The last thing you want to worry about when making a big purchase is being scammed. Whether you’re buying or selling something, you don’t want your money or investments to go to waste. Making any financial decision can be unsettling for your budget when faced with a chance of fraud. That’s where certified checks can help add security. But first, what is a certified check?
A certified check is authorized by a bank to guarantee buyers have the funds before writing the check. This ensures that the person receiving payment isn’t left hanging, and the buyer double-checks they have enough funds to make the purchase.
Why Use a Certified Check?
A certified check is one of the most secure payment options available. When you’re selling or buying expensive items, you want to ensure you get what you were expecting. Certified checks generally require a bank or credit union to set aside money in the buyer’s account until the check has gone through. This way, the bank verifies the buyer has enough cash to make the purchase and the seller gets paid. If you’re selling a big ticket item, you can request payment with a certified check.
If you’re buying an expensive item, certified checks will offer your seller additional security. It will prove to the seller that you’re serious about your choice and that your finances are in place for this investment.
Certified Check vs. Cashier’s Check
A cashier’s check is also used for large purchases and authorized by a bank or credit union. The main difference between cashier’s checks and certified checks is where the money’s stored until it’s cashed out. Before signing a cashier’s check, banks will move the funds into a separate account for security purposes. Then, a bank representative will sign the check over to the receiver.
Even though both check types are generally safe, cashier’s checks tend to be more secure. As banks take the buyer’s funds when they authorize the check, your funds are waiting at the bank instead of in your buyer’s account until cashed out.
How to Get a Certified Check
For buyers looking to get certified checks, most banks or credit unions offer these services. While you’re able to get them at financial institutions that offer these services, fees may apply at banks you don’t have an account with. If you’re in need of a certified check, read our tips below:
Call your bank to ensure you meet all their requirements.
Visit the bank in person to avoid any mishaps or miscommunication.
Funds needed for the check amount
Name of the recipient
Your account number
Verify your identity and funds with a photo ID and bank account numbers for authorization. You may be asked to sign the check in front of a teller for them to certify it.
Bring extra cash in case your bank charges a service fee, typically anywhere from $5 to $25. A bank you already do service with may waive your fee.
The Pros and Cons of Certified Checks
Certified checks lower the risk of carrying around large sums of money or bounced checks. There are a few pros and cons to weigh before choosing your payment option as a buyer or seller.
Safer way to carry cash: Certified checks are great tools for large purchases. It can be impractical to carry around a large stack of cash or the risk of a regular check. This way, you’re able to cash in your earnings, or pay the seller without any worries.
Adds additional payment security: For large purchases where a buyers credit score or payment is questioned, this adds additional security. Since the bank issuing the check double-checks that the funds are there, it takes more risk out of the deal.
Scammers may be ready to scam: One downside of this payment option is the risk of scams. It’s common for businesses to purchase bulk products out of state in exchange for a certified check. If you realize your purchase is a scam after sending your check, you may not be able to stop the payment from going through.
Potential service fees: As always, bank services usually come at a price. In this case, most banks and credit unions will bill you for the time used to certify the check. Generally, these services cost anywhere from $5 to $25. If you decide to request a certified check from a bank you already do business with, they may waive your fee.
4 Tips to Prevent Check Fraud
Forty-seven percent of industry money losses were from fraudulent checks in 2018. Taking the extra steps to double-check your buyer’s payment could prevent your budget from taking a hit. Follow the steps below to ensure you and your earnings are on the right track:
1. Research Your Buyer
People may use fake names, addresses, phone numbers, and more to get away with a scam. Without knowing the identity of the person you’re selling to, it may be hard to get your money if things go wrong. Research your buyer or safely meet with them in person to get a better feel for their identity.
2. Call or Visit Your Buyer’s Bank of Choice
For more security, reach out to the financial institution where the check is issued. Contact your buyer to see where they’ll be authorizing their check. Look up the branch’s phone number and call to verify the check went through. Avoid calling any phone numbers the buyer gives you in case they provide you with the wrong number.
3. Immediately Double-Check With Your Bank
Right after you get paid, go straight to the bank or call to ensure there weren’t any complications processing the check. Ask your bank or credit union if the funds made it to your account safe and sound.
4. Save All Documentation
Receipts, emails, and other information can build a case in the event you don’t receive your payment. Keep all documentation or files until you’ve been paid in full. As long as you have all the details, you’ll have a better chance of building a case.
A certified check is a check that’s authorized by a bank to guarantee buyers have the funds before writing the check.
When you’re selling or buying a large item, certified checks are a less risky payment option.
If you’re unsure about your buyer, do more digging. Research them, call the buyer’s bank, and save all documents and files from the exchange.
Call your bank beforehand to ensure you meet all the requirements and ask about service fees.
Having an uneasy feeling about selling or buying a large ticket item is normal. You don’t want your hard-earned money or investments going to waste over a bounced check or scam. Certified checks can be a safer payment option and it’s worth the extra research for your budget’s sake.
Not sure what to do with a retirement account from an old employer? Laura covers five options for managing your retirement funds when your job ends. Handling your nest egg the right way is critical for preserving what you’ve worked so hard to save.
Laura Adams, MBA
September 16, 2020
Retirement Account Comparison Chart (PDF)—a handy one-page download to see the retirement account rules at a glance.
What is a retirement account rollover?
Don’t make the mistake of thinking that once you leave a job with a 401(k) or a 403(b) you can’t continue getting tax breaks. Doing a rollover allows you to withdraw funds from a retirement plan with an old employer and transfer them to another eligible retirement account.
When you roll over a workplace retirement account, you don’t lose your contributions or investment earnings. And if you’re vested, you don’t lose any money that your employer may have put into your account as matching funds.
The main rule you must follow when doing a retirement rollover is that you must complete it within 60 days once you begin the process.
The main rule you must follow when doing a retirement rollover is that you must complete it within 60 days once you begin the process. If you miss this deadline and are younger than age 59½, the transaction becomes an early withdrawal. That means it is subject to income tax, plus an additional 10% early withdrawal penalty.
If you’re a regular Money Girl podcast listener or reader, you know that I don’t recommend taking early withdrawals from retirement accounts. Paying income tax and a penalty is expensive and reduces your nest egg.
If you complete a traditional rollover within the allowable 60-day window, you maintain all the funds’ tax-deferred status until you make withdrawals in the future. And with a Roth rollover, you retain the tax-free status of your funds.
What are your retirement account options when leaving a job?
Once you’re no longer employed by a company that sponsors your retirement plan, there are four options for managing the account.
1. Cash out your account
Cashing out a retirement plan when you leave a job is the easiest option, but it’s also the worst option. As I mentioned, taking an early withdrawal means you must pay income tax and a 10% penalty.
Cashing out a retirement plan when you leave a job is the easiest option, but it’s also the worst option.
Let’s say you have a $100,000 account balance that you cash out. If your average rate for federal and state income taxes is 30%, and you have an additional 10% penalty, you lose 40%. Cracking open your $100,000 nest egg could mean only having $60,000 left, depending on how much you earn.
Note that if your retirement plan has a low balance, such as $1,000 or less, the custodian may automatically cash you out. If so, they’re required to withhold 20% for taxes (although you may owe more), file Form 1099-R to document the distribution, and pay you the balance.
2. Maintain your existing account
Most retirement plans allow you to keep money in the account after you’re no longer employed if you maintain a minimum balance, such as more than $5,000. If you don’t have the minimum, but you have more than the cash-out threshold, the custodian typically has the authority to deposit your money into an IRA in your name.
The downside to leaving money in an old retirement account is that you can’t make additional contributions because you’re not an employee. However, your funds can continue to grow there. You can manage them any way you like by selling or buying investments from a set menu of options.
The downside to leaving money in an old retirement account is that you can’t make additional contributions.
Leaving money in an old retirement plan is certainly better than cashing out and paying taxes and a penalty, but it doesn’t give you as much flexibility as you you would get with the next two options I’m going to talk about.
I only recommend leaving money in an old employer’s retirement plan if you’re happy with the investment choices and the fund and account fees are low. Just make sure that the plan doesn’t charge you higher fees once you’re no longer an active employee.
Another reason you might want to leave retirement money in an old employer’s plan is if you’re unemployed or have a job that doesn’t offer a retirement account. I’ll cover some special legal protections you’ll get in just a moment.
3. Rollover to an Individual Retirement Arrangement (IRA)
Another option for your old workplace retirement plan is to roll it into an existing or new traditional IRA. If you have a Roth 401(k) or 403(b), you can roll it over into a Roth IRA. The deadline to complete an IRA rollover is 60 days.
Your earnings in a traditional IRA would continue to grow tax-deferred, just like in your old workplace plan. And earnings grow tax-free in a Roth IRA, like a Roth account at work.
Here are a couple of advantages to moving a workplace plan to an IRA:
Getting more control. You choose the financial institution and the investments for your IRA.
Having more flexibility. With an IRA, there are more ways to tap your funds before age 59½ and avoid an early withdrawal penalty than with a workplace account. That rule applies to several exceptions, including using withdrawals for medical bills, college expenses, and buying or building your first home.
Here are some downsides to rolling over a workplace plan to an IRA:
Having fewer legal protections. Depending on your home state, assets in an IRA may not be protected from creditors.
Being ineligible for a Roth IRA. When you’re a high earner, you may not be allowed to contribute to a Roth IRA. However, you can still manage the account and have tax-free investment earnings.
If you want more control over your investment choices, think you’ll need to make withdrawals before retirement, are self-employed, or don’t have a job with a retirement plan to roll your account into, having an IRA is a great option.
4.Rollover to a new workplace plan
If you land a new job with a retirement plan, it may allow a rollover from your old plan once you’re eligible to participate. While the IRS allows rollovers into most retirement accounts, employer plans aren’t required to accept incoming rollovers. So be sure to check with your new plan administrator about what’s possible.
Once you initiate a transfer from one workplace plan to another, you must complete it within 60 days to avoid taxes and a penalty.
Here are some advantages of doing a workplace-to-workplace rollover:
More convenience. Having all your retirement savings in one place may make it easier to manage and track.
Taking early withdrawals. Retirees can begin taking penalty-free withdrawals from workplace plans as early as age 55.
Avoiding Roth income limits. Unlike a Roth IRA, there are no income restrictions for participating in a Roth workplace retirement account.
Getting more legal protections. Workplace retirement plans are covered by the Employee Retirement Income Security Act of 1974 (ERISA), a federal regulation. It doesn’t allow creditors (except the federal government) to touch your account balance.
Some downsides to transferring money from one workplace plan to another include:
Having less flexibility. You can’t take money out of a 401(k) or a 403(b) until you leave the company or qualify for an allowable hardship. It doesn’t come with as many withdrawal exceptions compared to an IRA.
Getting less control. You may have fewer investment choices or higher fees than an IRA, depending on the brokerage firm.
5. Rollover to an account for the self-employed
If you left a job to become self-employed, having an IRA is a great option. However, there are other types of retirement accounts that you might consider, such as a solo 401(k) or a SEP-IRA, based on whether you have employees and on your business income.
Read 4 Ways to Start a Retirement Account as a Self-Employed Freelancer or 5 Retirement Options When You’re Self-Employed for more information.
When is a Roth rollover allowed?
For a rollover to be tax-free, you must use a like account. For example, if you have a traditional 403(b), you must rollover to another traditional retirement account at work or to a traditional IRA.
If you move traditional, pre-tax funds into a post-tax, Roth account, you must pay income tax on any amount that wasn’t previously taxed. That could leave you with a massive tax liability. If you want a Roth, a better move would be to open a Roth account at your new job or to start a Roth IRA (if your income doesn’t make you ineligible to contribute).
Where should you move an old retirement account?
The best place for your old retirement account depends on the flexibility and legal protections you want. Other considerations include the quality of your old plan, your income, and whether you have a new job with a retirement plan that accepts rollovers.
The best place for your old retirement account depends on the flexibility and legal protections you want.
The goal is to position your retirement money where you can keep it safe and allow it to grow using low-cost, diversified investment options. If you have questions about doing a rollover, get advice from your retirement plan custodian. They can walk you through the process to make sure you choose the best investments and don’t break the rollover rules.
How to tell you’re a frequent flyer — without telling anyone you’re a frequent flyer
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The holiday season is the biggest travel season of the year, and traveling during the holiday season, especially with kids, can be super stressful. AAA forecasted that 112.5 million people traveled in the holiday season in 2018, and sometimes it feels every single one of them is in the airport with you at once! Here are 5 ways to keep your sanity if you have to navigate the airport while traveling this holiday season.
A little bit of planning goes a long wayEspecially if you are flying with young kids, make sure that you are planning your travel smartly. Yes, that red-eye flight or 6 hour layover looks like it won’t be a problem back several months ago when you booked the flight, but now that it’s impending, you might be starting to second-guess yourself. If you do find yourself in an unenviable situation, don’t just ignore it. Make a plan for it (and if you’re traveling with young kids, you might as well make 2 or 3 backup plans too!)
Keep track of your flights
One of the things that I highly recommend is to keep track of your flight reservations. Every couple of weeks, log on to the airline’s account and make sure that your flights still have the same time and you still have the same seats that you picked (if your ticket allows you to pick seats). Airlines are changing their flight schedules all the time, and the more time you have to make changes, the better. The worst thing that can happen is that you don’t find out about a flight change or an aircraft swap until the day before, when there isn’t much you can do.
Another thing I usually do, starting the day before my flight when I check-in, is to look at where my flights are, and where those planes are coming from. I use FlightAware.com to do that kind of research – you can put in your airline and flight number and it will show you not only the status of YOUR flight, but also where your plane is now.
By looking at where my plane is now, I usually know about flight delays BEFORE the airline itself acknowledges it. More information can help you plan your day and get a leg up on making alternate arrangements should you need it
Consider an airport lounge
If you do have an extended layover in an airport, you might want to consider checking if your airline has an airport lounge and how much it costs for entrance. Many credit cards come with access to the Priority Pass network of lounges, which allow you complimentary airport lounge access.
If you don’t have a credit card that gives lounge access, you can investigate how much it costs for a day pass. Most lounges cost $30-$50 for a day pass, though many admit children under 12 for free. Generally I wouldn’t recommend paying that much for a day pass, but it depends on your situation. Look at what you might pay for food and drinks at an airport restaurant and you may find that a day pass to an airport lounge isn’t that much more.
In addition to a quieter place than the terminal and complimentary food and drinks, many airport lounges have a separate children’s area which can be a lifesaver on a long layover.
Sign up for TSA Pre®
Another travel benefit that comes with some credit cards is a $100 credit towards Global Entry membership. If you have Global Entry membership, you also generally will receive TSA Pre on your domestic flights. Depending on where and when you’re traveling, this could be a huge lifesaver to keep you from spending a ton of time waiting in an endless airport security line.
Many of the credit cards that give Global Entry / TSA Pre are premium cards with annual fees north of $450. But here are a few cards with smaller annual fees, including some that waive the annual fee the first year.
Be smart about checked bags vs carry-ons
Our final tip to keep your sanity in airports while traveling this holiday season is to take a step back and consider whether checking bags is better for your situation than just taking carry-ons. There are pros and cons to both situations and you need to decide what works best for you. Our family of 8 has done it both ways. When our kids were younger, with all the baby gear we toted around, we tended to check bags. Southwest Airlines and their 2 free checked bags on every flight were huge – I remember a Southwest flight to Reno where between checked bags, carry-ons, strollers and car seats, we lugged 17 pieces of luggage through the airport! We’ve now gone more towards not checking bags and just taking carry-on luggage. Not only does that save on bag fees, we also don’t have to wait at baggage claim or worry about the airline losing our luggage. But my kids are now all old enough where they can take care of their own carry-on luggage. If you have younger kids who can’t manage their own rollerboards in the airport, then you might consider checking your bags, even if you have to pay extra for it. You don’t want to have to be lugging around multiple suitcases through the airport on top of making sure your kids stay happy and safe.
I hope these tips have given you some ideas to de-stress your holiday airport travel. Got another tip? Leave it in the comments!
With no monthly fees, unlimited refunds for ATM charges and a focus on digital banking, Novo business checking is a great option for small-business owners on the go. Novo offers its own integrated invoicing tool as well as direct integration with top business tools, making it ideal for streamlining financial processes and managing multiple accounts in one place.
While Novo Bank has a strong online focus, it cannot accommodate cash deposits, an essential feature of business banking. Many competitors, on the other hand, offer the ability to deposit cash with an online-based business checking account.
Novo business checking is best for small-business owners who:
Prefer to manage their finances online and do not need to deposit cash on a regular basis.
Want to be able to use any ATM in the U.S. or internationally without worrying about fees.
Want to connect their business checking account to financial tools they already use.
Pros & Cons
No monthly fees or minimum balance requirement.
Unlimited fee-free transactions, no ACH transfer fees and no incoming wire fees.
Refunds on all ATM fees worldwide.
Online banking with unlimited invoicing and bill pay, which includes the option to send paper checks for free.
Integration with top business tools like QuickBooks, Xero, Stripe and Shopify.
Access discounts on business software and services through your account.
Can’t deposit cash.
Can’t send domestic or international wires (international wires available through TransferWise integration, however.)
No recurring payments available with bill pay.
$27 fees for insufficient funds/uncollected funds returned.
Novo business checking at a glance
Minimum opening deposit requirement:
How Novo business checking works
Novo is a mobile business banking platform that allows you to open a business checking account and manage your finances online. Novo Bank is completely digital, with no physical branch locations, and deposit account services are provided by Middlesex Federal Savings, Novo’s partner bank. Each account is insured by the Federal Deposit Insurance Corp. up to $250,000 through Middlesex Federal Savings.
You can apply for Novo business checking by creating an account and submitting an application through the Novo website. You will need to provide information about yourself, your business and any additional business owners, as well as personal identification and legal business documents.
To be eligible for a business checking account from Novo Bank, you’ll need to be at least 18 years old, a U.S. citizen or permanent resident and have a U.S.-based business. You’ll also need to provide a valid U.S. mailing address, Social Security number and mobile phone number.
Once you’ve submitted your application, Novo will review it and reach out directly if it requires additional information or documentation. Generally, you’ll receive a decision within two to three business days. After you’ve been approved by Novo, you’ll be able to fund your account, log in to online banking using the username and password you created during the application process and download the Novo mobile app for iOS or Android.
You’ll also be able to integrate your account with business tools you already use; Novo offers direct integrations with QuickBooks, Xero, Stripe, TransferWise, Shopify, Zapier and Slack.
If you opted to receive a Novo business debit card when completing your application, your card will be delivered to your designated mailing address. Although you can only have one debit card per user with the Novo business checking account, you can use the mobile app to ask to add multiple users to your account and then order debit cards for those users. Added users will have full account access, including the ability to transfer and withdraw funds.
Where Novo business checking stands out
Fee-free: Novo Bank’s business checking account has no monthly fees, no minimum balance requirements, no transaction fees and no incoming wire fees. In addition, there are no fees for incoming or outgoing ACH transfers, stop payments, debit card replacements or paper statements.
Novo business checking also includes free mobile check deposit, free bill pay with physical checks (which are mailed out from the mobile app) and free bank checks. The only instances in which you’ll face fees with Novo are insufficient funds and uncollected funds returned, both of which will incur a $27 fee.
Free ATM access: Novo does not offer fee-free ATM access through a specific partner network, unlike most online business checking account competitors. Instead, Novo allows you to use any ATM in the U.S. or abroad, without charging you any fees. Additionally, Novo will reimburse all fees that you face from those banks for using their ATMs, depositing the refund directly into your account at the end of each month.
Online and mobile banking: Novo business checking is designed to make it easy for small-business owners to manage their finances regardless of location, focusing on mobile tools to avoid the hassle of visiting a physical bank. With the included online and mobile banking features, you can deposit checks, make payments, send money and even mail paper checks for payment.
In addition, you can perform transfers, track your account activity and contact Novo customer service for support. Plus, with the Novo Reserves budgeting tool, you can set aside funds within your checking account to budget for different types of expenses.
Invoicing: A particularly useful tool for freelancers and contractors, Novo’s integrated invoicing feature allows you to create, send and manage an unlimited number of invoices directly within your checking account. You can accept payments by ACH transfer, or — if you’re using the Novo Stripe integration — you can accept payments through your Stripe account. Invoicing is available through the Novo web app, but is not yet supported by the iOS or Android mobile app.
Integrations with business tools: Novo offers direct account integration with QuickBooks, Xero, Stripe, Shopify, TransferWise, Zapier and Slack. You can also connect your Novo business checking account to Square, PayPal and Wave, even though Novo doesn’t currently offer direct integration with these tools. Additionally, you have the option to connect Novo to Venmo, as well as Apple or Google Pay.
Although some online business checking account competitors offer proprietary financial tools or add-ons, Novo stands out with the ability to seamlessly connect to popular tools many small-business owners already use.
Discounts on software and services: Through the Novo Bank perks program, you can access discounts on certain business software and services with your checking account. Novo partners with providers including Stripe, QuickBooks, Gusto, Google, HubSpot and others to offer savings opportunities for account holders. For example, Novo account holders can access a 30% discount on all new GoDaddy purchases, as well as $150 in Snapchat ads credits.
Where Novo business checking falls short
Can’t deposit cash: Novo business checking cannot accommodate traditional cash deposits. If you have cash that you’d like to deposit, instead of simply depositing it at an ATM, you’ll have to purchase a money order and then use Novo’s mobile check deposit feature to deposit the check into your account.
Although this may not be problematic if you need to deposit cash once in a while, it’s less than ideal if your business needs to deposit cash on any regular basis. In comparison, many other online-based business checking accounts offer the ability to deposit cash through their partner ATM networks.
No recurring payments with bill pay: Novo allows you to pay bills, fee-free, with ACH transfers and mailed checks. Additionally, although you cannot send domestic or international wires using Novo business checking, you can send international wires using the TransferWise integration (with associated fees). Regardless of the method of the payment, however, Novo Bank’s business checking account does not offer recurring payments, a common feature included with online bill pay.
You can save your payee’s information within your Novo account for future payments, but you can’t set payments to automatically send — meaning you’ll need to actively monitor your bills and initiate payments before their due dates.
New Northwestern Mutual Research Finds 20% of People Plan to Retire Later than Expected, and 10% Plan to Retire Earlier
MILWAUKEE, Dec. 3, 2020 /PRNewswire/ — The economic impact of the COVID-19 pandemic has changed the retirement timeline for 30% of Americans, according to research from Northwestern Mutual’s 2020 Planning & Progress Study. The study finds that 20% of U.S. adults age 18+ plan to delay retirement beyond what they expected, while 10% plan to accelerate their timelines and retire earlier than anticipated.
Millennials are the most likely generation to move up their planned retirement date, with nearly one in six (15%) saying they would accelerate their plans. This compares to less than one in 10 among Gen Z (8%), Gen X (6%) and Boomers (4%). Meanwhile, Gen X (25%) is the most likely generation to say the pandemic has caused them to push back their planned retirement date, followed by Gen Z (22%), Millennials (19%), and Boomers (14%).
When asked what age people expect to retire, Millennials indicated the earliest target date, nearly seven and a half years younger than Baby Boomers:
Gen Z – 62.5
Millennials – 61.3
Gen X – 63.2
Boomers – 68.8
“These numbers illustrate what may be a distinct difference in the way generations view retirement,” says Christian Mitchell, executive vice president & chief customer officer at Northwestern Mutual. “Millennials appear to prioritize retirement earlier on, whereas other generations may be quicker to extend their retirement timelines outward. Much of this depends on individual circumstances, of course, but it also underscores that a long-term financial plan has to factor in the unexpected and be nimble enough to adjust course.”
Retirement Obstacles The study finds that the greatest obstacles to financial security in retirement have flip-flopped during the pandemic. Before COVID-19 began to spread widely, lack of savings (42%) was the top obstacle followed by healthcare costs (38%) and the economy (34%). Now it is the economy (49%) followed by lack of savings (33%) and healthcare costs (32%).
Findings also reveal that people are relying heavily on Social Security as a funding source during retirement but don’t have great faith it will actually be there when they need it. Social Security ranked as the top source of retirement funding, accounting for an average of 27% of Americans’ overall retirement funding. But one-fifth (20%) of people believe it is not at all likely Social Security will be there when they’re ready to use it.
“This is a good reminder that there are always factors to consider that are outside of people’s control such as the economy, healthcare costs and Social Security,” says Mitchell. “That only underscores how important it is to focus on the things you can control such as saving, investing and protecting your assets. A solid financial plan and a trusted advisor can help.”
Working Longer One in five (21%) U.S. adults expect to work past the traditional retirement age of 65. Among those who do, nearly half (45%) say it’s because of necessity and 55% say it’s because of choice.
Taking a closer look at those who plan to work out of necessity, the top reason cited was not having enough saved to retire comfortably at 60%. Other top reasons include:
I do not feel like Social Security will take care of my needs – 58%
I am concerned about rising costs like healthcare – 49%
I had an unexpected situation arise that has cut into my retirement savings – 20%
For those who plan to work past the age of 65 by choice, the top reason cited by nearly half (49%) is that they enjoy their job/career and would like to continue. Other reasons include:
I want additional disposable income – 43%
It is a social outlet that will help me stay active/prevent boredom – 34%
I want to do something that will let me give back to the community – 21%
“While the nature of retirement continues to change, it’s encouraging to see more people working past the age of 65 out of choice and not necessity,” says Mitchell. “Although that may not always be an option for all, having a tailored, diversified strategy with both insurance and investments can allow people to make informed choices regarding a retirement that suits their unique circumstances.”
About The 2020 Northwestern Mutual Planning & Progress Study The 2020 Planning & Progress Study is a research series conducted by The Harris Poll on behalf of Northwestern Mutual. This wave included 2,702 American adults aged 18 or older who participated in an online survey between June 26 – July 10, 2020. Results have been weighted to Census targets for education, age/gender, race/ethnicity, region and household income. Propensity score weighting was also used to adjust for respondents’ propensity to be online. No estimates of theoretical sampling error can be calculated; a full methodology is available.
About Northwestern Mutual Northwestern Mutual has been helping people and businesses achieve financial security for more than 160 years. Through a holistic planning approach, Northwestern Mutual combines the expertise of its financial professionals with a personalized digital experience and industry-leading products to help its clients plan for what’s most important. With $290.3 billion in total assets, $29.9 billion in revenues, and $1.9 trillion worth of life insurance protection in force, Northwestern Mutual delivers financial security to more than 4.6 million people with life, disability income and long-term care insurance, annuities, and brokerage and advisory services. The company manages more than $161 billion of investments owned by its clients and held or managed through its wealth management and investment services businesses. Northwestern Mutual ranks 102 on the 2020 FORTUNE 500 and is recognized by FORTUNE® as one of the “World’s Most Admired” life insurance companies in 2020.
Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company (NM)(life and disability insurance, annuities, and life insurance with long-term care benefits) and its subsidiaries in Milwaukee, WI. Subsidiaries include Northwestern Mutual Investment Services, LLC (investment brokerage services), broker-dealer, registered investment adviser, member FINRA and SIPC; the Northwestern Mutual Wealth Management Company® (investment advisory and trust services), a federal savings bank; and Northwestern Long Term Care Insurance Company.
SOURCE Northwestern Mutual
For further information: JEAN TOWELL, 1-800-323-7033, firstname.lastname@example.org
Several months ago, I decided to leave my job of 14 years to become a full-time freelance writer. But when it was time to give notice, fear overcame me. I’d seen other people leave the company over the years, and it rarely ended well.
Although I did the best I could, I wish I had treated the process more professionally. It’s always better to try and leave doors open rather than slam them shut on your way out.
According to the U.S. Bureau of Labor Statistics, 3.5 million people quit their job in January 2020, and it’s safe to assume that not all of those people left their job amicably. While it would be nice if it were this simple, quitting a job is more than just telling your boss you’re leaving, packing up your desk, and walking out the door.
Follow these 10 steps to ensure you leave your job in a professional manner and remain on good terms with your former employer.
1. Have a job or other income stream lined up.
If you’re planning to quit a job, it’s a good idea to have another job lined up beforehand to ensure there’s less of a disruption of income. Since there’s no guarantee that a job search will go quickly, having a job, emergency fund, or another income source in place means you don’t have to worry about that kind of uncertainty. It also means you can take your time finding a job that’s a good fit.
Once you’ve found a new job or career path, then you can work towards an end date at your current position and a start date with a new company. Find out how flexible your new boss is with your start date in case things don’t go to plan when you leave your current job.
2. Avoid starting workplace chatter.
Once you know it’s time to move on from your job, it’s best to play your cards close to your chest. Knowing you’re leaving creates a false sense of security, making it easier to say how you feel about the job, the company, and your coworkers.
This isn’t always a wise move. “Oftentimes employees fantasize about finally standing up to bosses or coworkers that have mistreated them,” says Chane Steiner, CEO of Crediful. “While this might be a satisfying fantasy, never quit like this. It’s immature, hostile, and will sever any solid relationships or connections you’ve built with anyone at the company.”
If you have legitimate gripes or complaints about your job or treatment by the company, Steiner says to use your exit interview with HR to express those.
3. Schedule a meeting with your supervisor.
Not only should you refrain from airing your grievances about the company, but you should speak to your direct supervisor before telling your co-workers. It’s professional common courtesy, and it helps you control the situation. Telling your co-workers could lead to your boss hearing about it secondhand, which can cause unnecessary issues or animosity.
Make it a point to schedule a meeting with your boss. A face-to-face meeting is preferable, but if meeting in person doesn’t work, schedule a teleconference or phone call instead.
This doesn’t need to happen as soon as you know you want to quit your job, but once you’ve determined a time frame and a target last day, your boss needs to know.
4. Prepare for your meeting.
Once the meeting is scheduled, take some time to prepare for it. Have an idea of what you want to say and what you don’t, and make some notes for yourself with those talking points. In the heat of the moment, it’s easy to say things you didn’t intend or that may hurt your reputation.
Be prepared for questions your boss may ask and how you might answer them, but don’t feel pressured to explain yourself or your reason for leaving. You can share those sentiments during your exit interview.
Write your resignation letter ahead of time to give to your boss at the meeting. A resignation letter is your chance to leave professionally, lay out a timeline for your departure, and share your appreciation for the time spent with the company.
5. Ask for a reference.
If you plan to use your supervisor as a job reference during your job search, try to secure this now while the news is fresh.
Asking for a reference right after telling someone you’re quitting may be awkward, but it’s worthwhile, especially if you have a solid relationship. Good references, especially from a former employer, will help you when landing future jobs.
If your supervisor says no to your reference request, ask someone else in the company that you’ve either worked under or alongside who can attest to the quality of your work.
6. Show gratitude for your job.
In all your communications, make it known that you are grateful for your job. Gratitude can take several forms. You can write thank you notes to supervisors and co-workers who’ve helped you along the way. Purchase a small gift or buy co-workers lunch to say thank you one last time.
It’s usually possible to find things to be thankful for and lessons you’ve learned to help you in the future.
7. Give at least two weeks’ notice.
When quitting your job, make sure you give the company at least two weeks’ notice or whatever the company policy requires. This allows them to prepare internally for your departure and makes you look respectful, professional, and courteous.
Steiner says, “So many employees will quit jobs without giving their employers notice at all. This is one of the worst things you can do when quitting a job. No matter how much success you had at the position or how many solid relationships you built, you’ll always be looked at as the employee who quit unannounced.”
Once you’ve given them notice, stick to that time frame. Don’t try to leave earlier than planned and if asked, don’t stay beyond it.
8. Ask what they need from you.
Although quitting your job means a significant change for you, it’s also one for your employer.
Content writer and freelancing coach Laura Gariepy spent a decade working in human resources and saw this firsthand.
“Your departure from the company likely throws a wrench in your supervisor’s plans,” she said. “They’ll need to shuffle resources around and shift their strategy to achieve company objectives.” You can ease the burden by being proactive and asking what you can do to help during the transition. It’s a professional gesture that both your boss and your co-workers will appreciate.
Helping the company may mean training your replacement or leaving resources or notes to help the next person working in your position. You may also want to finish up any lingering projects or paperwork, notify customers or clients of your departure, or return any company-issued equipment.
9. Leave on a positive note.
Choose to leave well. Even if your experience with the company was less than desirable, try to find some good aspects beyond receiving a paycheck. Maybe you received training you couldn’t have otherwise afforded or developed a skill you can transfer to a new career. Or perhaps you expanded your professional network or made close friends.
Gariepy considers this an important step in quitting a job. Regardless of poor pay, micromanaging supervisors, or an overall toxic work environment, she advises leaving on a positive note.
“Continue to show up and perform well through your last day,” Gariepy says. “The professional world can be small and you may run into folks from this job later in your career. So don’t burn bridges if you can help it.”
10. Understand your employer is entitled to their reaction.
When you announce your departure, your employer will inevitably have a reaction, and it may not be the reaction you expect or want. They may be angry or confused and demand you leave immediately.
Even if you disagree, try to respect their emotions. This was likely an emotional decision for you but you’ve had time to process your feelings. This is the first they’re hearing your news and need some time to work through theirs.
Offer some grace as they try to plan for your departure.
Quitting a Job on Good Terms Is Best for Your Future Endeavors
Although it’s difficult to know how decisions you make now may impact your career in the future, there are some steps you can take to make sure you protect your reputation and job prospects.
While it’s tempting to let your boss know how you feel, some things are better left unsaid. Abide by company protocol, give notice, and tie up all loose ends before you leave. Talk to HR, get your references in writing, and give your employer space and time to process your notice.
Even if you’re changing careers, it’ll serve you well to quit your job professionally and respectfully.
Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.
Note: This article has been updated to reflect the new programs and provisions in the second stimulus package.
For the first time nationally, independent contractors and gig workers can receive unemployment benefits — through Pandemic Unemployment Assistance. Millions of Americans have relied on this program since it was created by the first stimulus package in March 2020.
Depending on your state, PUA effectively expired on Dec. 26 or 27. At the 11th hour, lawmakers rallied to pass a second stimulus package, extending the program for 11 weeks. However, some states had to pause making PUA payments as they implemented the new rules.
The Penny Hoarder looked at the application process in all 50 states, plus Washington, D.C. when the program was first created. We compiled the information into an interactive map that shows you how to file in each state, then updated the information based on new provisions laid out in the second stimulus package.
This guide will explain everything you need to know about Pandemic Unemployment Assistance.
Here’s a look at what’s included. (Click a link to jump to the section you need.)
What Is Pandemic Unemployment Assistance?
Pandemic Unemployment Assistance was established by the $2.2 trillion federal stimulus package in March 2020 and was extended by the second stimulus package passed in December 2020.
PUA grants unemployment benefits to people who don’t typically qualify for their state’s regular unemployment program. A whole new set of people are now eligible for unemployment benefits — namely gig workers, independent contractors and furloughed workers.
To be eligible for Pandemic Unemployment Assistance, you must be fully or partially unemployed due to one or more of the following reasons:
You have been diagnosed with COVID-19 or have symptoms and are seeking diagnosis.
A member of your household has COVID-19.
You are taking care of someone with COVID-19.
You are caring for a child or other household member who can’t attend school or work because it is closed due to the pandemic.
You are quarantined by order of a doctor or health official.
You were scheduled to start employment and don’t have a job or can’t reach their workplace as a result of the pandemic.
You have become the breadwinner for a household because the head of household died due to COVID-19.
You had to quit your job as a direct result of COVID-19.
Your workplace is closed as a direct result of COVID-19.
If you have already exhausted your state’s Unemployment Insurance benefits, you may receive additional benefits through PUA.
Weekly PUA pays half of your state’s average unemployment payment. Average state payments range from roughly $180 to $480, meaning that you can expect PUA payments between $90 and $240 weekly.
If you are approved for at least $1 in unemployment benefits, you will also be eligible for a $300 weekly boost for up to 11 weeks and until March 14, 2021. This $300 boost is known as Federal Pandemic Unemployment Compensation (FPUC).
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How the Second Stimulus Package Changes PUA
Initially, the CARES Act authorized PUA payments for a maximum of 39 weeks. The second stimulus package extended PUA to 50 weeks total — or 11 extra weeks.
PUA now sunsets on March 14, 2021, unless extended by Congress and the Biden administration. Those who haven’t exhausted their PUA benefits as of March 14, 2021, may continue receiving benefits until April 5, 2021.
One new and notable limitation: PUA used to be available retroactively as far back as January 2020. The new stimulus law tightens the window for retroactive PUA payments to Dec. 1, 2020, through March 14, 2021.
All PUA recipients should be expecting to file more paperwork, too. To curb fraud, the second stimulus deal forces current and new PUA recipients to submit documents related to employment or self-employment, according to the DOL.
The exact documents needed will be determined by your state agency, which is required to notify you. The deadline to file those documents is March 27, 2021. Defer to your state’s deadline if different.
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How to File for Pandemic Unemployment Assistance, State by State
Our interactive map includes PUA filing instructions for all 50 states and Washington, D.C.
Based on The Penny Hoarder’s analysis, 35 states and D.C. process PUA applicants using the same application for general unemployment. Only 15 states have separate PUA applications.
Here’s how we broke it down on the map.
To determine PUA eligibility, most states funnel applicants through the Unemployment Insurance system first. Those states require you to file two applications: state unemployment first, then PUA.
In such states, you must get denied Unemployment Insurance (UI) before applying for PUA. Only a handful of states have one streamlined, general unemployment application that determines your eligibility for both PUA or regular benefits.
For simplicity — and because in both instances your first step is filing a general unemployment claim — both methods are categorized as “general unemployment (UI)” on the map, in dark blue.
To see if you need to file two applications or one streamlined version, click your state on the map for specific filing instructions.
States marked in light blue have a PUA application separate from the regular Unemployment Insurance system. If you are a resident of one of these states, you can file for PUA directly so long as you meet the eligibility criteria.
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Documents Needed to File for PUA
If you’re ready to file for Pandemic Unemployment Assistance, you’ll need to gather several types of identification- and income-related documents.
Your state may require a few additional documents, but here’s an overview:
State-issued ID card.
Social Security Number or Alien Registration Number.
Mailing and residential address (if different).
Bank account information for direct deposit, otherwise your benefits will arrive via a prepaid debit card or check.
Tax return: Form 1040, Schedule C, F and/or SE.
As many income statements as possible: bank receipts with deposit information, 1099 forms, W-2s, paycheck stubs, income summaries and business ledgers.
Income statements and related documents are crucial to proving how and when the coronavirus affected your earnings. For freelancers and independent contractors, it may be difficult to compile everything. Include as much as possible.
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Due to new rules outlined in the second stimulus package, state labor departments are once again scrambling. Hiccups should be expected while applying for, asking about or submitting documents related to PUA. Many gig workers and independent contractors warn of website crashes, unavailable customer service, confusing questionnaires and more.
Perseverance is key.
Adam Hardy is a staff writer at The Penny Hoarder. He covers the gig economy, entrepreneurship and unique ways to make money. Read his latest articles here, or say hi on Twitter @hardyjournalism.
A payday loan is a short-term loan with a high annual percentage rate. Also known as cash advance and check advance loans, payday loans are designed to cover you until payday and there are very few issues if you repay the loan in full before the payment date. Fail to do so, however, and you could be hit with severe penalties.
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Lenders may ask the borrower to write a postdated check for the date of their next paycheck, only to hit them with rollover fees if that check bounces or they request an extension. It’s this rollover that causes so many issues for borrowers and it’s the reason there have been some huge changes in this industry over the last decade or so.
How Do Payday Loans Work?
Payday lending seems like a simple, easy, and problem free process, but that’s what the payday lender relies on.
The idea is quite simple. Imagine, for instance, that your car suddenly breaks down, payday is 10 days away, and you don’t have a single cent to your name. The mechanic quotes you $300 for the fix, and because you’re already drowning in debt and have already sold everything valuable, your only option is payday lending.
The payday lender offers you the $300 for a small fee. They remind you that if you repay this small short-term cash sum on payday, you won’t incur many fees or any real issues. But a lot can happen in 10 days.
More bills can land in your mailbox, more expenses can arrive out of nowhere, and before you know it, all of your paycheck has been allocated for other expenses. The payday lender offers to rollover your loan for another month (another “payday”) and because you don’t have much choice, you agree.
But in doing so, you’ve just been hit with more high fees, more compounding interest, and a sum that just seems to keep on growing. By the time your next payday arrives, you’re only able to afford a small repayment, and from that moment on you’re locked into a debt that doesn’t seem to go anywhere.
Payday loans have been criticized for being predatory and it’s easy to see why. Banks and credit unions profit more from high-income individuals as they borrow and invest more money. A single high-income consumer can be worth more than a dozen consumers straddling the poverty line.
Payday lenders, however, target their services at low-income individuals. They offer small-dollar loans and seem to profit the most when payment dates are missed and interest rates compound, something that is infinitely more probable with low-income consumers.
Low-income consumers are also more likely to need a small cash boost every now and then and less likely to have the collateral needed for a low-interest title loan. According to official statistics, during the heyday of payday loans, most lenders were divorced renters struggling to make ends meet.
Nearly a tenth of consumers earning less than $15.000 have used payday loans, compared to fewer than 1% for those earning more than $100,000. Close to 70% of all payday loans are used for recurring expenses, such as utility bills and other debts, while 16% are used for emergency purchases.
Pros and Cons of Taking Out a Payday Loan
Regardless of what the lender or the commercial tells you, all forms of credit carry risk, and payday loans are no exception. In fact, it is one of the riskiest forms of credit available, dragging you into a cycle of debt that you may struggle to escape from. Issues aside, however, there are some benefits to these loans, and we need to look at the cons as well as the pros.
Pros: You Don’t Need Good Credit
Payday loans don’t require impeccable credit scores and many lenders won’t even check an applicant’s credit report. They can afford to do this because they charge high interest and fees, and this allows them to offset many of the costs associated with the increased liability and risk.
If you’re struggling to cover your bills and have just been hit with an unexpected expense, this can be a godsend—it’s a last resort option that could buy you some time until payday.
Pros: It’s Quick
Payday loans give you money when you need it, something that many other loans and credit offers simply can’t provide. If you need money right now, a payday lender can help; whereas another lender may require a few days to transfer that money or provide you with a suitable line of credit.
Some lenders provide 24/7 access to money, with online applications offering instant decisions and promising a money transfer within 24 hours.
Pro: They Require Very Little
A payday loan lender has a very short list of criteria for its applicants to meet. A traditional lender may request your Social Security Number, proof of ID, and a credit check, but the average payday lender will ask for none of these things.
Generally, you will be asked to prove that you are in employment, have a bank account, and are at least 18 years old—that’s it. You may also be required to submit proof that you are a US citizen.
Cons: High Risk of Defaulting
A study by the Center for Responsible Lending found that nearly half of all payday loans go into default within just 2 years. That’s a staggering statistic when you consider that the average default rate for personal loans and credit cards is between 1% and 4%.
It proves the point that many payday lender critics have been making for years: Payday loans are predatory and high-risk. The average credit or loan account is only provided after the applicant has undergone a strict underwriting process. The lender takes its time to check that the applicant is suitable, looking at their credit history, credit score, and more, and only giving them the credit/loan when they are confident it will be repaid.
This may seem like an unnecessary and frustrating process, but as the above statistics prove, it’s not just for the benefit of the lender as it also protects the consumer from a disastrous default.
Con: High Fees
High interest rates aren’t the only reason payday lenders are considered predatory. Like all lenders, they charge fees for late payments. But unlike other lenders, these fees are astronomical and if you’re late by several weeks or months, those fees can be worth more than the initial balance.
A few years ago, a survey on payday lending discovered that the average borrower had accumulated $458 worth of fees, even though the median loan was nearly half that amount.
Cons: There are Better Options
If you have a respectable credit history or any kind of collateral, there are better options available. A bank or credit union can provide you with small short-term loans you can repay over many months without accumulating astronomical sums of interest.
The interest rates are much lower, the fees are more manageable, and unless your credit score is really poor, you should be offered more favorable terms than what you can get from a payday lender.
Even a credit card can offer you better terms. Generally speaking, a credit card has some of the highest interest rates of any unsecured debt, but it can’t compare to a payday loan. It also has very little impact on your credit score and many credit card providers offer 0% on purchases for the first-few months.
What’s more, if things go wrong with a credit card, you have more options than you have with a payday loan, including a balance transfer credit card or a debt settlement program.
Why Do Payday Loans Charge So Much Interest?
If we were to take a cynical view, we could say that payday loans charge a lot simply because the lender can get away with charging a lot. After all, a payday loan lender targets the lowest-income individuals, the ones who need money the most and find themselves in desperate situations.
However, this doesn’t paint a complete picture. In actual fact, it all comes down to risk and reward. A lender increases its interest rate when an applicant is at a greater risk of default.
The reason you can get low rates when you have a great credit score and high rates when you don’t, is because the former group is more likely to pay on time and in full, whereas the latter group is more likely to default.
Lending is all about balancing the probabilities, and because a short-term loan is at serious risk of defaulting, the costs are very high.
Payday Loans and Your Credit Score
Your credit will only be affected if the lender reports to the credit bureaus. This is something that many consumers overlook, incorrectly assuming that every payment will result in a positive report and every missed payment in a negative one.
If the lender doesn’t report to the main credit bureaus, there will be no changes to your report and the account will not even show. This is how many payday lenders operate. They rarely run credit checks, so your report won’t be hit with an inquiry, and they tend not to report on-time payments.
However, it’s a different story if you miss those payments. A lender can report missed payments and defaults and may also sell your account to a debt collector, at which point your credit score will take a hit.
If you’re concerned about how an application will impact your credit score, speak with the lender or read the terms and conditions before applying. And remember to always meet your payments on time to avoid any negative marks on your credit report and, more importantly, to ensure you’re not hit with additional fees.
Payday Loans vs Personal Loans
A personal loan is generally a much better option than a payday loan. These loans are designed to help you cover emergency expenses, pay for home improvements, launch businesses, and, in the case of debt consolidation loans, to clear your debt.
The interest rates are around 6% to 10% for lenders with respectable credit scores, and while they often charge an origination fee and late fees, they are generally much cheaper options. You can repay the loan at a time that suits you and tailor the payments to fit your monthly expenses, ensuring that they don’t leave you short at the end of the month.
You can get a personal loan from a bank or a credit union; whenever you need the money, just compare, apply, and then wait for it to hit your account. The money paid by these loans is generally much higher than that offered by payday loans and you can stretch it out over a few years if needed.
What is an Unsecured Loan?
Personal and payday loans are both classed as unsecured loans, as the lender doesn’t secure them against money or assets. Secured loans are typically secured against your home (mortgage, home equity loan) or your car (auto loan, title loan). They can also be secured against a cash deposit, as is the case with secured credit cards.
Although this may seem like a negative, considering a lender can repossess your asset if you fail to meet the payment terms, it actually provides many positives. For instance, a secured loan gives the lender more recourse if anything goes wrong, which means the underwriters don’t need to account for a lot of risk. As a result, the lender is more likely to offer you a low interest rate.
Where cash advance loans and other small loans are concerned, there is generally no option for securing the loan. The lender won’t be interested, and neither should you—what’s the point of securing a $30,000 car against a $1,000 loan!?
New Payday Loan Regulations
Payday lenders are subject to very strict rules and regulations and this industry has undergone some serious changes in recent years. In some states, limits are imposed to prevent high interest rates; in others, payday lenders are banned from operating altogether.
The golden age of payday lending has passed, there’s no doubt about that. In fact, many lenders left the US markets and took their business to countries like the UK, only for the UK authorities to impose many of the same restrictions after a few years of pandemonium. In the US, the industry thrived during the end of the 2000s and the beginning of the 2010s, but it has since been losing ground and the practice is illegal or highly restricted in many states.
Are Payday Loans Still Legal?
Payday loans are legal in 27 states, but many states have imposed strict rules and regulations governing everything from loan amounts to fees. The states where payday lenders are not allowed to operate are:
It is still possible to apply for personal loans and title loans in these states, but high-interest, cash advance loans are out of the question, for the time being at least.
Debt Rollover Rules for Payday Lenders
One of the things that regulations cover is something known as Debt Rollover, whereby a consumer rolls their debt over into the next billing period, accruing fees and continuing to pay interest. The more rollovers there are, the greater the risk and the higher the detriment to the borrower.
Debt rollovers are at fault for many of the issues concerning payday loans. They create a cycle of persistent debt, as the borrower is forced to acquire additional debt to repay the payday loan debt.
In the following states, payday loans are legal but restricted to between 0 and 1 rollovers:
Other states tend to limit debt rollovers to 2, but there are some notable exceptions. In South Dakota and Delaware, as many as 4 are allowed, while the state of Missouri allows for 6. However, the borrower must reduce the principal of the loan by at least 5% during each successive rollover.
Are These Changes for the Best?
If you’re a payday lender, the aforementioned rules and regulations are definitely not a good thing. Payday lenders rely on persistent debt. They make money from the poorest percentage of the population as they are the ones most likely to get trapped in that cycle.
For responsible borrowers, however, they turn something potentially disastrous into something that could serve a purpose. Payday loans still carry a huge risk, especially if there is any chance that you won’t repay the loan in time, but the limits imposed on interest rates and rollovers reduces the astronomical costs.
In that sense, they are definitely for the best, but there are still risks and potential pitfalls, so be sure to keep these in mind before you apply for any short-term loans.
If you’ve been thinking about canceling a credit card, it’s critical to understand how it will affect your entire financial life. Laura covers 10 dos and don’ts for when to cancel a credit card that will help you minimize credit damage and improve your finances.
Laura Adams, MBA
June 17, 2020
12 Credit Myths and Truths You Should Know
The Connection Between Credit Cards and Your Credit
The only way to build credit is to have active credit accounts in your name and to use them responsibly over time. That’s where credit cards come into play.
One of the biggest factors in how credit scores are calculated is called your credit utilization ratio. It only applies to revolving accounts, such as credit cards and lines of credit, which don’t have a fixed term. Credit utilization isn’t measured for installment loans, such as mortgages and car loans, because they do have a set ending or maturity date.Credit utilization is a simple formula that equals your total account balance divided by your total credit limit. For example, if you have a credit card with a balance of $1,000 and a credit limit of $2,000, your utilization ratio is 50% ($1,000 / $2,000 = 0.50).
Keeping a low utilization, such as below 20%, is optimal for good credit.
Keeping a low utilization, such as below 20%, is optimal for good credit. So, by paying down your balance on the card to $400, you could reduce your utilization ratio to 20% ($400 / $2,000 = 0.20) and boost your credit scores.
A low utilization ratio says that you’re using credit responsibly. A high ratio indicates that you may be maxed out and even getting close to missing a payment.
Many people mistakenly believe that getting rid of their credit cards will automatically improve their credit. The surprising truth is that canceling credit cards usually hurts it because your available credit on the card plunges to zero, which instantly increases your utilization and causes your credit scores to drop right away.
However, whether closing a card is right for you really depends on your current and future financial situation. Use the following do and don’ts to know when ditching a card is best and how to do it with minimal damage to your credit.
RELATED: 5 Ways to Get a Loan With Bad Credit
10 dos and don’ts for when to cancel a credit card
1. Do cancel credit cards that are a net loss
If you’re like Maria and have great credit with an unused card that’s costing you money, you may want to consider canceling it. Many rewards cards come with an annual fee, especially when they offer cashback, airline miles, or points for merchandise. In some cases, using the rewards easily offsets the annual fee.
If you won’t use the card or can’t afford the annual fee, common sense should be the deciding factor, not your credit score.
However, if you won’t use the card or can’t afford the annual fee, common sense should be the deciding factor, not your credit score. However, one option is to replace a card that charges an annual fee with another card that doesn’t, ideally before you cancel the first one. That allows you to swap out one credit limit for another one and avoid any damage to your credit.
2. Do cancel credit cards that tempt you to overspend
I also don’t recommend keeping a credit card if it tempts you to overspend. Taking a temporary hit to your credit might be worth it to prevent bigger problems in your financial life.
3. Do cancel credit cards to simplify your financial life
If you’ve missed payments or can’t keep up with transactions because you have too many cards, it might be worth it to strategically cancel one or more credit cards. Keep reading for tips to minimize the potential damage to your credit.
4. Do cancel credit cards with low credit limits first
If you cancel a credit card, choosing one with a higher credit limit poses more of a threat than getting rid of one with a smaller limit. The lower your credit limit on a card, the less closing it could negatively affect your credit.
As I previously mentioned, for optimal credit, it’s best to never carry a balance that exceeds 20% of your available credit limit. If you’re not sure what your credit limits are, you can review them by getting a free copy of your credit report at annualcreditreport.com.
5. Do cancel credit cards you recently opened by mistake
A common credit dilemma is what to do after opening a new credit card that you felt pressured into at a retail store. Sales clerks make getting a huge discount with a new card signup sound too good to pass up. In some cases, you may not even realize that what you’re signing up for is a credit card.
If you’re loyal to a store and make frequent purchases there, having its branded credit card can give you nice savings and promotional benefits that make it worthwhile. While you can’t erase the card from your credit history, if you decide that you’d rather not have the account, closing it sooner rather than later is better for your credit.
Free Resource: Credit Score Survival Kit – a video tutorial, e-book, and audiobook to help build credit fast!
6. Don’t cancel your only credit card
In addition to maintaining low credit utilization, the health of your credit depends on having a mix of credit accounts. That shows you can handle different types of credit, such as installment loans and revolving accounts. But if you cancel your only credit card, that would leave you deficient in the revolving credit category.
It’s better to spread out your balances on multiple cards and maintain low utilization on each of them, rather than have one card that you charge to the limit.
Therefore, I don’t recommend canceling a credit card if it’s your only one. Having at least one card in the mix rounds out your credit file. Ideally, you would have a total of two or three cards that come from different issuers, such as Visa, Mastercard, American Express, or Discover.
If you have more than one line of credit or credit card, most credit scoring models calculate your utilization ratio for each account and collectively on all your accounts. So, it’s better to spread out your balances on multiple cards and maintain low utilization on each of them, rather than have one card that you charge to the limit.
Depending on the types of charges you make, you may need a low-rate card for times when you must carry a balance and a higher-rate rewards card for charges that you always pay off each month. No annual fee cards are best, but as I previously mentioned, rewards cards that come with a fee may be worth it.
7. Don’t cancel credit cards you’ve had for a long time
As if credit utilization and having a mix of credit accounts weren’t enough, a canceled credit card hurts your credit in other ways. Another factor that’s used in calculating credit scores is how long you’ve had credit accounts.
Having a long, rich credit history boosts your scores and makes you appear less risky to potential lenders and merchants. Canceling a long-standing credit card causes your average age of credit history to decrease, which hurts your credit. So, value credit cards that you’ve had for a long time more than those you’ve recently opened.
8. Don’t cancel multiple cards at the same time
If you have more than one credit card that you want to cancel, don’t shut them all down at the exact same time. It’s better to space out cancellations over time, such as one every six months, to minimize the damage to your credit health.
9. Don’t cancel credit cards if you’re planning to make a big purchase
If you’re planning to finance a big purchase, such as a home or vehicle, in the next three to six months, it’s not wise to cancel any credit cards. If your utilization rate increases and your credit scores suddenly take a dive during the application process, you may ruin your chances of getting a low-interest loan.
If you’re planning to finance a big purchase, such as a home or vehicle, in the next three to six months, it’s not wise to cancel any credit cards.
Maria didn’t mention if she’s looking to use her great credit to borrow money any time soon. But it’s an important issue that I recommend she consider.
10. Don’t cancel credit cards because you’ve made late payments
Never cancel a credit card with negative information, such as late payments or being in collections, thinking that it will disappear from your credit file. All credit accounts stay on your credit report for seven years from the date you became delinquent, even after you or a card issuer closes it. Accounts with only positive information remain in your credit file longer, for up to 10 years
What should you do with unused credit cards?
If you or Maria go through these dos and don’ts and decide that it’s better not to cancel a credit card, use it occasionally to make small purchases that you pay off in full. That keeps it active and allows you to continue adding positive information to your credit history.
However, I don’t recommend keeping a credit card that you’re not using responsibly or that tempts you to overspend. Taking a temporary hit to your credit might be worth it to prevent bigger problems in your financial life.