Neighborhood Credit Union

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What You Need to Know Before Getting a Loan

loans
 

We’re back for the part 3 of our Financial Literacy Month Series! If you missed the first two articles, be sure to check out “Fix Your Broken Budget” and “All About Credit.”

Loans. You might need one for a new car, house, or maybe you have a big purchase that you need a little help with. Regardless, everyone will eventually need to take out a loan for something. With that being said, there is some information you’ll need to know before you start your application.

Your credit history

Think of this as the first impression your potential lender gets of you. Your credit score and credit history shows them that you can, or can’t, pay your balances on time. It can also determine if you can secure the loan at a preferable rate saving you thousands over the duration of your loan.

Let’s put some numbers in the mix.

NerdWallet ran a scenario showing how a 1 or 2 percentage-point difference can save you money. Say you took out a loan for $50,000 and paid over 5 years with an interest rate of 3 percent. Over 5 years you would pay $3,906 in interest. If you take the same loan with a 5 percent rate, you would pay $6,615. That is why it’s important to know your credit history because, in this instance, a 2 percent difference could save you $2,709. Think of what you could do with that amount of money.

If you missed our in-depth discussion about credit and how your credit score is determined, you can find it here.

Your income

It’s no surprise that your income plays a large role in your ability to pay back a loan, so you’ll need to have some proof of income when you apply. Here’s what you’re going to need.

If you’re an employee, you will need to show your pay stubs, W-2, and/or a salary letter from your employer. If you’re self-employed, you need a different set of documents. Here you’ll need your tax returns for the past 2 years and possibly invoices and receipts.

Finally, don’t forget to think of all your income sources. This can be your spouse’s income, freelance work, or second job income.

Your financial obligations

Not only does your monthly income affect your ability to pay off a loan, but your monthly obligations do as well. Before applying for a loan, you need to know how these two factors work together. For example, if your monthly income is $4,000 but your expenses take up $3,900, you probably won’t be able to pay off a new loan.

Keep this in mind because a loan application might require you to put in certain obligations like existing debt and your rent or mortgage payments.

Your debt-to-income ratio

While this is primarily taken into consideration when you’re applying for a mortgage loan, it’s helpful to be aware and know how to calculate your debt-to-income ratio (DTI). What is it? This is the amount of debt you currently have compared to your overall income.

It’s usually calculated in a percentage. Simply add up your monthly expenses and then divide that by your monthly gross income. The rule of thumb is that your debt-to income ratio should be 36 percent or lower. In addition to your credit score, your DTI will let lenders know if you’ll run into any issues with repaying the money you borrowed.

If you have any questions about the loan process, our lending team would be more than happy to review your credit report and see how we can save you money!


Showing Your Savings Some Love in Your 20s

You’ve landed your first full-time job and are ready to leave the “broke college student” part of your life behind and start earning some real income. The problem is that financial experts say if you don’t start saving every extra cent then you’re financially doomed. Not exactly what you wanted to hear because it leaves you feeling just as broke as you were in college.

Don’t worry, you won’t be doomed to fail. However, saving should be a top priority because you will probably want to buy a house, car, or go on a nice vacation one day. Not to mention saving for retirement.

To help you get started, here are a few ways you can boost your savings early.

Develop good saving habits

If you haven’t already, it’s important to lay your financial foundation by learning to save and practice saving every month. It can be tempting to live it up with your larger paychecks, but you never know when you might need to fall back on your savings.

Have you heard of financial gurus talking about “paying yourself first”? That means you should commit to putting away a portion of every paycheck directly into your savings account. If you want to make things even easier, you can even set up an automatic savings transfer so you don’t forget to pay yourself.

Budget like a boss

Once you’re the master of saving, you need to sit down and craft your battle plan so you know where the rest of your money will go. There are a lot of budgeting tools, like FinanceWorks, which make it easier to build a budget you know you can commit to.

Combining a good habit of saving with a strong budget, you’ll be surprised at how much you can save, take care of bills, and still have a little left over.

Don’t disregard the value of cash

Do you carry cash? Do you actually use cash?

As technology gets more advanced, more and more 20-somethings don’t carry cash and stick to using their debit cards. While this does make paying easier, only carrying your debit card can contribute to you over spending.

When you carry cash, you can only carry so much and won’t be tempted to make a huge purchase on a whim. Plus, handing over cash is not fun because you see it go into a drawer and you don’t get it back. On the other hand, you will always get your cards back ready to go for the next purchase that could bust your budget.

So, do you feel like carrying cash now?

Make saving fun

Saving? Fun?

Saving money doesn’t feel fun because you’re usually are putting off doing fun things so you can save money. What if we told you that it’s possible to have fun while saving?

When you make saving a game, you’ll find yourself saving more and more. Set a goal for yourself and save up to buy a hypothetical product. Once you hit that goal, find another product you want to “save for” and do it again. Before you know it, your savings will grow exponentially.

You can also open a savings account, like our Prize Savings Account, that give you the opportunity to win prizes by how much you save. That’s a pretty cool incentive, right?

Embrace the DIY culture

You’ve probably seen all the DIY videos floating around your Facebook feed wondering if you could try it yourself. Go for it! Making, fixing, and doing tasks yourself will save you a lot of money in the long run because you won’t have to buy it or pay someone to do it.

If you want to try doing more things yourself to save money, the Internet is a wonderful place to look it up and learn how to do almost anything.

Don’t be too strict

While you want to stay in check and not fall off the wagon, you can’t be too hard on yourself because that ultimately leads to rebelling against your budget with an unplanned shopping spree. There has to be some room to have fun and treat yourself from time to time.

It’s like when you start a fitness plan. You have to budget in a cheat day so you don’t get into trouble. When you’re making your budget, leave some money aside and use it for whatever your heart desires. You’ll see that it’s possible to save and live at the same time.


All About Credit

credit cards
 

Miss part 1 of our Financial Literacy Month Series? Check out “Fix Your Broken Budget.

You’ve probably heard both sides of the credit debate. Some say you should take full advantage of it while others tell you to stay far away from it. Who do you listen to?

If you ask us, credit is a tool that can be your best friend or your worst nightmare depending on how you use it. Would you want to put a chainsaw in the hands of someone who has no idea how to use it or someone who’s knowledgeable? The same is true for credit.

So buckle your seatbelt because we’re about to give you a crash course of what credit is all about.

What is credit?

Without getting into the dictionary definitions, credit is simply where you buy something of value now and promise to pay it back at a later date. Car loans, home mortgages, student loans, and credit cards are all types of consumer credit. You couldn’t afford to pay for these out of pocket, so you’re getting money for it now with the lender trusting you to pay it back later.

When you buy on credit, you will usually be charged interest on the money they lend you in exchange for giving you the funds. This gives you the chance to pay it back over an extended period of time.

Different types of credit comes with varying interest rates. Credit like federally guaranteed student loans have lower interest rates while credit cards have higher rates. Why? These student loans are guaranteed by the government and the lender will get the money back even if the borrower doesn’t pay. On the other hand, the credit card lender runs the risk of not get repaid. Hence the higher rate.

Credit reports and scores

Having some kind of established credit can help you when you eventually need a loan to buy a new car or house. There are three big credit agencies that keep tabs on you and how you use credit—from the amount you borrow to how timely you are on your payments. This is reflected in your credit report.

Not to be confused with your credit score, your credit report shows what you do with your credit, the state where you applied, whom you borrowed from, and whom you still owe. Now here is where the credit score comes into play.

Your credit score is determined by the information in your credit report. Your credit score is used by lenders to see how much of a risk you are when it comes to repayment. It decides if you qualify for a loan and what the interest rate will be.

What’s a good credit score? We’re glad you asked. Credit scores range from 300 to 850. Here’s how they line up:

  • 300-579: Very poor
  • 580-669: Fair
  • 670-739: Good
  • 740-799: Very good
  • 800-850: Exceptional

Just so you know, each credit agency is required by law to give you a free credit report each year. You can request it from AnnualCreditReport.com with no strings attached. We would recommend staggering your three requests throughout the year so you can stay up to date on your credit score.

If you need a little help understanding your credit report, GreenPath offers a free credit report review where you can sit down and review your report with a GreenPath credit report expert.

What is your credit score based on?

Now that you know what your credit score is and why it’s important, let’s talk about what determines your credit score. There are 5 different areas that make up your credit score with each carrying a different weight.

  • Payment History (35%) — This is the most important because it shows whether you can, or can’t, be trusted to repay money that is lent to you. Have you paid your bills on time? If you’ve been late, how late were you? Have any of your accounts gone to collections?
  • Amounts Owed (30%) — Your score is affected by how much of your total credit you use and the different types of credit in your report. Believe it or not, owing a little is better than owing none because lenders want to see if you’re financially stable enough to pay it back.
  • Length of Credit History (15%) — How long have you been using credit? A long history is helpful as long as it isn’t blemished by late payments. If you’re just getting started, don’t worry because a shorter history is fine as long as you pay on time and don’t owe too much.
  • New Credit (10%) — Your score considers how many accounts you have and how many new accounts you’ve applied for. If you’ve opened several new accounts, lenders see that as a risk and assume you will be making a lot of purchases on credit.
  • Types of Credit In Use (10%) — The final aspect of your score looks at the different types of credit you have on your account. These can be credit cards, store accounts, mortgages, etc. This is a small piece of the pie so don’t worry if you don’t have multiple types of credit.

How can you improve your credit?

Let’s say your credit history is less than satisfactory. Can you fix it? Of course you can, but it will take some time, patience, and habit changes to get it done.

First, take a look at your credit reports and see if there is any incorrect information that could be causing your credit score to go down. All too often incorrect addresses and other personal information affects people’s score when it shouldn’t.

Next you should see what areas need fixing. Start by focusing on past due accounts and pay down your balance. It’s not the easiest, but it is a great way to improve your credit standing.

Finally, get some good credit history in your report. Look to open one, at the most two, new accounts and devote yourself to paying them off in a timely manner to start raising your score. Even go as far as setting up payment reminders so you’re not at risk for missing any payments.

Is your brain overflowing with credit knowledge? Always know that we are here to help you if you ever have any questions!


Fix Your Broken Budget

April is financial literacy month
 

The Budget. It’s what’s going to help you become more fiscally responsible, save more money, and help you achieve financial freedom. At least that’s the hope.

However, many people don’t take it seriously enough. Keeping a budget is looked at a lot like starting back at the gym. Many of us start one but rarely follow through. According to a 2015 survey from Bankrate, 82% of Americans say they keep a budget. That’s great, right?

Well, not so fast. Bankrate’s survey found out that while a majority claim they keep a budget, they don’t have the best budget practices. One-third said they “scrawl it out on paper” while another 20% just do it all in their head. That only opens you up to disaster.

We like to think of budgeting as an art where you can be creative and tailor your practices to your life. So in honor of Financial Literacy Month, let’s kick things off by talking about how you can accomplish the task many Americans can’t.

Why are budgets failing?

First of all, let’s address the problem. You’ve probably read a lot of articles on the benefits of budgeting, but do you know why your budget might be failing? Let’s talk about that right now.

You aren’t setting goals. When you don’t set goals for yourself, you aren’t giving yourself a reason to stay committed to your budget. If you don’t know what you’re working towards, you tend to just give up out of frustration. Another reason might be that you’re setting goals that are too broad. Setting a goal of “getting rich” is great, but it will be hard to stay on track and might lead to you and your budget breaking up.

You gave up too early. Budgets take time. If you’re hoping to see results in a week or two, you’re going to be disappointed. Making a budget might require you to change some habits, and we all know how difficult that can be. Budgets are all about trial and error, so don’t be discouraged when it’s been 3 months and you haven’t found that sweet spot. It will happen eventually.

You lack financial education. This is a growing issue that too many Americans are facing. According to the 2016 National Capability Study, an estimated two-thirds of Americans couldn’t pass a basic financial literacy test. Knowing the ins and outs of budgeting is essential to creating a budget you know you can stick to.

What can you do about it?

Lucky for you, there’s a lot you can do to put yourself on the road to becoming a master budgeter.

Brush up on your financial knowledge. Knowledge is power and having the mindset of always wanting to learn will only help you succeed. With that being said, do you know what goes into a budget? We’re glad you asked because here’s a quick rundown.

  • Determine your after-tax income.
  • Subtract necessary expenses you already know you’ll have to make.
  • Incorporate your optional expenses like “wants.”

Have you heard of the 50/30/20 budget? Financial experts recommend you spend 50% of your after-tax funds on necessities, 30% on wants, and at least 20% goes to saving and debt payments.

Be specific when setting goals. Not only should you have a large overall goal, it makes staying motivated easier when you have smaller goals you want to meet along the way. Set a goal to save so much each month or work to pay off specific amounts during a certain time frame. You’ll be surprised at how meeting those goals will fire you up to stick with it and want to reach your bigger goals.

Stay with it. Yes, this is easier said than done, but have patience and give yourself the time to work out the kinks and make the changes you need. Don’t set yourself up to fail and set the bar insanely high. Start small and gradually work your way up while making adjustments here and there. You’ll find a strategy that work for you.

Utilize technology. The internet is full of resources that let you plan and maintain a budget without having to write it down. If you’re used to doing everything online, this should be easy for you. Programs like FinanceWorks gives you a dashboard view of your budget so you can see where your money is going.

Now, if you like going old school and working a spreadsheet or physically writing it down, there’s nothing wrong with that.

If you want to bounce ideas off someone else, our Personal Finance Officers would be more than happy to sit down and work out the details.

So there you have it! With some time and a little personal touch, you can have a budget that will help you get where you want to be!


87th Annual Meeting

Thank you to all of our members who attended our 87th Annual Meeting this year! We appreciate your dedication to making Neighborhood Credit Union the best it can be.

You can access the 2016 Annual Report here.