When You Should Consider a Certificate of Deposit

by Roberta Pescow 4. March 2015

Grow Your Money

Looking for safe investments that grow faster than traditional savings accounts? Take a look at certificates of deposit, or CDs, and find out when these accounts make sense and how to make the most of them.

What’s a CD?

CDs are deposits that offer guaranteed interest in return for keeping an amount of money in the certificate for a fixed time period. A CD is among the safest investments available at a bank insured by the Federal Deposit Insurance Corp., because that agency backs them just like other deposits, up to $250,000 per depositor. Financial institutions such as 1st Mariner Bank generally offer higher returns on CDs than on regular savings accounts. And typically, the longer the term of the CD, the higher the annual percentage yield, or APY. Be aware though, that most CDs have heavy penalties for withdrawing funds early.

Great uses for CDs

Although CD investors are typically higher-income earners, certificates can help people in almost any income bracket achieve their financial goals because you don’t need much cash to get started. Certificates of deposit function particularly well to prepare for:

  • Vacations: Invest six months to a year ahead.
  • Weddings: Purchase CDs a year or two in advance.
  • Home purchase: Begin buying CDs three to five years before you need the down payment.
  • College education: Parents and grandparents might want to start investing in CDs 10 to 15 years before a child’s high school graduation, or even right after birth.
  • Retirement: CDs can be used to invest retirement funds for added tax advantages.

Make your CDs work harder

A little planning and strategy on your part squeezes even more from an already sound investment. When rates are low but expected to rise, choose short-term CDs so your cash will be available again sooner to purchase new certificates at better rates. On the other hand, when rates peak, it makes sense to buy long-term certificates to lock in high interest for as long as possible.

A classic CD strategy that works well in all market conditions is called laddering. It involves buying multiple CDs with staggered maturity dates rather than a single certificate. Here’s how it works:

  • An initial investment of $5,000 could be divided into five CDs of $1,000 each that mature in one, two, three, four and five years.
  • When the first certificate matures at the end of the first year, reinvest the money in a new five-year CD.
  • Each time a certificate matures, reinvest in a new five-year CD. This creates an annual stream of available cash.

CD investing is easy. No matter what your goal, CDs can help you achieve it. With the odds so clearly in your favor, almost any time can be the right time to open a CD.

Roberta Pescow writes about personal finance, insurance and banking for NerdWallet. She previously was a home and garden writer for IdealHomeGarden.com and has articles syndicated on over 200 websites nationwide.

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How Student Loans Can Affect Your Credit Score

by Roberta Pescow 5. November 2014

Student Loans

College graduation celebrates past accomplishments and upcoming adventures. It’s also the point when paying off student loans becomes a tangible financial obligation rather than a future burden. Once you start paying, you’ll feel the effect on your budget immediately. But what may not be apparent is how this debt affects your credit score, which will have long-term effects on almost all areas of your life.

Establishing Good Credit

When it comes to your credit rating, student loans can be a positive influence. They can be an important building block to establish or burnish your profile as a good financial risk, which in turn helps you obtain credit cards and borrow in other ways. The resulting diversity in your record is an important factor that ultimately boosts your credit score, provided you pay bills on time.

Student loans are considered “good debt” since they represent an investment in your future. How you handle them may be key to getting other financing such as a mortgage or auto loan, which would further build your profile. Dealing with these college-related obligations can boost your credit score, a measure of financial risk used by lenders, compared with peers who didn’t borrow to pay for school.

What if I Can't Make My Payments?

Getting that first job after graduation can be tough, and if you aren’t earning enough, it may be impossible to cover your payments. If this happens to you, don’t panic – you have options to protect your rating.

No matter how overwhelmed you may be, the worst course is doing nothing. Missing a payment by a few days or weeks might not be too damaging, but after 60 days, most lenders will report the loan involved as delinquent to the companies that maintain credit records, and your risk profile will worsen. Letting your loan slip into default will mar your rating and the stain will stay there for seven years.

Deferment and Forbearance

One way to maintain good standing even if you can’t make the payments is to seek a deferment or a forbearance agreement, which puts that obligation on hold. These options won’t harm your credit score and banks might even be more willing to lend you money after you’ve taken such steps.

You may be eligible for a deferment on a federal student loan if you’re unemployed, are enrolled in school at least half-time, are on active military duty during certain periods, or you’re in the Peace Corps. You don’t have to make payments during a deferment, but if you don’t pay the interest it may be added to the principal balance and you may end up paying more. Bear in mind that you’ll need to reach out to the organization handling your loan to request a deferment.

If you don’t qualify for deferment, you may still be able to arrange forbearance with your loan servicer. During the forbearance period of up to 12 months, you won’t have to pay any principal, but you’ll still have to make monthly interest payments.

Forgiveness and Cancellation

If you’ve made 120 consecutive on-time payments on direct federal student loans while working full-time in government or tax-exempt not-for-profit organizations, you may be able to erase the remaining debt. Designed to promote such careers, the Public Service Loan Forgiveness Program (PSLF) can be used to cancel or discharge qualifying school debts. These actions won’t negatively affect your credit score.

Repairing the Damage

Even those who’ve defaulted, usually by not paying for nine months or more, still have some options to repair the damage. Once regular payments begin, the default remains on your credit report for at least seven years. Once you get the account current, your rating will start to improve, sometimes within weeks.

Once you’ve made an agreed-upon number of on-time payments to the U.S. Education Department and the loan has been sold to a lender, it can be rehabilitated and the default status can be removed.

If you find yourself in trouble with student loan payments, be sure to contact your lender or loan servicer right away to make arrangements that will preserve your good credit.

Roberta Pescow writes about personal finance, insurance and banking for NerdWallet. She previously was a home and garden writer for IdealHomeGarden.com and has articles syndicated on over 200 websites nationwide.

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Consolidating Your Debt – Why it’s Important and When to Consider It

by Roberta Pescow 9. September 2014

Credit Cards

Unfortunately, debt has become a way of life in the United States, with American consumers owing an overwhelming total of $11.68 trillion as of April 2014. That debt comes from multiple sources, including credit cards, mortgages and student loans. If you’re struggling to manage your multiple debt payments, you may want to consider debt consolidation.

Why debt consolidation is important

Managing debt from several sources can get complicated quickly. With so many bills due at different times of the month, even the most careful borrower may accidentally miss a payment. In addition, you may struggle to pay off multiple high-interest debts and high monthly payments.

Debt consolidation involves taking out a single loan to pay off your various debts so you only have one easy-to-manage monthly bill to pay. Ideally, you’d also lower your interest rate and monthly payments in the process. If you can reduce your interest rate and total monthly payment, you can pay off your debt more quickly and consistently, lowering the risk of additional interest charges, late fees and a damaged credit score.

When to consider debt consolidation

Debt consolidation is worth considering if it can help you eliminate debt faster or pay bills on time. Keep in mind that debt consolidation won’t make your debt disappear, so it’s important to have a regular income and stick to a budget that gives you a financial cushion to make your payments.

Consolidating your debt is also beneficial if you need to lower your monthly payments. But because that requires that you extend the term of your loan, you’ll also want to assess whether you can contribute more than the monthly minimum to ensure you don’t end up paying significantly more in interest over time.

If you have high interest rates on multiple debts, you may also benefit from loan consolidation. But before you apply, you should check your credit score. If you have a low credit score, you may not be able to lock in a low interest rate that will make your debt consolidation worthwhile.

You’ll need to have enough cash saved to offset any fees that come with your new loan agreement. Fees may include balance transfer fees, closing fees and origination fees.

It’s important to do research before settling on a debt consolidation strategy. An amortization tool is an easy way to compare scenarios with various loan terms and and interest rates. As you research your options, use the tool to figure out what works best for your situation.

How to consolidate your debt

There are many ways to consolidate your debt. The following are a few options worth considering:

Credit card balance transfers

Some credit cards allow balance transfers with 0% interest for an introductory period, usually anywhere from six to 18 months. You can expect to be charged a balance transfer fee of 1% to 5% of the amount transferred. Your card may or may not have a maximum amount allowed for balance transfers, but usually you can only transfer debt within your credit limit, and that total should include your transfer fee.

Home equity loans

Mortgage rates are holding at near historic lows, but as the economy improves, those rates will rise. That means you may not have much time to take advantage of this window of opportunity and let your home equity work for you. Be aware that home equity loans aren’t for everyone, though. You’ll need a steady income, because defaulting on your payments can lead to foreclosure on your home.

Roberta Pescow writes about personal finance, insurance and banking for NerdWallet. She previously was a home and garden writer for IdealHomeGarden.com and has articles syndicated on over 200 websites nationwide.

If you found this article useful, be sure to check out these related articles:

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