Student Loan or Credit Card Debt
Which Is Worse?

Credit cards and student loans are two major debt lines plaguing American households today. It’s said that the average American family carries $16,061 in credit card debt and a whopping $49,042 in student loan debt.

The latter statistic is worth looking into further.

Student Loan and Credit Card Debt

How Your Student Loan Impacts Your Credit

Your student loan is as real as any credit card or loan on your credit file. It’s not anymore “forgiving” than any other type of installment debt. This means every delinquency will hurt your credit score.

The worst case scenario comes from defaulting on your student loan debts. This is something you absolutely want to avoid. It can send even the strongest credit scores down 100s of points. The road to recovery will be long, and the damage will stay on your credit report for seven years.

You can usually negotiate with your student loan provider. If you’re in financial distress, try to work out a payment plan for the near future. Even avoiding a delinquency entry on your file can save you an 80-point drop after your first 30 days of being delinquent.

Your student loan reports both good and bad. However, it’s the bad that does the most to your credit rating, while good efforts have little reward. You need to avoid the penalties to your FICO score to have a chance to repair your credit effectively.

How Credit Cards Differ from Student Loans

Credit cards are a type of “revolving” debt, which means there’s an open credit line at all times. You will be able to borrow up to your max amount so long as the minimum monthly interest payments are paid.

It’s imperative to stay up to date on your credit card debts. Defaulting will cause extensive damage to your credit. You can typically pay a very small payment to keep your card alive. Meanwhile, the minimum payment for your student loan might be a bit more difficult to sustain.

Your credit score’s second-biggest factor is your utilization rate. This is the amount of debt you carry versus the amount you’re able to borrow. The higher it is the worse it says about you as a borrower. You want to keep it low (below 30 percent) for as long as possible; your payment history is another calculation variable and it considers your previous utilization levels.

Pay Credit Cards or Student Loan First?

It’s quite the dilemma. Paying your student loan helps with offing a major outstanding debt. However, paying off your student loan will not impact your credit utilization rate for the better in any way.

If you have a substantial amount of credit card debt, it makes sense to tackle that first. Each $1,000 you knock down will have a bigger impact on our credit rating, but keep in mind if your student loan runs into default it will be all for nothing.

Your payment history still remains the number-one factor in your FICO score calculation. Thus, it’s a good idea to see how you can improve it. This would mean maintaining payments on your student loan while reducing other debts.

You want to use any extra cash to tackle your overall credit card debt. The goal is to bring your utilization rates down as much as you can. This can be done from accepting credit limit increases too – so long as you avoid using the newly available funds.

Using Tax Refunds to Pay Off Student Loans

You will not want to make the mistake of using your tax refund as a way to pay off your student loan. Everyone thinks it is hard to take care of, so using your taxes is a sensible way to get the debt under control.

The truth is, your student loan will not hurt your score if the debt remains on your balance sheet. Trouble only arises when you run delinquent or if you default the loan. This means you can leave this particular installment loan for last while focusing on paying off higher-interest debts.

You are endangering your creditworthiness by putting your tax refund to use to pay off your student loan. The large lump sum can go toward your credit cards and have a much greater impact. Remember, credit cards accrue interest month after month as you fail to pay them off; it won’t take long for your debts to pile up if these are left unchecked.

Conclusion

At the end of the day, the worst type of debt to carry is the one you fail to pay off. It’s important to prove you are a good, trustworthy borrow in every sense of the term. Therefore, you must maintain positive status with your accounts (including your student loan) even if you only pay the minimum.

If you ever feel unable to pay your student loan payments, consider one of the three payment plans they offer. You can arrange to pay as you earn, based on your income or contingent on a certain amount of generated income.

If you fail to come to a deal then missing your payment will result in a late payment entry on your credit report. The damage will be irreversible; now that you know what’s at stake, make sure you sort your debt repayments accordingly.

Sources:

http://www.myfico.com/credit-education/whats-in-your-credit-score/

https://www.nerdwallet.com/blog/average-credit-card-debt-household/

blog.ed.gov/2015/06/3-options-to-consider-if-you-cant-afford-your-student-loan-payment/

Taxes and Your Credit – Are you ready?

Your taxes are due by April 17 this year. There’s a lot of preparation that goes into being ready to submit your return. From assessing your current debts to avoiding tax offsets, it’s important to know everything about how your credit plays into your taxes.

Are you ready for the 2017 tax season?

It’s right around the corner, and you’ll want to prepare yourself now!

Taxes and Your Credit

Filing Your Taxes

You need to file your taxes. It’s also important to keep good on anything you owe to the IRS, as leaving an unpaid debt can result in serious damage to your credit score. This is because the federal government will opt to place it on your credit report.

Tax liens are no laughing matter. You can see your FICO score drop by more than 100 points. It can destroy even the best of borrowers; thankfully, you can submit a removal request to get the lien off your credit report.

There’s no guarantee your credit rating will improve after the lien is taken off your report. It can still weigh on your score calculation for up to seven years. Your best bet is to plan ahead of time if you expect to owe the IRS money. It’s usually possible to set up a repayment plan and avoid the credit-damaging implications altogether.

Before You File

Go over your credit report and all your outstanding debts. Figure out if you have any debts that could be taken via tax refund garnishments. Further, make sure you don’t have any judgments against you with bank levy approval. It will put all your funds at risk of seizure and, unfortunately, creditors tend to target your tax refund deposit.

Here are five quick questions to ask yourself before filing:

  1. Do you owe the IRS anything? If so, read up on the IRS’s Payment & Installation Agreements to avoid losing a large lump sump out of your refund.
  2. Do you have other federal or state debts? If so, negotiate a repayment plan to avoid wage garnishment — check your state’s laws first.
  3. Did you default on student loan recently? If so, it can lead to a student loan tax offset, which means a smaller refund for you.
  4. Did you avoid paying any fines or tickets? If so, the result varies by state, but some cities go as far as adding it onto property tax bills.
  5. Are you planning to file for Chapter 7 bankruptcy? If so, you might want to do it now — you’ll get your 2016 tax year refund, but nothing next year.

This is just the premise of what you should consider before you do your taxes. A more complex approach will be necessary if you answered “YES” to any of these questions.

Warning: Your spouse’s financial safety can be put at risk if you owe. If no settlement is made on your debts with the IRS and you filed together, the right to garnish tax refunds and wages will apply for your partner also. Things will get even more confusing if you live in one of the common-law states, but that’s a whole different topic.

Your Tax Refund

In 2015, the IRS reported that 83 percent of American taxpayers received a tax refund. Some did not, due to making too much through the year. However, it’s fair to conclude that the typical average credit borrower did receive at least some money back.

A lump of cash is the perfect kickstart toward your credit recovery goals. If you receive anywhere near the average tax refund amount ($2,701 in 2015), it will make a huge difference.

How Does Debt Impact Your Tax Refund?

Any bad debts, such as accounts in collections, can cause you significant financial troubles. In some cases the creditors might succeed at garnishing part of your wages. A creditor can even go as far as emptying your bank account if the court approves a bank levy request.

The creditor has the right to remove up to 100 percent of the amount owing.

Before filing your taxes, make sure any debt disputes are in order. Collection agencies look at tax season as “go time” for planning and executing wage garnishments.. If you have anything in your bank account, a court-approved levy could take it all.

What You Don’t Have to Worry About …

Do you have an annoying creditor that wants you to pay off a debt now?

Are discussions about repayment plans not leading anywhere?

If so, a typical creditor needs to take you to court and get a judgment against you. This will take a while, and chances are you’ll receive your tax refund before it’s done.

The majority of tax refund garnishments occur because of back taxes, child support and other legal judgments. Wage garnishments are a bit less complicated than bank levies, but they still require court approval first.

Take Advantage of Your Tax Breaks

It’s important to educate yourself on all the ways you can reduce what you owe and increase what you get back on your taxes. Not every tax break will help you, and sometimes what seems like a fair claim won’t get approved.

Regardless, below are some tax breaks and deductions worth noting:

To see more potential tax deductions, check the IRS’s Miscellaneous Deductions for the 2016 tax year. This covers the lucrative savings that many Americans fail to notice. If you want to run through the basic deductions, read the IRS’s page on Credits & Deductions for Individuals.

A Note for Homeowners

Things get more interesting if you’re a homeowner.

You’ll need to be careful when managing Private Mortgage Insurance (PMI). It’s essential if you don’t have at least 20 percent to put down on a purchase or refinance. When you reach at least 20 percent equity in your home, it’s no longer needed.

You might be underestimating the expensiveness of PMI premiums. It doesn’t just add a cost but rather, it takes away from affording other expenses. Hundreds, if not thousands of dollars, can be wasted. Your goal should be to remove the insurance as soon as you meet the equity requirement.

You may have the right to deduct your mortgage insurance premiums. Tens of millions of Americans can, and yet very few homeowners do. The biggest requirement for claiming a PMI tax deduction is having an adjusted growth income (AGI) of less than $100,000 for the 2016 tax year.

This tax break is meant for struggling families that own homes. It’s a small savings, but everything helps. The U.S. housing market is going up, and this is freeing more equity for the average homeowner. Keep an eye on your situation, because removing the PMI premium could be possible if the market increases the equity in your home.

Credit Repair and Taxes FAQ

1. Can the IRS Garnish My Wages/Tax Refund?

The IRS, within federal guidelines, has the right to garnish your tax refunds and wages to recuperate funds owing from previous years. Most of the time you can set up a payment plan to alleviate the situation before it escalates.

2. Can Child Support Debt Impact Your Tax Refund?

The state government can garnish any remaining funds on your tax return to cover what’s owed on your child support bill. This can continue until it’s paid off; likewise, there’s a risk of wage garnishment when you deal with child support debt.

3. How Will a Student Loan Affect Your Tax Refund?

The only real risk exists if you have defaulted on a student loan debt. This gives the federal government the power to garnish funds via a tax offset. Your significant other, if you filed together, could also have funds taken from their tax return.

4. Will a Tax Lien Hurt Your Credit Score?

Yes. As mentioned earlier, you can see your score drop by more than 100 points if there’s a lien against you. The only fix for this is to request its removal once you pay what’s owed, but it will continue to impact your credit for up to seven years.

5. Are Credit Repair Services Tax Deductible?

This is one of the tax deductions that slips by most Americans. If you get credit repair assistance, there are some components that will be tax deductible. The main write-offs are for attorneys, such as when dealing with bankruptcy or identity theft.

Sources:

https://www.irs.gov/uac/tax-refund-withholdings-and-offsets

https://www.irs.gov/pub/irs-pdf/f12277.pdf

https://www.irs.gov/individuals/payment-plans-installment-agreements

https://www.garnishmentlaws.org/

https://www.irs.gov/uac/newsroom/tax-refunds-reach-almost-125-billion-mark-irs-gov-available-for-tax-help

http://www.cpapracticeadvisor.com/news/12116556/average-income-tax-refund-for-2015-increased-to-2701-irs-caught-908-million-in-fraudulent-refunds

http://www.bankrate.com/finance/debt/3-ways-to-fight-a-creditor-s-account-levy.aspx

https://www.irs.gov/uac/credit-and-debit-card-fees-related-to-tax-payment-are-deductible

https://www.irs.gov/taxtopics/tc456.html

https://www.irs.gov/taxtopics/tc456.html

https://www.irs.gov/taxtopics/tc453.html

http://www.forbes.com/sites/robertwood/2015/03/19/which-legal-fees-can-you-deduct-on-your-taxes/

https://www.irs.gov/pub/irs-pdf/p529.pdf

https://www.irs.gov/credits-deductions/individuals

https://www.irs.gov/publications/p936/ar02.html

https://turbotax.intuit.com/tax-tools/tax-tips/General-Tax-Tips/Federal-Guidelines-for-Garnishment/INF14841.html

How Long Does It Stay on My Credit Report?

If your credit report includes some negative items, it’s important to know how long they will remain there. Every negative mark on your credit report has some impact on your overall credit score, so the sooner a negative mark no longer shows up, the better. If you’re trying to improve your credit score, take a look at some of the most common types of negative items and how long they will stay on your credit report.

Credit Report Lifetime

Late Payments

If you paid a debt more than 30 days late, your creditor may have reported it to the credit bureaus. It will take about seven years from the date of your late payment for it to come off your report.

A payment that was 90 days late affects your score more negatively than a payment that was 30 or 60 days past due. In addition, the older your late payment is, the less it affects your credit score. So while it might take seven years to get a late payment off your report, its impact will gradually lessen as you get closer to that seven-year mark.

Collections

Any debts you haven’t paid on time may go to collections, and these will stay on your credit report for seven years plus 180 days from the date of the first missed payment. Even one account going to collections will reduce your credit score, as will any subsequent accounts that you leave unpaid. Even after you pay an account that has gone to collections, it may remain on your credit report unless you contact the creditor or a credit repair agency for help removing it.

Charge-Offs

Many creditors decide that your debt is a lost cause once your payment is more than 120 days late, so they mark it as a charge-off. Essentially, it’s a negative item on your credit report at that point, and it will stay there for seven years plus 180 days from the date of the first missed payment. This is the case even if you pay this debt off eventually. Keep in mind that you may still owe the debt after it has been charged off, because the creditor can still sell it to a collections office that will contact you for payment.

Bankruptcy

The amount of time a bankruptcy stays on your credit report depends on the chapter you filed. For a discharged chapter 13 bankruptcy, it will stay on your report for seven years, since you had to repay at least some of the debt you owed. For chapter 7 or 11, the bankruptcy will show up for 10 years, since debts are not repaid with these chapters.

Foreclosure

Before you foreclose on a home, you should know the foreclosure will stay on your credit report for up to seven years from the date you file. This timeline also applies to a short sale, which will be reported as a negative mark on your credit report and will therefore make it more difficult for you to buy another house for at least seven years.

Tax Liens

If you have a tax lien on your credit report due to not paying your taxes, this negative item will remain on your report for up to seven years after the IRS filed it. This is the case even after you’ve paid it off. If you want it to come off sooner, contacting the IRS to see if you qualify for withdrawal of the lien. This is a good step to consider if you need to get a loan or mortgage soon and do not want an old tax lien affecting your credit score and thus your chance of obtaining the loan or mortgage.

Inquiries

Credit inquiries may show up as negative marks on your credit report, but they’re not as damaging to your score as many of the other negative items discussed above. In fact, soft inquiries do not damage your credit score at all. An example of a soft inquiry is when a current creditor reviews your account to see if you’re eligible for a better interest rate or increased credit limit. Checking your own credit score is also a soft inquiry.

On the other hand, hard inquiries occur when you apply for a new credit account, such as a car loan or credit card. This will damage your credit score slightly, but only for up to one year. Luckily, the effects of either type of inquiry are minimal, since inquiries stay on your report for up to two years.

Clearly, with most types of negative items on your credit report, the magic number is seven. So any time you make a mistake when it comes to your finances, you could be suffering the consequences for the next seven years. The good news is that you may be able to reduce the amount of time the typical negative mark stays on your report, because you have the option of hiring a credit repair company to help. This could get items removed much sooner and is worth looking into if you plan to make any big purchases soon that require you to have a good credit score.

Sources:

https://www.credit.com/credit-reports/late-payment-secrets-revealed/

http://blog.equifax.com/credit/faq-how-long-does-information-stay-on-my-credit-report/

https://www.credit.com/credit-repair/how-long-do-things-stay-on-your-credit-report/

http://www.experian.com/blogs/ask-experian/how-long-do-paid-public-records-remain-on-your-report/