MONEY mortgages

Here Come Cheap Mortgages for Millennials. Should We Worry?

young couple admiring their new home
Justin Horrocks—Getty Images

The federal agencies that guarantee most mortgages are launching new loan programs that require only 3% down payments for first-time buyers. Is this the start of financial crisis redux?  

According to new research from Trulia, in metro areas teeming with millennials, such as Austin, Honolulu, New York, and San Diego, more than two-thirds of the homes for sale are out of reach for the typical millennial household.

That goes a long way to explaining why first-time homebuyers have recently accounted for about one-third of homes sales, according to the National Association of Realtors, down from a historic norm of about 40%. And it should concern you even if you’re not a millennial or related to one: A shortage of first-time buyers makes it harder for households that want to trade up to find potential buyers; and spending by homeowners for homes and housing-related services accounts for about 15% of GDP.

Now the federal government appears intent on reversing the trend — or at least on easing the pain of the still-sluggish housing industry.

Trulia’s dire analysis assumes that buyers need to make a 20% down payment — a high hurdle for anyone, let along a younger adult. But Fannie Mae and Freddie Mac, the government agencies that guarantee the vast majority of mortgages, this week launched new loan options that will require down payments of as little as 3% for first-time buyers (and, in limited instances, refinancers as well). Fannie’s program will be live next week; Freddie’s, which will be available to repeat buyers as well, will launch in early spring.

Before you get all “Isn’t that the sort of lax standard that fueled the financial crisis!?”, it’s important to realize significant differences between now and then.

The only deals that will qualify for the 3%-down programs are plain-vanilla 30-year fixed-rate loans. No adjustable-rate deals, no teaser-rate come-ons, and, lordy, no interest-only payment options. And flippers are not welcome; the home must be the borrower’s principal residence.

Both Fannie Mae’s MyCommunityMortgage and Freddie Mac’s Home Possible Mortgage program are aimed at moderate-income households. For example, to qualify for Fannie Mae’s program, household income must typically be below the area median. Income limits are relaxed a bit in some high cost areas, such as the State of California (up to 140% of the local median) and pricey counties in New York (165% of the median).

That said, lenders will be allowed to extend these loans to borrowers with credit scores as low as 620. That’s even lower than the average 661 FICO credit score for Federal Housing Administration-insured loan applications that were turned down in October, according to mortgage data firm Ellie Mae. (The average FICO credit score for FHA approved loans was 683.)

Like FHA-insured loans, the new 3% mortgages offered by Fannie and Freddie will require home buyers have private mortgage insurance (PMI). That can add significantly to mortgage costs.

For example, a $300,000 home purchased with a 3.5% fixed rate loan and a 3% down payment would have monthly principal and interest charges of about $1,300 a month. The PMI adds another $240 or so to the monthly cost; that’s nearly 20% of the base monthly mortgage amount. (You can estimate the bite of PMI using Zillow’s Mortgage Calculator.)

But one significant advantage the new Fannie/Freddie loan programs have over the FHA program is that they will allow homeowners to cancel their PMI once their home equity reaches at least 20%. Beginning in 2013, the annual insurance charge on FHA-insured loans, currently 1.35% of the loan balance, can never be cancelled regardless of whether the borrower has more than 20% equity.

 

MONEY Student Loans

Help! I Owe $37K for My Kids’ College But I Make Only $28K a Year

knife cutting dollar bill
David Franklin

A student loan expert explains why there's hope for a parent saddled with student loan debt from two kids.

Brent Strine, 65, sent a blog comment to us describing what he thought was probably an impossible situation, and he despaired of ever being able to get out of debt. He wasn’t asking for help so much as describing a sense of hopelessness. Here’s what he told us:

I have 45k in parent loans from two children who cannot help me pay on them. Every time I defer them it costs over 1k added to the principal. I am 65, our (total household income) is 28k . . . (We have) no savings, no retirement plans or funds. Seems the only way out of debt is through the grave.

When we contacted him, he quickly noted that he feels grateful for his home and family, “and I am not in any way a ‘victim.’” He had deferred the loans when his wife was hospitalized after a serious car accident and when he had cancer surgery. He continues to work full time as a custodial supervisor, though he plans to retire in May 2015 because of some physical limitations. At that point, he wants to find part-time work. He was clearly worried about his debt, though.

He gave us the balances of his loans, down to the penny. And though he knew exactly how much he owes, he hadn’t a clue about how he could possibly repay it. He wondered if there’s some way he can get lower interest rates — he has several loans, $37K total, with rates of 8% or 8.5%. (The rest of the loans have much lower interest rates.)

We spoke with Joshua Cohen, “The Student Loan Lawyer,” on Strine’s behalf. The good news is Strine probably need not worry about unaffordable payments or high interest rates. Because he has federal Parent PLUS loans, he — and not his children — is on the hook for the debts, Cohen noted. And although Strine won’t be able to get lower interest rates, it won’t matter, said Cohen.

That’s because Strine’s $28K income should make him eligible for a repayment plan based on the borrower’s income. Cohen said a family of two with an adjusted gross income (reported on federal tax return) of $28K would have a monthly payment of $205. However, when we reached out to Strine, he told us his most recent tax return had an AGI well under $20K. That would result in a payment of just $71 per month, and possibly even less, Cohen said.

“The plan I’m talking about is called Income-Contingent Repayment (ICR) — the only income-based plan allowed for Parent PLUS loans,” Cohen wrote in an email. He had more good news for Strine: “It comes with 25-year forgiveness, which means if you live to 90, your loans will be forgiven. If you pass away before then, the loan goes with you — it will not attach to your estate.

“Bottom line, you can survive this loan,” Cohen said. “It would have been nice if the servicer gave you this information. After all, that’s what us taxpayers are paying for — to help borrowers stay out of default and continue paying.”

Student loans have an impact on your credit, for better or worse. Making arrangements with the servicer for payments you can afford can help you stay afloat financially, as well as help your credit standing — by making the payments on time and as agreed. You can see how your student loans are affecting your credit for free on Credit.com, where you can get two free scores updated monthly.

More from Credit.com

This article originally appeared on Credit.com.

MONEY alternative assets

Lending Club’s $4 Billion IPO Puts Peer-to-Peer Lending in the Mainstream

IOU note
Getty Images

Lending Club priced its IPO on Monday, putting it in the ranks of the biggest public offerings ever for an Internet company. Here's what you need to know about peer-to-peer lending.

UPDATE: On Monday, peer-to-peer lending company Lending Club announced it would be pricing its upcoming IPO at $10 to $12 a share in an effort to raise as much as $692 million. (Click here to read the filing.) At the midpoint of the range, that would value the company at around $4 billion. Now that P2P lending has firmly entered the mainstream (and then some), it’s worth looking again at the advice we published in August, when Lending Club filed to go public, on how P2P lending works and how best to use Lending Club and similar services.

Your bank makes money off borrowers. Now you have the opportunity to do the same. One of today’s hottest investments, peer-to-peer lending, involves making loans to strangers over the Internet and counting on them to pay you back with interest. The concept may be a bit wacky, but the returns reported by sites specializing in this transaction—from 7% to 14%—are nothing to scoff at.

Investors aren’t laughing either. Lending Club, one of the leading peer-to-peer lending companies, filed to go public on Wednesday. The New York Times reports the company is seeking $500 million as a preliminary fundraising target and may choose to increase that figure.

Such lofty ambitions should be no surprise, considering that the two biggest P2P sites are growing like gangbusters. With Wall Street firms and pension funds pouring in money as well, Lending Club issued more than $2 billion of loans in 2013, and nearly tripled its business over the prior year. In July, Prosper originated $153.8 million in loans, representing a year-over-year increase of over 400%. The company recently passed $1 billion in total lending. “A few years ago I would have laughed at the idea that these sites would revolutionize banking,” says Curtis Arnold, co-author of The Complete Idiot’s Guide to Person to Person Lending. “They haven’t yet, but I’m not laughing anymore.”

Here’s what to know before opening your wallet.

How P2P Works

To start investing, you simply transfer money to an account on one of the sites, then pick loans to fund. When Prosper launched in 2006, borrowers were urged to write in personal stories. Nowadays the process is more formal: Lenders mainly use matching tools to select loans—either one by one or in a bundle—based on criteria like credit rating or desired return. (Most borrowers are looking to refi credit-card debt anyway.) Loans are in three- and five-year terms. And the sites both use a default investment of $25, though you can opt to fund more of any given loan. Pricing is based on risk, so loans to borrowers with the worst credit offer the best interest rates.

Once a loan is fully funded, you’ll get monthly payments in your account—principal plus interest, less a 1% fee. Keep in mind that interest is taxable at your income tax rate, though you can opt to direct the money to an IRA to defer taxes.

A few hurdles: First, not every state permits individuals to lend. Lending Club is open to lenders in 26 states; Prosper is in 30 states plus D.C. Even if you are able to participate, you might have trouble finding loans because of the recent influx of institutional investors. “Depending on how much you’re looking to invest and how specific you are about the characteristics, it can take up to a few weeks to deploy money in my experience,” says Marc Prosser, publisher of LearnBonds.com and a Lending Club investor.

What Risks You Face

For the average-risk loan on Lending Club, returns in late 2013 averaged 8% to 9%, with a default rate of 2% to 4% since 2009. By contrast, junk bonds, which have had similar default rates, are yielding 5.7%. But P2P default rates apply only to the past few years, when the economy has been on an upswing; should it falter, the percentage of defaults could rise dramatically. In 2009, for example, Prosper’s default rate hit almost 30% (though its rate is now similar to Lending Club’s). Moreover, adds Colorado Springs financial planner Allan Roth, “a peer loan is unsecured. If it defaults, your money is gone.”

How to Do It Right

Spread your bets. Lending Club and Prosper both urge investors to diversify as much as possible.

Stick to higher quality. Should the economy turn, the lowest-grade loans will likely see the largest spike in defaults, so it’s better to stay in the middle to upper range—lower A to C on the sites’ rating scales. (The highest A loans often don’t pay much more than safer options.)

Stay small. Until P2P lending is more time-tested, says Roth, it’s best to limit your investment to less than 5% of your total portfolio. “Don’t bank the future of your family on this,” he adds.

MONEY Student Loans

How to Pay Off Student Loans Without Surviving on Ramen

graduate eating ramen on the floor
Datacraft/QxQ images—Alamy

Recent grads: You don't need to live off instant noodles or buy only the cheapest beer. What you really need is a plan.

For some federal student loan borrowers who graduated in May, the time has come: It’s the end of your loan repayment grace period.

If you’re about to start shelling out monthly loan payments, just started or are hoping to aggressively tackle your debt, there are a lot of things to do before you start transferring money.

1. Get a Grip on the Basics

Let’s start with the fundamentals of loan repayment: You owe a certain servicer a minimum amount of money at the same time every month. Make sure you know how all that works. You should have received notification from your student loan servicer, but if you’re not sure who you’re supposed to pay, you can access your federal loan information in the National Student Loan Data System. It’ll tell you who you owe. Private student loans won’t be found in that database, but will likely show up on your credit reports with information about the lender so you can contact them.

Make sure you understand exactly what you’re required to pay each month and your payment due date. Jodi Okun, founder of College Financial Aid Advisors and Discover Student Loans Brand Ambassador, recommends organizing your student loan information in a document and setting up calendar reminders for when the payments are due. Look into automatic payment options with your servicer, as well, but you’ll still want to make sure the payment goes through every month. Forgetting about it could accidentally lead you to miss a payment.

2. Figure Out What You Can Afford

As a new graduate, you may be dealing with more life expenses than you have in the past, or you might still be in search of a job you want. Paying your student loans needs to be a priority, because once you fall behind, it can be very difficult to catch up, and missing loan payments will seriously hurt your credit score. You can see how your student loan payments affect your credit score from month to month by getting two of your scores for free on Credit.com.

If you’re concerned about being able to afford your payments, look into student loan repayment options. Federal loan borrowers are often eligible for income-based repayment or loan forgiveness. The application process might take a few months, said John Collins, managing director for GL Advisor, a student loan debt consultancy. Servicers are dealing with a lot of repayment program applications this time of year, so it could take you 60 to 90 days to enroll, Collins said. In the meantime, make sure you can afford your payments.

3. Make a Plan

You may hate the idea of paying debt off over the course of a decade, racking up interest along the way, but before you decide to throw as much money as possible at your debt, consider your entire financial picture.

“What we’ll recommend to everybody is right out of school, limit your required payment as much as possible,” Collins said. “They need to have an emergency savings fund in case something happens. That should be a goal before you start paying down debt.”

Once you have enough socked away to cover three to six months of expenses, then you can consider upping your loan payments, though you’ll want to make sure you won’t incur penalties and your extra payment goes toward the principal loan balance.

Figure out if you want to consolidate or refinance your student loans and what it would take for you to qualify. There are a few companies offering competitive refinancing rates for private loan borrowers with qualifying credit histories, and that could save you a lot of money in the future.

Federal loan borrowers have some decent options for making payments affordable, and all it requires is a little planning. For example, when you’re gathering documents to prove your income level, make sure you’re providing the most accurate information — your earning situation may have changed drastically since you filed your taxes — so your loan repayment is accurate, Collins said.

“Ultimately I think borrowers have a great opportunity to reduce their debt payments through the federal loan repayment options,” Collins said. “A lot of people recommend eating only Ramen, and live in a studio apartment, and only buy toilet paper if necessary. You should never feel that pressure. Use the many tools that are out there, educate yourself on what they are, and if you need help, there are plenty of resources out there.”

More from Credit.com

This article originally appeared on Credit.com.

MONEY friends & money

3 Tools that Help You Nudge Friends to Pay You Back

restaurant bill with credit cards and cash
Dan Dalton—Getty Images

Fronted a pal for a meal, a vacation or rent? These will help you collect what you're owed, and keep your relationship in tact.

Raise your hand if you’ve fronted money to a friend or relative only to realize that your “loan” ended up being a “gift,” money you never saw again.

We’ve all been there—and probably will be again. A survey by American Consumer Credit Counseling found that 82% of adults would loan money to a family member in financial need. Another 66% would lend to a friend.

In a perfect world, borrowers would quickly pay back their IOUs. But the onus is often on lenders to bring up repayment. After all, as at least one study has found, borrowers sometimes just forget and may even incorrectly assume that they’ve paid up.

To keep the peace, we avoid collecting and regretfully file the experience under: “friends and money, lessons learned.”

But it doesn’t have to always end so poorly for lenders. These three online tools serve as financial liaisons to help coordinate and move along person-to-person payments—so that friends can stay friends.

Booked a group trip on your credit card? Use Splitzee

Let’s say you’ve finished booking a group vacation for you and three friends who’ve all agreed to pay you back.

The upside is that by securing all reservations on your credit card, you earn quadruple the points. The downside is that you could be waiting for a while for your friends to pay you back—and rack up interest charges in the meantime.

Head to Splitzee and create a vacation “pool” ahead of the trip, and invite all three friends to participate. They can pay you back via the site using either a credit or debit card. You can then cash out by either having the site send you a check (which takes up to three business days) or make a direct transfer to your bank account (usually three to five business days).

To get your pals to act sooner rather than later, you might want to add a note of explanation: “I know our trip seems so far away still, but I need to pay off my card’s balance by the end of the month to avoid interest. So if you can make a payment by the 20th, I’d really appreciate it.”

If you want, you can allow everyone in the group to see who’s paid up and who hasn’t, which provides some added pressure.

If the total amount of money collected per pool is under $200 there’s no fee. After that, the site collects 5%. So, for example, if you collect a total of $500, the Splitzee sends you $475.

(If you use the collected money to buy a select product directly from one of the site’s retail partners, no fees apply—but that won’t help with your unpaid credit card balance)

Paid for your roommate’s share of the rent, Cheetos and HBO last month? Use Splitwise

As the first of the month nears, that’s a perfect time to remind your roommate that his portion of the rent and living expenses is due plus the $542 you spotted him last month.

Don’t leave this reminder via a Post-It note on the fridge. Mention it in person and say, “Hey, you know, I’ve been thinking it would be helpful for the both of us to begin tracking all of our shared expenses in one place.”

Say you found this interesting free site called Splitwise. There you can create a dashboard listing your joint expenses and invite your roommate to see exactly what he owes (and what you owe).

Splitwise lets users settle up their debts by recording a cash payment, sending money via PayPal or using Venmo. It also sends monthly reminders and alerts so you don’t have to keep chasing down your roommate.

Covered your friend’s steak and martini dinner last week? Use Square Cash

The next time the two of you go out on the town again, and the bill arrives, remind your friend that, “I think you owe me, right?”

Assuming the dinner bill’s roughly the same as last time say, “Are you okay to pay this time?” In the same breath, add, “If not, no worries…You can just pay me back online. It’s really easy.”

If she goes for the latter, introduce Square Cash, a mobile app that lets users transfer money using an email address and their debit card for free to anyone within a matter of seconds.

Farnoosh Torabi is a contributing editor at MONEY and the author of the book When She Makes More: 10 Rules for Breadwinning Women. More of her columns and videos for MONEY.com:

MONEY

Former Federal Reserve Chair Ben Bernanke Can’t Refinance His Home

Even former central bankers can't get a loan

If you’ve failed to get a loan in this market, don’t feel too bad. Not even central bankers can catch a break–as Ben Bernanke, who chaired the Federal Reserve from 2006 through February of 2014, recently revealed that he has been unable to refinance his home.

“Just between the two of us, ” Bernanke told the moderator at a recent conference of the National Investment Center for Seniors Housing and Care, “I recently tried to refinance my mortgage and I was unsuccessful in doing so,” Bloomberg reports.

The audience laughed.

“I’m not making this up,” Bernanke insisted.

Bernanke also complained that stringent credit standards have made the process for first-time homebuyers excessively difficult, especially as economic conditions have improved. “The housing area is one area where regulation has not yet got it right,” Bernanke said. “I think the tightness of mortgage credit, lending is still probably excessive.”

As of press time, there is no word on whether current Federal Reserve Chair Janet Yellen has been denied for an auto loan.

[Bloomberg]

TIME Money

PayPal Co-Founder Takes Aim at Credit Card Industry With New Startup

Yelp Chairman Max Levchin Creates New Mobile Payments Startup Affirm
Max Levchin speaks during a Bloomberg West television interview in San Francisco on Thursday, March 28, 2013. David Paul Morris—Bloomberg / Getty Images

“You have to have a credit card. You have to use it. You are going to get screwed and you know it."

The most miserable year of Max Levchin’s life began in 2002, shortly after he sold off his ownership stake in PayPal to eBay for an estimated $34 million. “At the time, I had a fascination with the color yellow,” Levchin told TIME. He would arrive to work in a yellow car, wearing a yellow jumpsuit and hole up in his executive suite, blending in with the all-yellow office paraphernalia. His former direct reports, who numbered in the hundreds, shuffled past the door, “staring at me every morning,” he recalls, “as I would sort of mope around going, ‘My baby’s now been sold to a giant company’ while wearing a yellow clown suit.”

He was 27 years old, flush with cash and adrift in an ocean of downtime. If that sounds like your idea of heaven, then you’re no Levchin. “I literally — I think I started hearing voices,” he says. His girlfriend left him. He wrote 10,000 lines of code, a “minuscule amount,” he insists. His friend persuaded him to take a scenic drive along the Oregon coast. “We saw a lot of very beautiful places,” he says, “and I don’t remember any of it other than the fact that Oregon is a really messed up state, economically.”

Nothing could lift his spirits, short of launching another company, which he did in 2004. It was called Slide, and it was a fun ride down the chute toward another sale in 2010 to Google for $182 million, Levchin says.

Today, he knows better than to slip back into the interminable boredom of easy living. He’s in the thick of a third venture, Affirm, and to sop up the last waning moments of his spare time, he also oversees an investment fund called HVF, short for “Hard, Valuable and Fun.” “Fun” has a very peculiar definition in this case — referring to any massive, globe-spanning problem that Levchin might get to noodle over in his scrappy new office in downtown San Francisco.

Affirm’s 32 employees have set up shop on a quiet street lined by venerable brick buildings, some of which withstood the great fire and earthquake of 1906 and have the commemorative plaques to prove it. Here, Levchin is thriving in his element. His girlfriend came back. They got married and had two kids. He still favors the style of clothing that might diplomatically be called “start-up chic,” a puffy sleeveless winter vest, unzipped and revealing a weathered t-shirt that practically whispers, “I’ve got bigger things to worry about than shopping.”

In fact, though, he does worry about shopping. Obsessively. Levchin has been visiting retailers across the country, asking about the state of consumer lending. He sums it up grimly: “You have to have a credit card. You have to use it. You are going to get screwed and you know it.”

Millennials are ditching the plastic in droves. More than 6 in 10 of them say they have never signed up for a credit card, a group that has doubled in size since the financial collapse of 2007. Evidently they’d rather scrimp on their purchases than get snagged on finely printed fees or mired in debt. “Which is wrong,” Levchin says. “If you are living hand to mouth every month you’re not going to improve your standard of living and you’re not going to scale up.”

Enter Affirm, a startup that that offers consumers the option to split payments over time, which a growing number of online retailers have added to their checkout pages. Users can get instantly approved for a loan by tapping their personal phone numbers into Affirm’s welcome page. From that phone number Affirm launches into the murky world of online data. “It anchors you to a whole host of information that is entirely public, or pretty close to public,” says Levchin. It can scan for social information across social media or dip into proprietary marketing databases or combine that with credit histories. In total, the Affirm team has identified more than 70,000 personal qualities that it thinks could predict a user’s likelihood of paying back a loan. If old fashioned credit scores provide a fixed, black and white portrait of the borrower, Affirm claims to capture that borrower in full, moving technicolor.

The company is so confident in its claims that it puts its own money on the line, extending loans to people who are normally considered a risky gamble. Active duty soldiers, for instance, return home with scant credit histories. A raft of regulations require lenders to extend credit to the soldiers, even if the decision goes against their better judgement. As a result, lenders have historically eyed returning soldiers with suspicion.

“I couldn’t care less about the narrative of why that might be true,” Levchin says, “except that I know it’s actually not. From all the loans that we’ve issued I think we’ve had literally 100% repayment rate from active duty servicemen.” Of course, military service is just one of at least 70,000 variables that can tip Affirm in the user’s favor. The formula is complex by design, so that no user can game the system by, say, posting “brain surgeon” as a new job on LinkedIn and then requesting a fat line of credit.

Whether Affirm will truly upend the rules of lending or foolishly rushed in where lenders fear to tread will depend on its ability to collect interest on loans without resorting to hidden fees. After all, credit card companies do that for a reason: It’s lucrative. Affirm, on the other hand, actually alerts users to approaching payment deadlines and clearly states fee rates before they arrive.

In short, Affirm has to lend at the right rates to the right people. Fortunately for the company, it has $45 million of venture capital to test run its unified theory of lending. It also has no shortage of potential competitors circling in on the hotly contested field of smartphone payments, from Apple Pay, to Google, to Levchin’s old “baby,” PayPal, all competing for the same “under-serviced” customers, as he put it.

But perhaps Affirm’s greatest asset is Levchin himself, who was practically bred for this kind of work. His mother was a radiologist at a Soviet-era research institute, where she was tasked with extracting reliable measurements from Geiger counters. The old Soviet era instruments spewed out a tremendous amount of error data. Her manager dropped a computer on her desk and asked her to program her way to a more reliable reading. Stumped, she turned to her 11-year-old son and asked, ”Do you know anything about this stuff?” The question kicked off Levchin’s life-long love affair with programming, and it made him acutely aware of what data a machine can capture, and what essential points might elude its sensors. He points out that a heartbeat counter may measure 64 beats per minute, but it almost certainly misses a number of half-beats along the way. Affirm, in a sense, listens for those missed beats.

“The fact that we can look at data, pull it, and underwrite a loan for you in real-time is very valuable, because we can literally decide, ‘Hey, in the last 48 hours you got a new job, that changes things a little bit. Now you’re able to afford more,'” Levchin says.

Maybe that’s a hasty gamble, or maybe it’s sound financing. In either case, it’s Levchin’s idea of fun.

TIME

6 Surprising Reasons You Can’t Get That Credit Card

Even if you have good credit

Even if you think you have good credit, even if you get a “preapproved” credit card offer in the mail, you can still be shot down when you apply for a credit card. What gives?

Credit experts say there are a few obvious reasons — like blowing off bills regularly or having a recent bankruptcy — that can get you denied. There are also some more surprising reasons why you might have trouble getting a credit card.

You don’t have enough credit. Some people pat themselves on the back for having only a single credit card, or none at all. No credit cards or other obligations like mortgages or car loans, may mean you’re just frugal and really good with your money. But it makes you a cipher to credit card companies. “Lenders prefer being able to review a track record of how a person has managed credit in the past,” the National Foundation for Credit Counseling says. Without that, there’s a good chance they might not gamble on the unknown.

You’re going too fast. “It’s a red flag if a person is attempting to obtain too much credit at one time,” the NFCC says. Yes, this might seem counter to the idea that you need to build up your credit to get more credit. The key, though, is to build that credit history slowly. If an issuer sees that you just got a few new credit cards, they might wonder if you’re going to be able to handle one more.

You fell for that “preapproval” pitch. All that junk mail you get that says you’re preapproved doesn’t mean a thing, says Gerri Detweiler, director of consumer education at Credit.com. “Those offers are prescreened, but when consumers respond, an actual, full screening will take place,” she says. That more extensive look at your finances could catch a red flag the system’s earlier, less in-depth review missed.

You follow the 30% rule. The conventional wisdom is that you should keep your credit utilization ratio — that is, how much credit you have outstanding as a percentage of your credit limit — to 30% or lower. In reality, even a reasonable-sounding 30% might be too high for some skittish lenders. “The lower the utilization ratio the better,” says Curtis Arnold, founder of CardRatings.com. The amount of debt you have makes up 30% of your FICO credit score, so too much outstanding debt compared to your limit (that’s both per card and in the aggregate, FYI) can turn off a lender.

You’re double-dipping. “If you are trying to take advantage of the same bonus offer you already nabbed, your application may be denied,” Detweiler says. On a related note, if you already have multiple cards from the same issuer, you may not be approved for another one, Arnold says, especially if you’re trying to hit up the same bank for a balance transfer deal.

Somebody else messed up. Mistakes happen, and one on your credit report can keep you from getting a card, says Odysseas Papadimitriou, CEO and founder of Evolution Finance. Go to annualcreditreport.com to see your credit report for free. Don’t fall for similar-sounding sites; they might be trying to sell you an expensive credit-monitoring subscription. Go through the report and, if you find a mistake, Papadimitriou says sites like CardHub.com (which his company owns) offer guides for how to dispute credit report errors.

MONEY Banking

Get Paid Before Payday Without Any Fees, New App Promises

ActiveHours app screenshot

A payday loan alternative called Activehours promises employees that they can get paid immediately for the hours they've worked, without having to wait for a paycheck—and with no fees.

Payday lenders are often compared to loansharking operations. Critics say such lenders prey on people so desperately in need of quick cash that they unwittingly sign up for loans that wind up costing them absurdly high interest rates. According to Pew Charitable Trusts research from 2012, the typical payday loan borrower takes out eight short-term loans annually, with an average loan amount of $375 each, and over the course of a year pays $520 in interest.

These short-term loans are marketed as a means to hold one over until payday, but what happens too often is that the borrower is unable to pay back the loan in full when a paycheck arrives. The borrower then rolls over the original payday loan into a new one, complete with new fees, and each subsequent loan is even more difficult to pay off.

You can see how quickly and easily the debt can snowball. And you can see why payday loans are demonized—and mocked, as John Oliver just did hilariously on “Last Week Tonight”:

You can also see why many people would be interested in an alternative that isn’t as much of a rip-off. Payday loan alternatives have popped up occasionally, with better terms than the typical check-cashing operation. Now, Activehours, a startup in Palo Alto that just received $4.1 million in seed funding, is taking quite a different approach: Instead of offering a short-term loan, the app allows hourly employees to get paid right away for the hours they’ve already worked, regardless of the usual paycheck cycle.

What’s more (and this is what really seems like the crazy part), Activehours charges no fees whatsoever. In lieu of fees, Activehours asks users to give a 100% voluntary tip of some sort as thanks for the service.

There may be more than one reason you’re now thinking, “Huh?” On its FAQ page, Activehours explains that the service is available to anyone who gets paid hourly via direct deposit at a bank and keeps track of hours with an online timesheet. Once you’re signed up, you can elect to get paid for some or all of the hours you’ve worked (minus taxes and deductions) as soon as you’ve worked them. In other words, if you want to get paid for the hours you worked on, say, Monday, there’s no need to wait for your paycheck on Friday. As soon as your Monday workday is over, you can log in to Activehours, request payment, and you’ll get paid electronically by the next morning. When official payday rolls around, Activehours withdraws the amount they’re fronted from the user’s account.

As for voluntary tips instead of service or loan fees, Activehours claims the policy is based on something of a philosophical stance: “We don’t think people should be forced to pay for services they don’t love, so we ask you to pay what you think is fair based on your personal experience.” Activehours swears that the no-fee model is no gimmick. “Some people look at the model and think we’re crazy,” Activehours founder Ram Palaniappan told Wired, “but we tested it and found the model is sufficient to building a sustainable business.”

“People aren’t used to the model, so they think it’s too good to be true,” Palaniappan also said. “They’re judging us with a standard that’s completely terrible. What we’re doing is not too good to be true. It’s what we’ve been living with that’s too bad to be allowed.”

Yet Activehours’ curiously warm and neighborly, no-fee business model is actually one of reasons consumer advocates caution against using the service. “At first glance, this looks like a low-cost alternative to other emergency fixes such as payday loans,” Gail Cunningham of the National Foundation for Credit Counseling said via email in response to our inquiry about Activehours. “However, a person who is so grateful, so relieved to have the $100 runs the risk of becoming a big tipper, not realizing that their way of saying thanks just cost them a very high APR on an annualized basis. A $10 tip on a $100 loan for two weeks is 260% APR – ouch!”

Consumer watchdog groups also don’t endorse Activehours because it’s a bad idea for anyone to grow accustomed to relying on such a service, rather than traditional savings—and an emergency stash of cash to boot. Access your money early with the service, and you’re apt to be out of money when bills come due, Tom Feltner, director of financial services for the Consumer Federation of America, warned. “If there isn’t enough paycheck at the end of the week this week, then that may be a sign of longer-term financial imbalance,” he explained.

“Everyone thinks they’ll use the service ‘just this once,’ yet it becomes such an easy fix that they end up addicted to the easy money,” said Cunningham. “A much better answer is to probe to find the underlying financial problem and put a permanent solution in place. I would say that if a person has had to use non-traditional service more than three times in a 12-month period, it’s time to stop kicking the can down the road and meet with a financial counselor to resolve the cash-flow issue.”

The other aspect of Activehours that could be a deal breaker for some is the requirement of a bank account and direct deposit: Many of the workers who are most likely to find payday loans appealing are those without bank accounts.

Still, for those who are eligible and find themselves in a jam, Activehours could be a more sensible move once in a blue moon, at least when compared to feeling forced to turn to a high-fee payday loan outfit over and over.

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