Money Management

Approximately 77% of Americans are worried about their finances, worried perhaps about defaulting on a loan. Read on to learn what they can expect if a default occurs. 

You know what to expect if you’re caught driving over the speed limit or nabbed cheating on your taxes. However, you may not know what you’re in for if you default on a loan. Here, we outline how a default can impact your life and suggest ways to avoid a default in the first place.

Your credit score takes a hit

Your FICO® Score, the score most commonly used by lenders, can drop by 100 points if you miss a payment by 30 days. How much it will drop following a default depends on several factors, including how old your credit history is and what your credit score was before the default.

Imagine that you have a score of 750. That puts you in the “very good” category. Your score is high enough to qualify you for the best deals and lowest interest rates. If your score drops to 650, you drop to the “fair” category, and lenders consider it riskier to loan you money. To protect themselves, they charge a higher interest rate and more fees.

Here’s how a lower credit score can hurt you. Let’s say your car dies, and you need to purchase a dependable used model that’s large enough to chauffeur the dogs and kids around town. You find the perfect vehicle for $20,000 and borrow the money to pay for it.

The most important thing to remember is this: The lower your credit score, the higher your interest rate. For example, if the lender would have offered you an interest rate of 6% with a credit score of 750, the interest rate could be double that (or more) once your score takes a serious hit. Here’s how the difference adds up:

At first glance, it doesn’t look so bad. After all, the payment will only cost you $58 more a month. However, over the life of the loan, you’ll pay nearly $3,500 more in interest. That’s $3,500 you could use to build an emergency savings account, invest, or take a long-awaited vacation.

You can take steps to raise your credit score, but as long as it remains low you can count on paying more for loans.

Legal problems may hound you

If a loan is in default for months or years, a creditor has the legal right to take you to court — as long as the statute of limitations has not run out. Typically, the statute of limitations is three to six years, although some types of debt allow lenders more time to take legal action.

But you can’t consider yourself free and clear once the statute of limitations has passed. A creditor may no longer be able to take you to court, but it can still try to collect by contacting you directly or by hiring an outside firm to collect on their behalf.

If a debt collector gets in touch with you, your best bet is to ask for the name and address of their company and send a certified letter requesting that they cease all contact. Once they’ve received that letter, further contact may be illegal.

Failure to pay taxes or child support can absolutely land you in lockup. However, failure to pay a “civil debt” like a credit card statement or hospital bill won’t doom you to a life behind bars. Do not allow an unscrupulous debt collector to convince you otherwise.

Under the Fair Debt Collection Practices Act (FDCPA), debt collectors are not allowed to threaten arrest. Yes, you can be sued, and yes you can be hounded, but you won’t be jailed.

Bankruptcy may seem like the best option

Once a loan goes into default and you’re stuck dealing with the aftermath, you may feel as though bankruptcy is your only move. Your options will be to file either Chapter 7 or Chapter 13. Chapter 7 wipes out all your balances, while filing Chapter 13 means repaying the debt over a three- to five-year period.

Either way, bankruptcy impacts your credit score and can make it difficult to rent a home, lease a car, or even land a job. Plus, Chapter 7 stays on your credit report for 10 years, and Chapter 13 lingers for seven years.

Three steps to avoid defaulting on a loan

The best way to avoid any of these scenarios is to keep an eye out for issues that frequently lead to default. For example:

1. Limit loans and credit card use

Do not use a credit card or loan to buy something you’re not sure you can pay off quickly. Ideally, you’ll plan to pay your credit cards off in full each month and use loans sparingly.

2. Always make on-time payments

No matter what you’ve got going on in your life, prioritize getting payments in on time. If you can’t pay something off in full, make sure to pay at least the minimum. The easiest way to ensure that payments are never late is to set up autopay for bills whenever the option is available.

3. Make the first move

No one knows your monthly budget as well as you. If you’ve fallen behind on a financial obligation, contact your creditor to negotiate. Ask about setting up a different repayment plan or settling your debt with a single lump-sum payment. Both actions will lower your credit score, but the damage may not be as dramatic as a default.

Of course, if you’ve already defaulted on a loan, your immediate concern is doctoring your credit score back to health. It will take time and effort, but as millions before you have illustrated, it can be done.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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You could be at risk if you lose your checkbook. Protect the money in your bank account by learning about an important step you should take right away. 

A lost checkbook isn’t a situation most people encounter often. If you pay for purchases with your debit card, credit cards, or cash, then your checkbook is probably safely at home most of the time.

Since losing a checkbook isn’t a common occurrence, you might not be sure exactly how to handle this. But it’s not good to wait around, because if someone gets their hands on your checkbook, they could use it to steal money from your bank account. To protect yourself, there’s one important step to take right away.

Do this immediately if you lost your checkbook

When you can’t find your checkbook, call your bank immediately to report it and have your checking account frozen. This prevents withdrawals and transfers, including checks, ACH transfers, and debit card payments, from going through. Frozen bank accounts can still receive deposits, so it won’t be a problem with any direct deposits you have, such as your paycheck.

Hopefully, your checkbook is just misplaced, but it’s smart to prepare for the worst-case scenario. Anyone who has your checkbook could use it to forge checks tied to your account. While you can dispute fraudulent checks, that’s a hassle you can avoid entirely by freezing your account.

Since you probably don’t know exactly when your checkbook went missing, also review recent transactions in case check fraud has already occurred. If you see transactions you don’t recognize, alert your bank and dispute them.

Keep in mind that while your account is frozen, any bills you normally pay with it will be declined. You’ll need to update your payment method for anything urgent. Make sure you check for any accounts where you have autopay set up so you can adjust them accordingly.

Once you find your checkbook, contact your bank again to unfreeze your account. You’ll then be able to use it for writing checks, paying bills, and making withdrawals again.

What to do if you can’t find your checkbook

If you can’t find your checkbook, you have a couple of options. The simplest is to put a stop payment on all the lost checks, effectively canceling them, and order a new checkbook. Then, you can unfreeze your account and continue using it.

However, there will still be the possibility that someone has your checkbook. Even though they won’t be able to use those checks, they will have your account number and routing number, since those are printed on each check. They could use those numbers to attempt withdrawals and transfers from your account.

The safest option is to close your checking account and open a new one. It will have a new account number, a new debit card, and you’ll be able to order a new checkbook. Once you do that, it won’t matter who has your old account details and checks. Remember that you’ll need to update your payment information for any bills that you paid using your old checking account.

It’s always inconvenient when you lose something tied to your financial accounts, but it happens. What’s most important is reporting the loss promptly so the bank can take the necessary measures to protect your account. This starts with freezing the checking account, and if you can’t find your checkbook, then you can either put stop payments on the checks or get an entirely new account for more security.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Costco might raise membership fees. Read on to see why it’s worth joining regardless. 

Right now, a basic Costco membership costs $60 a year, while an executive membership costs $120. In exchange for that higher price, an executive membership also gives you 2% back on all Costco purchases (including those made online), the same way a credit card might give you cash back on the things you buy.

But while these numbers apply right now, they have the potential to change — and soon. See, Costco hasn’t raised its membership fees in more than five years. So at this point, the warehouse club giant really is due for an increase.

If you’re thinking about joining Costco, that may not be news you want to hear. But actually, it could still very much make sense to get a Costco membership this year, even if it ends up costing you more.

It’s just a matter of when

During its most recent earnings call, Richard Galanti, Costco’s Chief Financial Officer, said that June would be the sixth anniversary of the current membership fee structure. And so when it comes to raising fees, Galanti said, “In our view, it’s a question of when, not if.”

In other words, Costco is making plans to raise the cost of an annual membership. Whether that happens in mid-2023, late 2023, or even 2024 is still yet to be determined (or at least it was as of the company’s last earnings call).

Now, we don’t know what a Costco fee hike will look like. But chances are, it won’t be all that substantial.

It’s likely that the cost of a basic membership will rise from $60 a year to $65, while the cost of an executive membership will increase from $120 a year to $130. All told, that’s $5 to $10 more per year than what it costs to join Costco right now. So if you can justify a membership at today’s fee levels, you can probably justify one for a bit more money.

A Costco membership could more than pay for itself

People who join Costco but rarely shop there might be throwing their money away. But if you’re convinced you’ll do plenty of shopping at Costco, and you have a warehouse club store located close to your home, then what you spend on a membership, you might more than make up for in the form of savings on groceries and household essentials.

In fact, let’s say you’re able to shave $20 off of your monthly grocery bills by shopping at Costco. Let’s also assume the cost of a basic membership rises to $70, and that’s the membership you opt to get. Even so, you’re looking at spending $70 to save $240, thereby saving $170. So all told, you stand to come out ahead financially, and you’ll potentially have an opportunity to put more cash into your savings account.

Nobody wants to see their expenses go up. And that extends to paying for a Costco membership. But even with a modest price increase, you’re likely to find that a membership is more than worth the cost involved.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.

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