ELFI Credit Series: Why Maintenance Matters for Credit

December 17, 2019

Once you establish credit, it’s time to go into maintenance mode. Good credit won’t sustain itself without your attention, and you need it for just about every life milestone.

Not convinced? Let’s go through a sample life trajectory to see how good credit comes in handy at nearly every turn, from getting a car loan and a good auto insurance rate to obtaining a mortgage and refinancing student loans.

Buying a car

Let’s start at age 25. You’ve just finished up grad school and landed your first professional job. But there’s one problem: It requires a commute, and you don’t have a car after years of relying on public transportation in the city. Time to get a vehicle.

You don’t have enough saved to pay cash, so an auto loan it is. Credit determines your borrowing price.

The average auto loan rate for customers with super-prime credit — scores ranging from 781 to 850 — is 4.01% for new cars and 4.66% for used cars, according to Experian data from the third quarter of 2019. For customers with non-prime credit (scores of 601-660), the average rate for new and used cars is 7.77% and 11.01%, respectively.

Source: Experian, State of the Automotive Finance Market, Q3 2019.

As the owner of a new car, you’ll also need car insurance. And — surprise! — credit is a factor insurers consider when they set premiums. They use FICO insurance scores, which are different than FICO credit scores but are still credit-based. These scores are a predictor of the risk you pose to insurance companies, according to FICO.

“People who don’t manage their finances responsibly are also not likely to maintain their homes or autos responsibly — and, thus, are more likely to file claims,” according to the FICO Insurance Score product sheet.

Refinancing student loans

You start the job with your new set of wheels, and it’s going along swimmingly. But now, the grace period on your student loans is about to end. After years of deferring the debt during college, it’s finally time to face it — and all the interest that has accumulated.

You owe a total of $75,000 in student loan debt from your undergraduate and graduate degrees, with interest rates averaging 7%. On a 10-year repayment timeline, you owe $871/month.

After researching all your options — income-driven repayment, Public Service Loan Forgiveness, just buckling down and paying it — you decide that refinancing the student loan debt makes the most sense.

Typically, you need a credit score in the high 600s to even qualify for student loan refinancing. From there, your credit determines your rate (and how much you save). Assuming you stay on a 10-year repayment schedule, you could get a rate as low as 3.99% with Education Loan Finance*. That’d lower your monthly payment to $759, saving you $112/month and more than $13,000 overall, according to our student loan refinance calculator.

But of course, the lowest rates require the best credit. Shopping around will help you find the lowest possible rate you qualify for, but too many hard pulls on your credit could hurt you. To maintain your credit while comparing rates, stick to lenders that can prequalify you with a soft credit pull, so there’s no ding to your score.

Buying a house

Time passes. You’ve been living in apartments for a few years (with no problems ever renting a place because landlords love your good credit). But you can’t help thinking about how you’ve been diligently paying rent for years with no wealth to show for it. Maybe it’s time to think about investing in a place of your own.

You keep paying down your student loan debt, slowly socking away the money you saved from refinancing. Before long, there’s enough for a down payment.

Mortgage shopping begins. Like with rates for auto loans and student loan refinancing, home loan rates are credit-based. Now, credit matters more than ever: Your mortgage is likely the biggest debt you’ll ever have, and qualifying for a rate that’s even half a point lower could save you hundreds of dollars a year.

But you also realize that credit score isn’t the only thing lenders are looking at. They also care a lot about your debt-to-income ratio. Yours might have been too high before — the maximum allowable DTI is 45% to 50%, according to guidelines from Fannie Mae. But because you have good credit and have made a dent in your student loan debt, banks are happy to help you buy your first home.

Set yourself up for success

We could go on and on. Good credit is necessary to get low rates on personal loans, qualify for the credit cards that give you the best rewards, and co-sign a student loan for your child.

And speaking of kids, you can set yours up for future credit success by making them an authorized user on your credit card (at an appropriate age, of course). That way, the good credit you’ve spent a lifetime building and maintaining will give them a head start.

No matter what your (and their) goals are, proactively maintaining good credit over time will almost certainly help achieve them.

Credit-worthiness is an important factor in maintaining good financial health. And if you’re considering student loan refinancing, your credit score plays an important role in securing great rates. ELFI’s prequalification process is quick, 100% online and won’t affect your credit*. Speak with one of our Personal Loan Advisors today, or see how much you could save today.*

*Subject to credit approval. Terms and conditions apply.

Make a Budget

Deciding on a budget before you start shopping will help you choose a home you love that falls within your price range. In building a budget, be sure to consider your total income, as well as necessary expenses like utilities, food, and gas you’ll incur each month in addition to housing costs. As a rule of thumb, you should aim to keep the cost of your mortgage below 25% of your take-home pay.

Maintaining a budget is a great way to continue to meet other financial goals, like paying down student loans, saving for a car, or building an emergency fund, while searching for your dream home. If you’re not sure where to start, SouthEast Bank’s fixed and adjustable-rate mortgage calculators can help you determine your initial budget and launch a successful house hunt!

Here’s an extra tip. Don’t forget to include closing costs in your final total! Many first-time homebuyers make this mistake and find themselves over-budget at the end of the transaction. Average closing costs fall between 2-5% of the total cost of the home. In some situations, the seller may agree to cover the closing costs, so be sure to consider including that in your home offer as well.

Boost Your Credit Score

When you’re considering buying a home, give yourself every advantage by keeping your credit score in great shape. If your credit could use a little extra help, try these tips to polish your score:

Make bill payments on time. Late payments are a credit score’s worst enemy, as payment history is the most heavily weighted category in determining your score. Set reminders in your phone, leave yourself sticky notes, and do whatever it takes to get those payments submitted by their deadlines!
Slow down the spending. Hitting your credit limit can also damage your score, so be careful to use different forms of payment, like cash or debit, or cut down on unnecessary spending.
Don’t close that card. Closing lines of credit can be damaging to your score, even if they’re linked to cards you rarely or never use. Instead, put your card in a safe place and use it for occasional transactions, or set it up on autopay for a small monthly expense. If you do need to cancel the card, take these steps from U.S. News to avoid significantly dropping your credit score.

If you found this advice helpful and you’d like to take a deeper dive into your credit score, check out ELFI’s blog, “How to Build Credit: A Beginner’s Guide.”

Understand Your Mortgage

Buying a house is a big decision, but understanding your mortgage will give you the confidence to take the next steps in finding your perfect home! Here are a few ways to determine which mortgage loan is right for you:

Choose a mortgage term that fits your budget. Mortgages generally have terms of 15, 20, or 30 years, meaning the length of time it takes to repay them.
- If your goal is to keep your monthly payment low, then opt for a longer-term loan, which will allow you to make smaller payments over time. While long-term loans are great for lowering your monthly payment, however, they increase the number of total payments and result in more interest than short-term mortgages.
- On the reverse side, short-term mortgages have higher monthly payments but less total interest. Either way, the important decision is choosing the term that allows you to remain within your budget and keep your financial goals on track!
Find the right mortgage lender. All too often, first-time homebuyers make the mistake of stopping their mortgage search after being approved by one lender. Instead, take the time to reach out to multiple lenders and determine who can offer the best rate. By being selective, you could save thousands of dollars over the life of your loan.
Get preapproved by your top lenders. After you’ve decided which lenders you’re most interested in working with, show sellers you’re serious by getting preapproved for a loan. A preapproval letter shows that a lender has researched your credit and financial history and determined they’d be willing to offer you a mortgage loan.
- When you’re researching lenders, it’s smart to submit all preapproval applications within 30 days to avoid hurting your credit score.

Choose the Right Insurance

Once you’ve built your budget, boosted your score, and finished your mortgage research, it’s time to close on your dream home!

As part of the closing process, you’ll be required to purchase homeowners insurance. Like mortgage lenders, several companies offer homeowners insurance with different rates and benefits. Take the time to research which insurance plan is right for you to ensure you’re receiving the best protection.

If you could use some expert help, reach out to SouthEast Insurance Services¹. Their experienced representatives can compare rates from more than 40 major lenders to be sure you’re getting the most for your money. Visit them here to learn more to receive a complimentary, no-obligation quote.

Congratulations! You’ve done your research and found a dream home within your budget. With our first-time house hunter tips, you’ve also built your credit and received competitive rates on your mortgage and insurance. Now, it’s time to enjoy the home you’ve worked so hard for.

At ELFI, we’re proud to support your financial goals and are here to help you along every step of the way. Check back soon for new blog posts, and happy house hunting!

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

¹SouthEast Insurance Services Products

are not a deposit
are not FDIC-insured
are not insured by any federal government agency
are not guaranteed by the bank
may go down in value

Insurance products are not insured by FDIC or any Federal Government Agency; are not a deposit of, or guaranteed by the Bank or any Bank Affiliate; and may lose value. Any insurance required as a condition of the extension of credit by SouthEast Bank need not be purchased from our Agency but may, without affecting the approval of the application for an extension of credit, be purchased from an agent or insurance company of the customer's choice.

2020-07-13

How to Save for Retirement While Making Student Loan Payments

If you have student loans, you know how your debt can affect your ability to pursue your other financial goals, especially saving for retirement. According to a recent survey by TIAA, 84% of responding adults said that their student loans negatively impacted the amount they were able to save for retirement. For those who aren’t saving for retirement at all, 26% said their student loan balances were why they couldn’t afford to do so. However, putting off saving for your retirement is a costly mistake. It’s important to balance saving for your future with paying down student loan debt now. If you’re struggling to manage both priorities, here’s how to save for retirement while keeping up with your loan payments.

Why you need to save for retirement now

When it comes to saving for retirement, the earlier you begin saving, the better. Compound interest and the power of annual returns can help your money grow over time. The longer you wait to start saving for retirement, the more you’ll have to invest your own money to have enough saved to retire comfortably. For example, let’s say Jen begins saving for retirement at the age of 25. She contributes $250 per month into her retirement account, and her average annual return is 9%. By the time Jen reaches the age of 67, she’s contributed just $126,000 into the account, but her retirement account is worth $1,406,746. By contrast, Jen’s friend Stephanie puts off saving for retirement until she pays off her student loans and doesn’t start contributing to her retirement until she’s 35. She starts putting $500 per month toward her retirement fund — double what Jen contributes each month. Like Jen, Stephanie earns an average annual return of 9%, but by the age of 67, her retirement fund is worth only $1,108,257. Stephanie contributed $192,000 of her own money — nearly $70,000 more than Jen — but her retirement account is worth approximately $300,000 less than Jen’s because Stephanie got a later start.

Chart showing the impact of saving for retirement earlier

Retirement savings options

If you’re not sure how to save for retirement, here are some popular retirement plans.

401(k)

A 401(k) plan is an employer-sponsored retirement plan, meaning it’s a benefit offered through your job. With a 401(k), you invest a portion of your pre-tax salary in the investments you choose. Your contributions and the earnings are not taxed until you withdraw from the account.

401(3)b

401(3)b plans are very similar to 401(k) plans, but they’re offered to employees of non-profit organizations, churches, public schools, and universities. You make contributions to your retirement plan on a pre-tax basis, and your contributions and earnings aren’t taxed until you make withdrawals.

IRAs

Another great option is to open an Individual Retirement Account (IRA) on your own. There are two options: a Traditional IRA and a Roth IRA.

Traditional IRA

Anyone can contribute to a Traditional IRA, regardless of income. With an IRA, your earnings can grow tax-deferred, meaning you only pay taxes on your gains when you make withdrawals in retirement. Your contributions may be tax-deductible depending on your income level and if you have access to an employer-sponsored plan.

Roth IRA

If you meet the income restrictions, a Roth IRA may be a useful option. With a Roth IRA, you make contributions with after-tax dollars. Why is that a good thing? While your contributions aren’t tax-deductible, your earnings and withdrawals are tax-free. And, you can take out the money you contribute to your Roth IRA — but not your earnings — before you reach retirement age without paying any penalties, so your Roth IRA can double as an emergency fund in a pinch.

How to save for retirement while paying student loans

Finding a balance between saving for retirement and paying down student loan debt can be tricky, but it can be done if you follow these three steps:

1. Make the minimum payments on all of your student loans

It’s important to stay current on all of your debt to maintain and protect your credit score and prevent racking up costly late fees. Keep making all of the required minimum payments on your federal and private student loans to avoid falling behind and entering student loan default.*

2. If your employer offers matching contributions, contribute enough to earn the full match

If you have access to an employer-sponsored retirement plan like a 401(k) or 403(b) and your employer offers matching contributions, contribute enough to your account to qualify for the full match. Otherwise, you’ll lose out on free money that is a key part of your compensation package. Over time, skipping the match could cost you thousands of dollars. For example, let’s say you make $40,000 per year, and your employer will match 100% of your contributions, up to 5% of your salary. That means if you contribute $2,000 per year to your retirement plan — 5% of your salary — your employer will match your contribution, giving you an additional $2,000 per year toward your retirement fund. If you didn’t take advantage of the match while you were with that employer for five years, you’d miss out on $10,000. But the long-term consequences are even worse. If that money earned an average 9% annual return, in 30 years, that $10,000 would be worth over $147,000. That’s why it’s so important to take advantage of employer matching contributions if they’re available to you. If your employer doesn’t offer a match, or if you don’t have access to an employer-sponsored plan, contribute to a Traditional IRA or Roth IRA instead.

3. Tackle your high-interest student loan debt

If you have extra money left over each month, put it toward high-interest student loan debt, meaning loans with an interest rate of over 5%. You can also consider student loan refinancing to lower your interest rate and reduce your monthly payment. By refinancing your student loans, you can save money and free up more money in your monthly budget to save for retirement. Use the student loan refinance calculator to see how much you can save.*

The bottom line

When it comes to saving for retirement while paying student loans, you should develop a balanced strategy. Aim to both save for retirement and pay down your student loans at the same time. By taking advantage of employer contributions and tackling high-interest debt, you can improve your finances and build a secure future.

*Subject to credit approval. Terms and conditions apply. Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.

2020-07-06

How Can I Get the Most Out of My Tax Return?

If you haven’t already filed your 2019 taxes, you don’t have much more time. The deadline to file your federal taxes this year has been extended to July 15, 2020, due to the COVID-19 pandemic. So if you still need to file this year, or if you’re looking for ways to maximize your tax return for the future, here are some important things to keep in mind. By Kat Tretina

Tax Implications of Student Loans

If you have student loans that you have been making payments on, there is a major benefit you may be able to take advantage of.

Student Loan Interest Deduction

Each year you pay back your student loans, you may be eligible to deduct up to $2,500 in interest costs off your taxable income. Here are the important things to know about the deduction:

The deduction is only for the interest portion of your loan payment. Your monthly loan payment consists of paying back the principal of the loan and interest, so you will not be able to deduct your entire loan payment.
You can take advantage of the deduction whether you have private student loans or federal student loans.
You do not need to itemize your tax return to take advantage of this deduction. This can be taken in conjunction with the standard deduction on your return. This deduction will lower your income, thereby lowering your tax liability.
You have to meet income requirements. You are eligible for the deduction if your Modified Adjusted Gross Income (MAGI) was below $70,000 ($140,000 for married couples filing jointly) the previous tax year. You may be eligible to deduct a reduced amount if your income is higher, however, the deduction does not apply once your MAGI is over $85,000 or $170,000 for joint filers.
You cannot claim this deduction if someone else claims you as a dependent on their tax return.
The loan must have been taken out for a qualified education expense for you, your spouse, or a person who was a dependent when you borrowed the loan.

How The Tax Deduction Works

A deduction is taken to reduce your income that taxes are assessed on, unlike a credit that reduces your taxes owed. For a simple example of how this works, if your income is $50,000 and you paid $1,000 in student loan interest, you can deduct the full $1,000 and your income would be reduced to $49,000 and taxes would be assessed on that amount. Whereas if you claimed any credits, discussed below, the amount of the credit would be taken off of your taxes owed. If you owe $1,500 in taxes and the credit is $500 you now owe $1,000 in taxes. It’s important to obtain the tax information from your loan servicer when you are ready to file your return. If you have paid more than $600 in interest, your servicer will most likely automatically provide you the 1098-E form. The form will show the total amount of interest you have paid for the year. If seeing the amount of interest you have paid gives you a shock, you may want to look into refinancing your student loans. Refinancing is when you obtain a new loan to pay off current student loans and can be a simple process that results in savings. Refinancing may help you obtain a lower interest rate, thereby saving you in interest costs. It can also help you lower your monthly payment. Use our Student Loan Refinance Calculator to see how much you may be able to save.*

Other Ways to Maximize Your Return

If you are looking for other ways to get the most out of your return, check to see if any of these could apply to you:

Education Tax Credits

If you are still in school paying for tuition, you may be eligible to take a tax credit, even if you used student loans to pay the expenses. Here are the two available for 2019 taxes.

American Opportunity Tax Credit

This allows you to take a credit of up to $2,500 per year for four tax years. You must be enrolled in school at least half time and be working towards a degree. Parents who are paying for the college tuition of their dependents can take this credit or the student themselves can take the credit. Make sure to obtain Form 1098-T from the school to show how much tuition has been paid. This credit is not available for graduate students. In addition, there are income requirements to meet.

Lifetime Learning Credit

If you are working towards a college degree or enrolled in courses to help with your career, you may be eligible to take a credit of up to $2,000 per tax year for tuition, fees, books, and supplies. There is no limit on how many years this credit can be taken. There are income requirements to meet for this credit as well.

Save More and Reduce Taxes

If you have an IRA or a Health Savings Account and you did not contribute the maximum amount allowed for the year, the deadline is extended to allow contributions until July 15. The money saved in an IRA and HSA is not subject to federal income taxes. So you are able to save more in these accounts and avoid federal income taxes on your savings. Hopefully, you can take advantage of some of these savings to get the most out of your tax return. As with any tax advice, make sure to use a reputable program or speak with an experienced tax preparer for your specific situation. The most important thing to remember is to file and pay your federal income taxes by the deadline, July 15, 2020.