Many of us are likely glad to see the end of 2020. The year began with a global pandemic that triggered a recession. Millions of workers lost their jobs or saw their hours cut. Even the usually stable public service sector saw steep job cuts, many of them in education. (A Labor Department spokesperson told Reuters that 469,000 public school personnel lost their jobs in April 2020 alone.)
The economy, though, continues to slowly recover. And now could be a good time to reassess your finances, getting them back on track or preparing for future setbacks. Here are some tips on how to do so.
Find mortgage and student loan relief
The Coronavirus Aid, Relief and Economic Security (CARES) Act provided a respite from payments on government-backed mortgages and federal student loans.
For example, the law not only placed a moratorium on home foreclosures in 2020, but allows homeowners suffering financial hardship because of Covid-19 to pause their mortgage payments for up to 180 days. If you took advantage of this but your finances haven’t recovered within that six-month period, you can request an additional 180 days of forbearance. (Interest on your mortgage continues to accrue during forbearance, and you’ll need to repay paused payments in the future.) Contact your mortgage servicer to request a forbearance or extend the relief.
Payments on federal student loans were also suspended and interest waived through the end of 2020. If you will have difficulty keeping up with payments once they resume, check out various federal repayment programs. An income-driven plan, for example, ties your monthly payments to your income and family size, potentially reducing them to $0. Learn about your repayment options at the NEA Student Debt Navigator.
Government relief doesn’t apply to private loans. But you can still reach out to your loan servicer to see what options are available if you’re struggling with payments.
You might also want to take advantage of today’s low interest rates to reduce your payments and borrowing costs by refinancing your private loans through the NEA Student Loan Refinance Program. The program, in partnership with College Ave Student Loans, allows you to choose a loan term from 5 to 20 years so you can choose what works best for your budget. You can also receive a one-time credit of 0.5% of your loan amount (up to $599.99) and get a 0.25% interest rate reduction when you enroll in auto pay.
Check credit reports
You’re entitled to a free credit report each year from one of the three major credit reporting businesses—Equifax, Experian and TransUnion—at AnnualCreditReport.com. But during the pandemic, the three bureaus waived this limit, and you can now get a free online report weekly from each through April 2021.
Review your reports to make sure there aren’t any errors in it that could affect your credit score, a critical number used by lenders to quickly assess your creditworthiness.
Certain relief offered to borrowers during the pandemic, such as mortgage forbearance and suspension of federal student loan payments, are not supposed to appear as negative marks on credit reports. Nevertheless, some borrowers complain that this relief was misreported, damaging their credit scores.
Dispute these or other errors on your credit report with the credit bureaus and the business that provided the inaccurate information. The Consumer Financial Protection Bureau provides a step-by-step guide on how to do so.
Build a better credit score
Given this year’s recession and the millions of layoffs, you’d expect credit scores to crater. Yet the average FICO score—a widely used measure of creditworthiness—reached a record high of 711 in July 2020. That’s a five-point bump up from a year earlier. (Scores range from 300 to 850, the higher the better.)
Why the increase? Fair Isaac Corp., the creator of the FICO score, says financial relief measures, including enhanced unemployment benefits, stimulus checks and payment accommodations by lenders, helped consumers avoid falling behind on bills. Plus, credit card balances also dropped during the first half of the year as consumers cut back on spending.
It’s unclear whether consumers can count on additional stimulus checks or other relief. To maintain a good score—or improve one—follow these tips:
- Pay bills on time, which accounts for 35% of your FICO score.
- Reduce debt on credit cards and other revolving accounts. Thirty percent of a FICO score is based on your credit utilization rate, or how much of your available credit you use. The less, the better. Aim to use no more than 30% of your total credit limit.
- Don’t close credit card accounts you’re not using unless it costs money to keep them open. Keeping unused accounts open increases your total credit limit and improves your credit utilization rate.
Dig out of debt
You likely didn’t accrue debt overnight, so it can take some time to reduce it. Start with the most-costly debt, which is generally credit cards. For example, the average annual percentage rate (APR) on credit cards is about 16%, according to Bankrate.com. But your APR could be more than 20% if you have a weak credit score.
A popular way to eliminate debt and save on interest is called the “avalanche method.” You put extra dollars toward repaying the card with the highest interest rate while making minimum payments on your other cards. Once the first card is paid off, you put the extra money toward the card with the next highest rate, and so on until the debt is wiped out.
But if you need the psychological boost that comes from eliminating some debts quickly, try the “snowball method.” Simply apply extra money to the card with the smallest balance first, regardless of the interest rate. When that’s paid off, you tackle the card with the next lowest balance, and so on. The snowball method won’t necessarily save on interest, but it can keep you motivated.
Alternatively, you can take out a personal loan to pay off high-interest card debt. For example, with an NEA Personal Loan through the First National Bank of Omaha, you can borrow $5,000 to $30,0001 at a fixed rate between 5.99% and 15.99% APR2, depending on your credit history. Just make sure that if you take out a loan to pay down debt, you don’t rack it up again.
Create or replenish an emergency fund
The benefit of emergency savings became evident during the pandemic when workers struggled to keep up with bills after a job loss or reduced hours. The general rule is to keep between three- to six-months’ worth of living expenses in an easily accessible savings account for emergencies. But the right amount for you will depend on your job security and if you have other reliable household income.
For example, a dual-income couple may need the standard three- to six-months’ worth of living expenses in an emergency fund. Yet a sole wage earner may need double that. Workers in stable industries may be able to get by with enough savings to cover two to four months’ worth of expense, while those with jobs that are at risk in economic downturns may want to salt away up to nine months or so of expenses.
Building an emergency fund can take time, but regularly stowing away small amounts can help it grow to a sizable sum over time. For example, saving $50 a week will amount to $5,200 in two years.
To help you find the money to fund that account, try this interactive budget worksheet—Build Your Budget in 6 Easy Steps—created for NEA members.
Keep your emergency savings in a separate account with little or no fees and a healthy interest rate. The NEA Online Savings Account through Discover Bank, for example, has no monthly fees and pays an interest rate (as of early November, 2020) that’s five times the national average for a savings account.
Consider bankruptcy as a last resort
Filing for bankruptcy can provide a much-needed fresh start and stop creditors’ calls. But it’s often referred to as a solution of last resort because of the repercussions. Depending on the type of bankruptcy filing, you may have to forfeit your house and car. You generally can’t wipe out student loans in bankruptcy. And a bankruptcy will stay on your credit report for seven to 10 years.
Before bankruptcy, try negotiating with creditors on a solution. Many credit card issuers, for example, offer hardship programs that may waive fees, lower your interest rate or reduce minimum payments.
Also consider working with a nonprofit credit counselor. Counselors can help with budgeting to make your finances manageable. They can also negotiate with your creditors to come up with a debt management plan for you. You can find a nonprofit counselor through the National Foundation for Credit Counseling.
If you are affected by COVID-19, check out this important list of resources and information from NEA Member Benefits and our partners.
1The NEA Personal Loan cannot be used to pay postsecondary educational expenses or tuition or to consolidate postsecondary educational loans.
2Your fixed APR will be established when we discuss your specific request with you and will be in the range of 5.99% fixed APR to 15.99% fixed APR, depending on your creditworthiness. Please note that all applicants may not qualify for the lowest rate. The lowest rate may not be available for the term chosen. NEA members may receive a 0.25% interest rate discount by enrolling in AutoPay. To qualify, you must set up automatic payments from a checking or savings account at the time of loan origination. When you enroll in AutoPay, a rate as low as 5.74% fixed APR may be available, depending on your creditworthiness. See the Key Information on the loan for additional details.