediately obvious how your credit card behaviors play into your ability to qualify for a mortgage. But these bad plastic habits will make the path to homeownership rocky:

·         Paying bills late. If you don't pay your credit card bills on time, your credit score will take a major hit. Thirty-five percent of your score comes from your history with paying your bills by their due dates, so it's important to take this point seriously.
·         Getting into debt. Racking up credit card debt will hurt your mortgage application in two ways. First, if you're using more than 30% of your available credit on any of your cards, expect your credit score to take a hit. Second, it will raise your debt-to-income ratio, which will make you seem like a riskier borrower. If you have credit card debt, now is the time to pay it down.
·         Applying for too many cards at once. Again, this will shave points off your credit score. If you plan on getting a mortgage soon, don't apply for a new credit card unless you absolutely need it.
·         Delaying credit card use. Mortgage lenders like to see a long history of responsible credit card use. Plus, 15% of your credit score comes from the length of your credit history. If you're a credit novice, getting a card and using it carefully will bolster a future home loan application.

What to do if plastic is interfering with your American Dream
If this information is making you panic, don't worry -- there's a lot you can do to bolster your chances of getting a mortgage. Follow these tips from the Nerds, and you'll be on your way to realizing the American Dream:

·         Pay your bills on time. Getting your bill payments in on time is the most powerful thing you can do to boost your credit score. Make this a priority!
·         Apply for a credit line increase. Increasing the limits on your credit cards will help reduce your credit utilization ratio, which will help your credit score. Just be sure to avoid the temptation to spend more.
·         Pay down your credit card debt. This will improve your credit utilization ratio and your debt-to-income ratio. Win-win!
·         Save up a bigger down payment. Sometimes lenders are willing to accept a lower credit score if you bring a bigger down payment to the table.
·         Wait a bit. It takes time to save money and improve your credit. Your best tool in the mortgage application process might be time, so use it wisely by employing the tips discussed here.

The bottom line: Understanding how your credit card habits affect your ability to get a mortgage is an important step on your path to homeownership. Keep this information in mind as you get ready to look for your new place!

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Friday, 27 June 2014

Cathford Group Credit Inc: Considering the personal cost of setting up a company

Erin Walls, a specialist business advisor for SMEs at Ward Williams Creative, looks at the important personal considerations that need to be made before going into business.

There are more UK businesses being launched than ever before, with 526,446 companies established in 2013 compared with 484,224 in 2012. London and the South East have seen the most entrepreneurial activity, with 136,936 new businesses launched in London alone last year.  This is great news for the economy, but inevitably not all those businesses will thrive and survive and it is important to consider the potential personal costs of starting up.

Erin Walls, a specialist business advisor for SMEs at Ward Williams Creative says, ‘There is a lot of buzz around start-ups at the moment. You can find lots of tips on start-up finances, but you also need to consider the personal cost of starting up a company of your own.’

Walls has the following advice:

·         Consider the impact of financial insecurity

New businesses can take anything from a few months to a few years before they start making revenue and initial seed capital or investment may not last that long, so there is usually a period of a few months at the very least where the founders have little or no income. This can be difficult for those with a family who may need to reduce personal outgoings. Personal pension payments could be frozen for a while and non essential spending could be cut, eg on holidays, gym membership, take-aways, new clothes. Those living in a large house could consider renting this out and living in smaller, cheaper rented accommodation, but would need to check the mortgage provider approves.

·         Be realistic about personal cash flow

When the finances become stretched it’s hard to remain objective. Be realistic when looking at business cash flow, for example if you have five potential jobs over the next six months, don’t be totally optimistic and account for them all coming in, equally don’t assume you’ll win none of them. Be realistic about personal cash flow too. Work out how much you need to earn once up and running, to provide not just for the business, but enough to live on and to provide for any dependants.

If your proposed business will generate about £35,000 revenue in a year and business costs are about £15,000, then you can only hope to earn £20,000 a year and there will be tax on that.  What if costs rise as they always do, can you live and provide on £15,000?

·         Manage everyone’s expectations

It’s said that most arguments between couple are about sex or money and many relationships come under strain during the start up process as money and pressure become daily issues.  If your partner supports you, how long are they willing for the household to live on a reduced income? If your partner has a variable income or a lack of job stability, then maybe this isn’t the best time to start up. What is your partner expecting the situation to be at the end of six months or a year and is it in line with your thinking? It is really important to manage everyone’s expectations.

·         Watch your stress levels

When you work for yourself there is no one above you on the ladder; the buck stops with you, which many people find stressful. Most people who run their own business, even those that are successful, say that they never turn their business mind off, even when at home, or out with friends. Lots of people think running their own business will allow them flexibility to do the hours you want, but in reality most people work more hours in their own business than they would as an employee. Some people find that as the pressure builds they start to become unwell or fall sick more often than usual. This is a sign that the stress it taking its toll and nothing is worth killing yourself over, so it is essential to find a way to de-stress and to keep fit in body and mind.

·         Consider the implications of personal guarantees for business loans

Sometimes giving a personal guarantee for a business loan is unavoidable when you are in a start-up situation, but before you sign your name on the dotted line you must at the very least consider the implications to your personal life if the business fails and the loan is recalled for immediate repayment by you personally, or if legal proceedings start. What if that happens?

·         Learn to spot the warning signs of business failure

Be aware of the signs of failure. Obviously you need to be positive and we all hope things will work out, but there are some signs that clearly signpost a big problem:

·         Negative cash flow. If you don’t have cash you will be unable to pay debts and the business will become insolvent

·         Lack of pipeline – When you start out, many friends and connections will generally be positive for you and say they will help, or know someone who would want your service or product, but if after a few months no one is following through and you have no work lined up, then that pretty much tells you that the business won’t work. If you continue, you will be working at a loss, or on a day to day survival basis and that is hard and stressful and not a nice way to exist.

Case study: How Richard Hearn adapted his business development
Richard Hearn of Stoke Newington left a full-time job with a charity in November 2013 to set up a business called GenerationMe, training disaffected young people and brokering work experience placements for them. He set up a pilot scheme with a few employers on board to host placements and connected with an education charity to source young people for placement.

There were delays along the way, so he began freelancing as a trainer for an apprenticeship provider, but this work was limited and sporadic, so his girlfriend agreed to support him financially for three months, but this crept to four and then five months. There were a lot of potential developments that Richard was confident could lead to an income, but they were not coming off quickly enough. Richard comments, ‘My lack of financial contribution to the household began to cause arguments, my partner being more objective about the fact money was not coming in and I took it personally at times.

'I have swallowed my pride somewhat and had a reality check that my training business will take longer than I thought. I am doing more freelance work to boost my earnings and have reduced the time spent on my training company to one or two days per week. In the meantime I make daily savings by small things like not buying lunches and travelling by bus instead of by tube, as small savings soon add up.’

Wednesday, 25 June 2014

Cathford Group Credit Inc: Six tips to help you stay out of debt

The financial crisis that has affected the US and many other countries can be traced to bad corporate practices of lending to people who were likely to default on their payments.  And default they did!  So now the global economy is reeling.

An individual should not be allowed credit if it is obvious that he will not be able to pay back. Lending him money will not help solve the borrower’s financial problems; it will only sink him deeper into a debt hole.  I’m really baffled at how someone can have so many credit cards and almost all of them maxed out.  It is probably due to lax policies in assessing creditworthiness or the lack of accurate credit data that the credit companies can check.  With the establishment of the Credit Information Corporation by the SEC, I really hope that we will have more responsible credit cardholders who won’t bite more than they can chew.

Borrowed money is one of the important resources you can use to achieve your financial goals.   Do not allow yourself to be stripped of this valuable resource by tainting your credit history. Borrow money only if you have to and be responsible in paying back what you owe. Here are some tips which will help you stay out of huge debts and keep your credit record pristine.

·         Do not borrow money to buy things you don’t really need.  A most “efficient” way to accumulate huge amounts of debt is buying (or charging to a credit card) a lot of things that you can live without. Do not abuse your credit card.  Don’t use it to support a lavish lifestyle. Borrow money only for important things and for emergencies.  A simple rule to follow in using your credit card: Do not use it to purchase something that you cannot afford to pay in cash.  If you want something “nice to have” but unimportant, save for it instead of buying on credit.  

·         Keep only one or two credit cards. The more credit cards you have, the more likely you will overspend and the bigger possibility you can get into debt trouble.  If you have more than a couple of credit cards, retain the ones with the most favorable terms and transfer the balances from the other cards. Get a pair of scissors, cut-up the unwanted cards and inform the concerned credit card companies that you will no longer use their card.

·         Treat your credit card as if it’s cash.  Buying with credit cards don’t feel like spending real money which makes it easy to spend more than you have to. Treat your credit card like cash so you will spend less.  Set a limit as to how much you will charge to your credit card monthly and do your best not to exceed it.

·         Pay more than the minimum.  Paying only the minimum every month will contribute in growing your credit-card debt to unmanageable levels. If you charge P3,000 monthly to your credit card and pay only the minimum amount, in 20 months you will have paid close to P29,000 and your outstanding credit card balance will be over P50,000.

·         Use other sources of money to pay your debt.  Be imaginative in finding money for debt payment.  If you have money “sleeping” in a low-interest savings account, use it to pay your debt.  Would you rather pay 3.5 percent in credit-card interest monthly than give up 1 percent in deposit interest annually?  I don’t think so.  Consider taking out a less expensive loan to pay your existing loan obligation. But never borrow money that charges interest that’s higher than what you are paying now.

·         Get yourself and your family insured. The wisest spender is not immune to unfortunate incidents like accidents, sickness and untimely death which can give your finances a major wallop.  Protect your family from financial losses and potential heavy debt by getting yourself and your family insured.  At the very least you should have a life insurance and health care or hospitalization insurance.

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Tuesday, 24 June 2014

Cathford Group Credit Inc - DR 080: How to Build Credit When You Are Just Starting Out (the Smart Way)

It’s official. Credit scores are the most confusing aspect of personal finance. The FICO formula remains largely a mystery. And don’t get me started on the multiple versions of credit scores out there. By one account, you may have 49 different FICO scores, not to mention dozens of credit scores calculated using non-FICO formulas.

So it’s understandable when folks (myself included) get a bit lightheaded when thinking about our credit. And that brings me to a great question sent in from a reader and podcast listener named Esther:

Thanks so much for writing a fantastic blog and sharing your podcasts. My husband and I just started listening a few weeks ago and have learned a great deal. We’re still in our 20s, but we often tell each other how we wish we would’ve known about financial independence and building credit earlier on in our lives to prevent all of the mistakes we made in college. We really want to teach our children about financial independence so they can avoid the same mistakes we made. So my question is: how can an 18 year old start building their credit the right way?

Esther’s question is a good one, and one I’ve given a lot of thought to as my children are now young adults. I’ve written before on how to build credit for the first time. In this article I’ll share some new perspectives, tips, and resources on this topic.

First Things First
Let’s start by making sure we put the question of credit and credit scores into the right perspective. There are three main financial priorities every young adult should have:

1.      Spend less than you make
2.      Invest wisely
3.      Avoid debt

Pretty simple. In fact, these are the three main financial priorities we all should have. Why? Because these priorities will enable us to achieve financial freedom. Financial freedom, in turn, will allow us to pursue our life’s purpose, whatever it may be.

So what’s this got to do with building credit? A lot. Building credit can involve some financially dangerous moves, particularly for those with little experience managing their finances. As will see below, credit cards are a great way to build credit. They are also a great way to ruin your finances. So as we walk through credit-building strategies, keep in mind the three priorities listed above.

Become an Authorized User on a Credit Card
The first and easiest way to establish credit is to become an authorized user on a person’s credit card. For most young adults, this will mean becoming an authorized user on a parent’s credit card. There are some important things to keep in mind with this approach:

·         An authorized user doesn’t have to use the card to build credit
·         As an authorized user, your credit can be harmed if the account holder makes payments late
·         If your credit is being harmed, you can call the credit card company and asked to be removed as an authorized user
·         Not all credit card issuers report authorized user status to the credit bureaus (here’s a thread on the myFICO forum that lists credit cards that report)

As a final word of caution, avoid what is known in the industry as piggybacking. With piggybacking, an individual becomes an authorized user on a credit card for a fee. These transactions usually involve complete strangers and are brokered by financial intermediaries and credit counselors in an effort to artificially inflate an individual’s credit score. FICO has worked hard to detect these situations and to exclude them from the FICO formula.

Get a Credit Card and Use it Wisely
The next step to building credit is to obtain a credit card. Consistent with the financial priorities listed above, however, care must be used when selecting and using a credit card.

There are excellent reasons to use a credit card beyond building credit. The security of using plastic and the potential rewards are the two primary reasons. If used responsibly, however, plastic can help establish credit as well.

Here are some things to keep in mind:

·         Prepaid cards and bank debit cards do not build credit
·         Some credit cards are designed for those with no credit history, including student and secured credit cards
·         Keeping your credit limit low to start is an excellent way to remove the temptation to overspend
·         Paying the card off in full each and every month is a must

Store branded credit cards are also an option, but not one I recommend for two reasons. First, store cards encourage frivolous spending. With a generic card, you can by everyday essentials, such as gas and groceries. A Macy’s store credit card doesn’t qualify as essential. Second, the interest rate that comes with these cards is usually very high.

What About Other Loans
I’ve not included other types of loans, such as car loans and student debt. These types of loans will of course affect your credit. Further, having different types of loans (revolving credit like credit cards and installment loans like a car loan) can affect your credit score. For me, however, it’s not worth going into these types of debts just to build your credit. Pay cash.

Pay Your Debts on Time, Every Time
It is absolutely critical that any monthly payments on credit cards or other debt is paid on time. Payment history is the single most important factor in the FICO formula, accounting for 35% of the overall score. A late payment, moreover, remains on your credit history for seven years.

Establishing Credit is Different Than Repairing Credit
Finally, there are some important differences between establishing credit for the first time and repairing credit. When repairing credit, keep a few things in mind:

·         Checking your credit report for errors is a must. It’s the quickest and easiest way to improve your score.
·         Baggage on your credit report stays there for a long time (7 years for late payments as noted above). However, the effect this baggage has on your score decreases over time.

It’s generally hard to get a credit card with bad credit than it is with no credit. A secured credit card is generally the best option for those recovering from a bankruptcy, foreclosure or other credit mishaps.

Monday, 23 June 2014

Cathford Group Credit Inc - Personal finance tips: Keeping car loans in check, and more

Three top pieces of financial advice — from how pay impacts credit to new rules for inherited IRAs

How pay impacts credit
A pay cut may hurt twice, says Christine DiGangi at While "income isn't reported to credit bureaus," the size of your paycheck "can still have an impact on your credit standing." For starters, your income will affect your ability to make loan payments and determine how much total debt you actually have. And while your salary isn't factored into your credit score, "it's often part of a credit application," with some lenders setting standards for debt-to-income ratios before taking on a customer. If your cash flow does change, the first thing you need to adjust is your budget. And be sure to pay "extra attention to your bank accounts," and limit your credit card purchases to correct your spending habits and protect your credit.

Keeping car loans in check
Quit extending that car loan, says Kerri Anne Renzulli at Time. According to a new report by Experian, the average length of new car loans is at a record high of five and a half years. But longer loans are "costing us, big time." Car loans of five years or more may require lower monthly payments, but that only means you are paying more interest over time. And since cars are depreciating assets, longer loans work against you by limiting your equity in the car even as it loses value. The best way to save on monthly costs is to put more money down and reduce the amount you need to finance. When negotiating, try to be armed with rate quotes from outside lenders, which may encourage car dealers to improve their financing offers.

New rules for inherited IRAs
Beware of bequeathing your IRA, says Dan Caplinger at Daily Finance. The Supreme Court issued a new ruling last week that changes the game for inherited IRAs. The decision "drew distinctions between one's own retirement accounts and those inherited," making the latter fair game for creditors seeking to collect on the deceased's debts. Surviving spouses can still roll inherited IRAs into their own accounts, but for other heirs, the impact could be huge. Individuals who plan to bequeath "substantial amounts in IRAs" should consider making serious changes to their estate planning, "establishing trusts to receive inherited IRA money rather than leaving it outright to your heirs." But be careful here, too, since the wrong terms can "reduce or eliminate the ability to stretch out IRA distributions and preserve tax benefits."

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