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Smart Ways to Spend Your Tax Refund

Tax Refund

As of April 12th, the average taxpayer who has received a tax refund in 2019 will receive a $2,795 payout(1). While the payout is down 1.3% from this time last year, it’s still a significant refund. And if strategically spent, can save you even more in the long run!

A recent survey from GOBankingRates.com(2) shows that many Americans plan to spend their tax refund wisely. Over 50% plan to pay off debt, invest or save their refund. Coming in at 16% in the survey? Americans plan to stash their tax refund into savings.

Build a Small Emergency Fund

If you don’t have an emergency fund, using your tax return (or part of it) to fund one is the first step in taking control of your money. According to Bankrate.com,(3) only 39% of American’s would be able to cover a $1,000 emergency with savings. This leaves the majority to find another way to cover the cost – typically using credit cards or other methods that in incur debt and interest.

Once you have an emergency fund to cover those potential unexpected emergencies, the next step towards controlling your finances is to pay down any existing debt. That’s exactly what over a quarter of those surveyed plan to do with their tax refund. With the national debt at an all-time high of $13.54 trillion,(4) it’s not a surprise that 27% of taxpayers want to use at least part of their tax refund to pay down debt.

What would this look like? We took the most common average American household debts and ran the numbers to see what would happen if you put your tax refund towards them. The results were staggering! Read on to see how much you can save with these simple steps.

Take on Debt With Your Tax Refund

1. Chip Away at Credit Card Debt
In the 4th quarter of 2018, credit card balances rose to $870 billion(4) – marking the first time credit card balances have retouched the 2008 nominal peak. According to Nerdwallet,(5) the average credit card debt per household is $15,561. If you’re only making the minimum monthly payment of 2% with an average annual interest rate of 15%, it will take you approximately 6.5 years to pay it off. That’s assuming you don’t charge any more on your credit card during that time.

Now, let’s say you take your tax refund of $2,795 and apply it to the balance of your credit card. This one small move means paying it off almost 2 years quicker and saving $3,890 in interest.

What if you take it a step further? What if you adjust your withholding so that Uncle Sam isn’t holding on to it (interest-free, I might add) for the next year? You could bring home an extra $233 a month ($2,795/12) and apply it to your credit card debt. In this scenario, you’d pay off 3 years faster and save over $8,170 in interest! Your initial tax refund of $2,795 almost triples its value!

2. Stamp Out Student Loans
Another option is to use your tax refund to pay off your student loans. Student loan debt is at an all-time high of 1.46 trillion dollars(4) with the total owed by an average US household totaling $47,671.(5) At an average interest rate of 5%(6) your monthly payment would come to $506 per month. That amounts to $23,836 in total interest over a 10 year repayment period. Yikes!

What if you decided to use your tax refund to lower the loan balance and make the additional $233 monthly payments? It would mean saving $9,733 in interest and shaving 4 years off the loan period! Not bad.

3. Crush Your Car Loan
Car loans are another debt to consider paying off, especially since their value can decrease rapidly. Experian’s latest research(7) shows that the average new car loan is $30,977 with a  7.04% interest rate. The average auto loan term for new vehicles is almost six years. Using your $2,795 tax refund along with increasing your monthly payments of $233, you can save $3,634 in interest and pay off your wheels in 4.5 years!

Invest In Your Retirement

Got your debts and savings covered? Consider kick-starting or adding to your retirement account. Retirement in the US is approaching a crisis. In the coming decades, millions of Americans will get too old to continue working but will not have the means to retire. While stats may differ slightly by source, the story is pretty much the same. A 2018 study by Northwestern Mutual(8) shows that 21% of Americans have absolutely no retirement savings while an additional 10% have less than $5,000! One in three Baby Boomers currently in or approaching retirement age have between $0 and $25,000 set aside.

With an initial investment of $2,795 and $233 monthly contributions, you could grow your retirement account by $377,820 over the next 30 years ($86,675 in contributions & $288,144 in growth*). Talk about peace of mind.

So, whether your tax refund is fairly substantial or just a drop in the bucket, putting it to work for you can improve your financial situation! You can even treat yourself – just don’t blow it at on a huge, unnecessary splurge.

The information contained herein is general in nature and based on authorities that are subject to change. Churchill Mortgage guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Churchill Mortgage assumes no obligation to inform the reader of any changes that could affect information contained herein. This publication does not, and is not intended to, provide legal, financial, tax or accounting advice, and readers should consult their advisors concerning the application of tax laws to their particular situations.
*assumes an average return of 8% per year
1. https://www.irs.gov/newsroom/filing-season-statistics-for-week-ending-april-12-2019
2. https://www.gobankingrates.com/taxes/refunds/what-americans-do-with-tax-refund/
3. https://www.bankrate.com/banking/savings/financial-security-0118/
4. https://www.newyorkfed.org/newsevents/news/research/2019/20190212
5. https://www.nerdwallet.com/blog/average-credit-card-debt-household/
6. https://www.nerdwallet.com/blog/loans/student-loans/student-loan-interest-rates/
7. https://www.experian.com/content/dam/marketing/na/automotive/quarterly-webinars/2018-q4-safm.pdf
8. https://news.northwesternmutual.com/2018-05-08-1-In-3-Americans-Have-Less-Than-5-000-In-Retirement-Savings

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Is Your Family At Risk of Child Identity Theft?

No one wants to go through the fallout from an identity theft. It’s incredibly stressful, it can be costly, and it can take what seems like forever to get your record clean again. By gaining access to your personal information, the identity thief can send your finances, credit, and your reputation into a tailspin.

When criminals steal your personal information for their own financial gain, it’s identity theft. It can include everything from stealing someone’s social security number to open new accounts to hacking into a bank account. Because so much of our information is now stored and shared electronically, this crime is on the rise – and child identity theft is happening more frequently, too.

It’s easy to forget that your children can also be the victims of identity theft, even without credit cards or bank accounts of their own.

Today, we’ll walk you through the basics of child identity theft, signs it may have happened to your family, and some tried-and-true ways to make sure you’re keeping your family as safe as possible from child identity theft.

What Makes Child Identity Theft An Appealing Crime?

  1. A child’s information gets shared on a regular basis. Think of all the times you’re required to share your children’s information: their schools, your work, and much more. Additionally, kids are known for hopping on social media without realizing the risks of sharing their own personal information. These realities can make your child’s information much easier to access.
  2. A child has no negative credit history. Of course, most children have zero credit at all! This means it’s much easier for identity thieves to take out new loans in your child’s name and commit child identity theft.
  3. A child’s credit information isn’t monitored. Years may go by before you realize your family is the victim of child identity theft.

Signs Your Child’s Information Has Been Stolen

While there’s no foolproof way to prevent child identity theft, there are ways you can be alerted that his or her information may have been stolen.

Since your child has no credit history, you should be concerned if:

  • You receive credit card applications in your child’s name. This could mean someone has used your child’s information to apply for credit.
  • A collections agency calls to speak with your child.
  • The IRS tries to contact your child. Someone could be using your child’s social security number.
  • Your child is turned down for financial aid, first apartment, or a job. If your child is getting refused because of a bad credit history, it could be a case of identity fraud. Many cases of child identity theft come to light only when child applies for college or a job – likely the first time anyone runs a credit check.

Make Sure Your Child’s Not Vulnerable To Identity Theft

When it comes to child identity theft affecting your family, you’re not limited to simply crossing your fingers and hoping for the best. There there are steps you can take to protect your child’s information and credit.

  1. Equip your kids with online safety smarts. Talk to your kids about the risks and pitfalls of sharing too much information, making purchases from unsecure websites, online scams, etc.
  2. Be careful with your child’s information. For instance, don’t carry your child’s Social Security card in your wallet – store it in a safe location with other important documents.
  3. Keep your child’s information as private as possible. Unless it’s absolutely necessary, don’t share your child’s private information (Social Security number and date of birth) to anyone.
  4. Check your child’s credit reports. Because your child shouldn’t have a credit report at all, you can use an annual credit check to easily verify whether someone has tried to obtain credit using your child’s social security number.

Realizing your child’s clean credit history has been ruined is a terrible feeling. It can result in you and your family feeling blindsided. Now that you’re equipped with today’s tips and insights, you’re far more likely to discover the child identity theft right when it happens, or hopefully, avoid it altogether.

Disclaimer: Citywide Home Loans does not provide identity theft services or any other service apart from lending.

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Your DIY Guide to Credit Repair

In the market for a new home, but your credit score could use some serious TLC? You’re not alone! And we’re here to tell you that credit repair is very possible – it just takes a little strategy, effort, and some discipline, too.

There’s even better news: you can perform the credit repair yourself. Don’t be taken in by offers from anyone promising easy credit repair overnight. You’ll likely end up paying a sizable sum of money (likely the last thing you need right now) when you could have handled it all on your own.

A solid credit score doesn’t happen instantly, but it will happen if you follow the five credit repair steps below.

1. Get Copies Of Your Full Credit Reports

Before you even start the DIY credit repair process, it’s time to grab copies of your full credit reports from all three credit bureaus (Experian, Equifax, or TransUnion).

You can get annual free copies of your reports when you visit annualcreditreport.com or by calling 1-877-322-8228. You’ll come across other websites offering “free reports”, but the Federal Trade Commission (FTC) has warned consumers time and again that these offers are often just scams. Avoid signing up for any free trials or fee-based credit reports.

2. Dispute Incorrect Information On Your Credit Report

Now that you’ve assembled the information you’ll need, it’s time to take the first step in the credit repair process: disputing incorrect information. It’s much more common than people realize! Make sure you check and double-check:

  • The spelling of your name
  • Your address
  • Social security number
  • Credit history information
  • List of credit cards
  • Major purchases
  • Outstanding debts

Did you spot any mistakes – or were there any items you found questionable? (Keep in mind that your reports from the three different credit bureaus may not have the exact same information.) First, make a copy of the report and make note of the mistake. Then, compile and make copies of any information that supports your position, including bank account statements.

Send a letter by certified mail to the specific credit reporting agency that had the error on its report, with a clear explanation of the errors and copies of your supporting documentation. Be sure to keep the original documents for yourself!

The reporting agency must investigate the item – usually within 30 days – and they must also forward all the relevant data you provide about the inaccuracy to the organization that provided the information.  Here is the contact information for the three credit bureaus:

If you’re looking for more specifics on this process, the Federal Trade Commission provides great advice on contacting the credit bureaus about errors.

3. Pay All Your Bills On Time

No exceptions! The single most important factor to your credit score is your ability to make on-time payments. Your credit can’t improve in any meaningful way until you show lenders you can consistently pay all your bills on time. Make every effort to get caught up as soon as possible.

4. Pay Down Credit Card Balances

Have outstanding balances? You’ll need to create a budget that allows you to pay down your credit cards bit by bit, month after month.

Refresh your knowledge of your credit limits – you’ll want to stay well under the maximum amount when you’re charging items.  In fact having a credit card utilization rate under 30%, per card is preferable. To illustrate, look at the following example of how your debt gets analyzed by ratios:

Let’s say you charge $500 on a card with a $1,500 limit – this means you have a credit card utilization rate of  33%. That’s far better for your credit score than charging $500 on a card with a $1,000 limit (50%). And of course, both of these scenarios are better than making out your credit cards (a ratio of 100%).

Even if you owe nothing, the total amount of available credit still affects your score. You should pay these credit cards down, but avoid canceling them!

5. Resist Temptation: Do Not Apply For New Credit!

This is where things get tough. It can feel difficult to avoid opening a new credit card, especially when, for example, your favorite store is offering a tempting discount and other benefits.

Remember: every time you apply for credit, it’s listed on your credit report as what’s called a hard inquiry.  If you have too many of these hard inquiries within two years, your credit score will take a hit.

DIY Credit Repair is A Journey – But It’s Worth It

It can feel like you’re taking a lot of steps and making sizable sacrifices without seeing much immediate payoff.  It may take months or even a couple of years, but your credit score will improve. And when you and your family are settling into your new dream home? All the discipline and hard work will feel completely worth it.

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Mortgage DON’Ts to Avoid During The Loan Process

The home loan process can be stressful – with many steps that need to be taken.  Something that may seem inconsequential to you could have an impact on your mortgage approval, and the last thing anyone wants is to have their dream to fall apart because of a simple misstep!

The following list of mortgage DON’Ts can help you avoid the mistakes many borrowers make and ensure a smoother loan process.

Mortgage Don’ts During Your Loan Process:

1. DON’T: Quit or Change Your Job
While changing jobs may not prevent you from getting a mortgage, it could delay your home purchase or refinance. Your credit approval is based on your current job history and income, so making a change – even if it is moving to a higher-paying job – could change your ability to qualify for your new home.

If you expect to change jobs during the loan process, tell your lender upfront so they can work with you on meeting the requirements.

2. DON’T: Make Any Major Purchases
Making major purchases such as a new car, furniture or appliances, will increase your debt and may impact the amount you’re qualified to borrow and may even affect your ability to get a loan.

This includes deferred payment plans that are a popular option when purchasing furniture. Even if the payments are delayed 6-12 months down the road, they will still show up on your credit report as debt.

3. DON’T: Apply for New Credit
You lose points from your credit score every time that your credit is pulled by a potential creditor or lender. Depending on your current credit report and the type of inquiry, you could lose anywhere from 2-50 points each time. This includes credit cards, student loans or any other lines of credit.

4. DON’T: Make Late Payments on Your Mortgage or Other Accounts
Payment history accounts for 35% of your credit score, and takes into account whether you’ve make your payments on time. Late payments are evaluated based on how recent the late is, the severity of it, and the frequently of the late payment(s).

In general, the longer a bill goes unpaid, the more damaging it is to your credit score. A 90-day late can have a more significant impact that on 30 day late. Additionally, the more recent that late payment is, the more damaging it will be.

Late payments may also have a more significant impact on a higher credit score. For example, a 30-day late could cause as much as 90-110 point drop on a FICO score of 780 for someone who’s never missed a payment on any credit account.

5. DON’T: Make Large Deposits Into Your Checking or Savings Accounts
Any time you make a large deposit (typically anything over 20% of your gross monthly income), it will need to be verified and will require a letter of explanation that sources the funds.  Transferring large balances in-between your accounts also needs to be tracked and verified. Listen to our educational video to learn more.

6. DON’T: Max Out or Over-Charge Your Credit Cards
Cards with a high credit utilization ratio, like high balances or maxed out cards, can lower your credit score. Keeping your credit card utilization low, preferably under 30%, is a good goal to aim for.

7. DON’T: Write Non-sufficient Funds Checks
During the loan process your lender will request 2 months of bank statements as documentation. Bank statements showing issues with overdrafts may indicate to the lender that a borrow has an insufficient income or inability to manage money and result in a declined mortgage application.

8. DON’T: Co-Sign For Another Person For a Loan or Line of Credit
Even though the loan is for someone else, by co-signing you’re assuming the debt as well, impacting your debt-to-income ratio and credit score.

9. DON’T: Close Credit Card Accounts
Even if they have a $0 balance. When you close a credit card account it will appear to the FICO scoring model that you debt ratio has gone up.  It can also affect other factors in the score such as length of credit history.

If you have to close a credit card account, wait until you’re finished with the loan process and make sure it is a more recent account.

10. DON’T: Pay Off Collections or Loans
Paying collections may decrease your credit score immediately due to the date of last activity becoming recent. Disputing credit trade lines or collections reporting on your credit report can have a similar impact. If you want to do any of the above, it’s best to discuss your options and their impact with your lender.

Don’t Change Anything

It’s probably becoming clear that the best rule is “Don’t Change Anything!” just before or during your loan process. While some of these moves may seem like a great idea, they often can have negative consequences…so talk to your lender before making any changes!

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Your Credit Report: How This Weekend’s Changes May Affect It

Many of us are all-too-familiar with our credit report, that detailed chronicle of your credit history. Credit bureaus compile this information, then your potential lenders use the reports to determine your creditworthiness for taking on loans and other debt.

Your credit report has always revealed things like whether you’ve been late on payments or whether you’ve defaulted on a loan. Seems like there’s plenty of information to be out there about you, right?

But this Saturday – September 24, 2016 – will see the information in a credit report tackled from a slightly different angle. Your credit report will now be answering the question: how have you been managing your debt?

Lenders will learn extra details about your habits, like what you paid on your balances from one month to the next over extended periods of time. They’ll be delving into any patterns or trends when it comes to how you manage your money.

New Credit Report Terms: Transactor vs. Revolver

If you’ve never heard of terms like “transactor” and “revolver,” it’s because they’ve never been very important until now! But this year they’re becoming incredibly important to millions of potential borrowers. Depending on which camp you fall into, it may even dictate whether you qualify for a mortgage at all.

If you’re a transactor, you pay off your revolving credit bills each month. While this demonstrates financial responsibility, the current system isn’t set up to reward this behavior because only the credit limit and the amount of credit used are taken into consideration.

If you’re a revolver, on the other hand, most of the time you make the minimum payment on your revolving credit. You simply roll your balances over to the next month. The credit industry has done its research and they’ve long known that, statistically, revolvers are far more likely to default at some point in the future, especially when those substantial unpaid balances are piling up. Transactors tend to be lower risks.

So what’s changed? Mortgage lenders and investors have always had difficulty differentiating the revolvers from the transactors. A person’s credit report could let them know whether an applicant is typically late on credit card payments or has defaulted on other loans, but they had no way of knowing exactly what was paid on the balances each month over the long haul.

The Move Toward Trended Credit Data

This Saturday, mortgage market powerhouse Fannie Mae will show trended credit data – looking into how all loan applicants have managed their credit over the last two years. They’ll learn how much revolving debt you owe each month, the minimum payment allowed on each debt, as well as how much you actually paid.

Meanwhile, two of the three national credit bureaus — Equifax and TransUnion — will supply two years’ worth of continuous, month-by-month data on the credit management patterns of millions of loan applicants.

What Will This New Method Mean To You?

It benefits borrowers who regularly pay off debt and it should also provide a greater number of creditworthy borrowers access to mortgage credit.

This is great news if you’re in the earlier stages of building your credit history! You may have once been considered “unscorable” because there wasn’t enough data to create a reliable credit report. But by adding credit usage data into their reports, you could potentially qualify for reduced interest rates from lenders.

Bottom Line: It’s a Huge Step Toward Fairer Credit

As a hopeful borrower, the way you manage your credit could now become the key factor. Consumers who pay their bills in full will reap the benefits while those who play games with credit cards will warrant a harder look.

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