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Is it possible to build credit when you don’t have a job?

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Dear Penny,

I’m a housewife who does not work outside my home. The only income I have on my own is my Social Security, which isn’t much. My husband and I have had bad credit in the past. I want to establish credit in my name. Is there a way I can go about doing this?

-K.

Dear K.,

First of all, let’s separate your credit history from your husband’s. You may have had joint accounts in the past, and if payments were delinquent, both of your credit reports and scores would have been tarnished. But your credit reports, which are used to tally your credit scores, are your own.

While a spouse can certainly help or hurt your efforts to build credit, ultimately the only way to establish credit is in your own name. Unless you have a co-signer or you’re applying for a card or a loan in both of your names, only your history will be considered if you apply for credit.

It’s important to think about your goals here. If you’re trying to rebuild credit so that you can get approved for a mortgage or a car loan on your own, that’s probably going to be tough without a job. But if your goal is simply to reestablish your credit, I think you’re in good shape to do so gradually.

The easiest way to build credit is with a credit card. You don’t need a job to get one. What you need is income. Your Social Security benefits may not be much, but they still count. If you have a joint bank account with your husband that his paycheck is deposited into or he regularly deposits money into your account, you’ll also be able to count that money as income.

Applying for a secured credit card, whether you’re rebuilding your credit or starting from scratch, is always a good move. You’ll put down a deposit — typically $200 to $500 — and use that as your line of credit. In these tough times, I get that not everyone can spare several hundred dollars for a deposit. If that deposit would set you behind on bills, you can’t afford to worry about your credit right now. Focus on building an emergency fund before you apply.

If you can afford the deposit, Capital One and Discover usually have good secured card options. (No, neither one paid me to say that.) Because you’re putting down that deposit, the credit and income limits are much less strict. Some cards will let you automatically convert to a regular card once you’ve made a certain number of on-time payments.

Look for a card with the lowest possible annual fee and APR. You’ll want both to be as low as possible, of course. But hopefully you’ll be paying off the balance each month so that the APR won’t matter to you. Also make sure the card issuer reports to all three bureaus so that you’re building a credit history.

The most important thing you can do is simply pay the bill on time each month. Payment history is the most important credit factor, determining 35 percent of your score.

You also need to be careful about how much you’re charging. Your credit utilization ratio, or the percentage of open credit that you’re using, accounts for 30 percent of your score. I’d recommend making a small purchase each month that you’d make, card or no card, that doesn’t cost more than 10 percent of the card’s limit. Then, pay it off in full each month.

If you do everything right, your credit could start to improve within about six months. Any negative information that’s on your reports, like late payments or accounts that went to collection, will stay there for seven years, but the damage will start to fade after two.

The key to fixing bad credit is to make sure you’ve addressed any underlying issues, as well. Some people wind up with credit problems because of a crisis that was out of their control. But if overspending was a problem in the past, make sure you have a plan to pay off every purchase you make each month. Living without credit, as you’re doing now, is tough. But it does force you to limit your spending to what you’re bringing in. Make sure you don’t change your spending once you have greater access to credit.

One thing you don’t say is whether your husband wants to fix his credit, too. While your credit reports are separate, this will be a lot easier if both of you share this goal. It’s essential that you make a budget together and hold each other accountable. Encourage your husband to apply for a secured credit card as well. All the discipline in the world on your part won’t go far if you’re not in this together.

Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. Send your tricky money questions to [email protected].

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Bad Credit

Loans Bad Credit Online – Reforming India’s deposit insurance scheme | Fintech Zoom

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The government’s incentive to step in and bail out depositors when banks fail is clear from past experience.

By Anusha Chari & Amiyatosh Purnanandam

The failure of the Punjab and Maharashtra Co-operative Bank (PMC) in September 2019 shone a light on the limitations of India’s deposit insurance system. With over Rs 11,000 crore in deposits, PMC bank was one of the largest co-op banks. That the Deposit Insurance and Credit Guarantee Corporation (DICGC) insurance covered depositors, provided little solace when the realisation hit that the insurance amounted to a mere Rs 1 lakh per deposit.

The predicament of PMC depositors is, unfortunately, not an anomaly. Several bank failures over the years have severely strained RBI and central government resources. While co-operative banks account for a predominant share of failures, other prime examples include the Global Trust Bank and Yes Bank failures. These failures entail a direct cost to the taxpayer—the DICGC payment or a government bailout. More importantly, bank failures impose long-term indirect costs. They erode depositor confidence and threaten financial stability, presenting an urgent need for deposit insurance reform in the country.

A sound deposit insurance system requires balancing two opposing forces: maintaining depositor confidence while minimising deposit insurance’s direct and indirect costs. At one extreme, the regulator can insure all the deposits, which will undoubtedly strengthen depositor confidence. But such a system would be very expensive.

A bank with full deposit insurance has minimal incentive to be prudent while making loans. Taxpayers bear the losses in the eventuality that risky loans go bad. Depositors also have little incentive to be careful. They can simply make deposits in the banks offering high interest rates regardless of the risks these banks take on the lending side.

Boosting depositor confidence and reducing direct and indirect costs require careful structuring of both the quantity and pricing of deposit insurance. Some relatively quick and straightforward fixes could help alleviate the public’s mistrust while improving the deposit insurance framework’s efficiency.

India has made some progress on this front over the last couple of years. First, the insurance limit increased to `5 lakh in 2020. Second, the 2021 Union Budget amended the DICGC Act of 1961, allowing the immediate withdrawal of insured deposits without waiting for complete resolution. These are very welcome moves. Several additional steps could bring India’s deposit insurance system in line with best practices around the world. Even with the increased coverage limit, India remains an outlier, as the accompanying graphic shows.

The government’s incentive to step in and bail out depositors when banks fail is clear from past experience. However, these ex-post bailouts are costly. The bailout process also tends to be long, complicated, and uncertain, further eroding depositor confidence in the banking system. A better alternative would be to increase the deposit insurance limit substantially and, at the same time, charge the insured banks a risk-based premium for this insurance. Under the current flat-fee based system, the SBI pays144 the same premium to the DICGC—12 paise per 100 rupees of insured deposits—as does any other bank!

A risk-based approach will achieve two objectives. First, it will ensure that the deposit insurance fund of the DICGC has sufficient funds to make quick and timely repayments to depositors. Second, the risk-based premia will curb excessive risk-taking by banks, given that they will be required to pay a higher cost for taking on risk.

India is not alone in trying to address the issue of improving the efficiency of deposit insurance. The Federal Deposit Insurance Corporation (FDIC) recognizes that the regulatory framework governing deposit insurance is far from perfect and the United States is moving towards risk-based premia. The concept is similar to pricing car insurance premia according to the risk profile of the driver. The FDIC computes deposit insurance premia based on factors such as the bank’s capital position, asset quality, earnings, liquidity positions, and the types of deposits.

In India, too, banks can be placed into buckets or tiers along these different dimensions. The deposit premium can depend on these factors. It is easy to see that a bank with a worsening capital position and a high NPA ratio should pay a higher deposit insurance premium than a well-capitalized bank with a healthy lending portfolio. The idea is not dissimilar to a risky driver paying more for car insurance than a safe driver.

Risk-sensitive pricing can go hand-in-hand with the increase in the insured deposit coverage limits bringing India in line with its emerging market peers. In a credit-hungry country like India, these moves would build depositor confidence, possibly increasing the volume of deposits and achieving the happy result of the banking system channeling more savings to productive use.

Chari is professor of economics and finance, and director of the Modern Indian Studies Initiative, University of North Carolina at Chapel Hill and Purnanandam is the Michael Stark Professor of Finance at the Ross School of Business, University of Michigan

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5 Signs You’re Not Ready to Own a Home, According to a CFP

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The housing market has boomed over the last year, despite a global pandemic and millions of Americans struggling to make ends meet. 

Many people are spending less on entertainment, clothing, travel, and other discretionary purchases during COVID. Federal student loan borrowers have seen temporary relief from their loan payments. These expenses will most likely rise again after the pandemic, and many people who committed to a new home with a large mortgage will struggle to keep up. 

I often speak with clients and prospective clients who want to buy a home before they have a strong financial foundation. Buying a home is not only one of the largest purchases you’ll make in your lifetime, but it’s also a huge commitment that’s extremely hard to undo if you have buyer’s remorse

It’s important to make a thoughtful, informed decision when it comes to a home purchase. Before you take the plunge into homeownership, check for these signs that you’re not quite ready to buy. 

1. You have credit card debt

Credit card debt can be a drain on your monthly budget, and when combined with student loans and a car loan, it can lead to high levels of stress. 

Generally, more debt means higher fixed expenses and little opportunity to save for long-term financial goals. Your financial situation will only get worse with the addition of a mortgage. I always recommend that clients be free of credit card or other high-interest debt before they consider buying a home. 

To rid yourself of credit card debt, take some time to get a good handle on your cash flow. Take an inventory of your spending over the last six to 12 months and see where you can cut back. From there, develop a realistic budget that includes aggressive payments to your credit cards. 

There are several strategies to help you knock out credit card debt fast. Regardless of the method you choose, stick with the plan and track your progress along the way. Once you pay off your credit cards, you can allocate your debt payments to savings, which can help you avoid this situation in the future.  

2. You have bad credit

Bad credit is not only a sign that you may not be ready to take on a mortgage, it can also signal a high risk to

mortgage lenders
. A high-risk status results in higher interest rates and more strict requirements to qualify for a loan. A mortgage is one of the largest loans you’ll take out in your lifetime, and if you get behind on payments, you could lose your home. 

Just as with credit card debt, bad credit could be a result of past financial mistakes. Dedicating the time to repair bad credit and improve your credit score will help you beyond purchasing your dream home. 

Start by pulling a recent credit report from each of the three credit bureaus so you can review it for errors. Dispute any errors, address past-due accounts, and bring your overall debt balances down. It’s helpful to learn what has a negative effect on your credit score so you can avoid these mistakes in the future. 

3. You don’t have an emergency fund (or an inadequate one)

If you’re unable to save for a rainy day, you probably don’t have enough money to buy a house. Owning a home is a big responsibility, and unexpected expenses pop up all the time. In addition, you could lose your job, have a medical emergency, or another unexpected expense unrelated to the home. Maintaining an emergency fund is a good sign that you have discipline and are prepared for the responsibility of homeownership.

Many financial experts recommend saving at least six months of living expenses in an emergency fund. If you have variable income, own a business, or own a house, you should save more. To build an emergency fund, set money aside from each paycheck and automate transfers to make the process easier. Give your emergency fund a boost when you receive lump sums such as bonuses or tax refunds. Start by saving one month of living expenses and build from there. 

4. You don’t have separate savings for your home

I always advise clients to set aside savings for a home in addition to an emergency fund. It’s a bad idea to start homeownership with no savings. Whether you have unexpected expenses related or unrelated to the home, having no emergency fund after a home purchase will lead to unnecessary stress — and possibly more debt. 

When purchasing a home, you’re responsible for a down payment and closing costs. While a 20% down payment is ideal to avoid private mortgage insurance, a down payment of at least 3.5% is typically required. Closing costs can range from 2 to 5% of the home’s value. 

Also, you will have moving costs, costs to spruce up your new place (like new furniture or light cosmetic updates), and any initial maintenance and repairs. Be sure to budget for these items to know how much to save on top of your emergency fund. It doesn’t hurt to boost your emergency fund, too, in preparation for homeownership. 

5. You have a low savings rate

It’s much easier to develop good savings habits before you have a lot of responsibilities. To get on track for financial independence, several studies show that you should save at least 15% of your income. The longer you wait, the more you’ll need to save. 

If your savings rate is low before you purchase a home, it will most likely worsen after becoming a homeowner. Even if your mortgage is similar to your rent, ongoing maintenance and repairs, higher utilities, and homeowners association fees can wreak havoc on your budget. 

Take a look at your current savings rate and see if you’re on track for financial independence. If you’re saving less than 15 to 20% of your income, work to improve your savings rate before you consider buying a home. A strong savings habit can help you build your home savings fund faster and ensure that a home purchase doesn’t impede your long-term financial goals. Finally, understand how much house you can afford so you can avoid being house poor. 

Buying a home can be rewarding, and when done the right way, it’s a way to build wealth. Before you decide to buy a home, it’s important to understand your numbers and ensure that you’re ready for the commitment. Without preparation, your dream home could be detrimental to your long-term financial goals.

Chloe A. Moore, CFP, is the founder of Financial Staples, a virtual, fee-only financial planning firm based in Atlanta, Georgia and serving clients nationwide.

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What Credit Score Do I Need for a Car Loan?

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Beware these car loan mistakes

Regardless of whether you have excellent credit, terrible credit, or you’re somewhere in between, there are a few potentially-costly mistakes that are important to avoid.

  1. Long-term loans. While the industry standard used to be 48- and 60-month loan options, 72-month and longer terms are now common. I’ve even seen 96-month (eight-year) loan terms. Auto dealers use these long terms to lower monthly payments and allow buyers to qualify for more expensive vehicles. The problem: Stretching a loan out can dramatically increase your interest cost. For example, a $30,000 car loan at 8% interest for 60 months will cost you $6,498 in total interest. The same size loan with the same interest rate for 84 months would cost $9,277 in interest. Long-term loans are helpful for borrowers who can’t afford the monthly payments of a short-term loan — but a long-term loan shouldn’t be your first choice.
  2. The “monthly payment trap.” Car salespeople like to ask you how much you’re looking to spend per month. Under no circumstances should you answer this question. This effectively gives permission to charge you as much as they want in interest (and for the car itself), as long as the monthly payment is within your limit. The price of the vehicle, price of your trade-in, and the interest rate on your loan should be three separate negotiations.
  3. Rolling your existing car loan into your new one. You may see advertisements that say something like “we’ll pay off your trade, no matter how much you owe.” Well, if the value of your trade is less than the amount you owe, many finance companies will add the difference to your new car loan. This is how people end up with a $35,000 loan for a $30,000 car — avoid this type of situation at all costs.
  4. Overpriced add-ons. Salespeople, especially in the finance department, love to try and upsell you on these. When I bought my 2013 Chevy Camaro, the dealership’s finance manager offered to sell me an upholstery treatment for $12 per month added to my loan’s payment — that’s a total of $720 on a 60-month loan. I said no, only to learn that it had already been installed in the car, and they were going to give it to me whether I paid for it or not. Needless to say, I’ll never do business with that dealership again.

Perhaps the most important suggestion I can give you, especially if you have so-so credit, is to shop around for your next car loan. You may be surprised at the dramatic difference in offers you get.

Many people make the mistake of accepting the first loan offer they get (usually from the dealership). It’s also a smart idea to get a pre-approval from your bank as well as from a couple of other lenders. Online lenders and credit unions tend to be excellent sources for low-cost loan options. Not only are you likely to find the cheapest rate this way, but you’ll then have a pre-approval letter to take to the dealership with you.

The best part is that applying for a few auto loans won’t hurt your credit. The FICO credit scoring formula specifically allows for rate shopping. All inquiries for an auto loan or mortgage that occur within a 45-day period are treated as a single inquiry for scoring purposes. In other words, whether you apply for one car loan or 10, it will have the exact same impact on your credit score.

Buy a car now or work on your credit?

The bottom line is that there is no set minimum FICO® Score to get a car loan. There’s actually a good chance that you can get approved for an auto loan no matter how bad your credit is.

Having said that, subprime and deep-subprime auto loans can be extremely expensive, so just because you can get a car loan with bad credit doesn’t necessarily mean you should. The savings from a moderate score increase can be substantial, so it could be a smarter idea to wait for a bit and work on rebuilding your credit before buying your next car.

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