Money Management

Using a “buy now, pay later” plan? Read on to see why it’s so important to keep up with your installment payments. 

For years on end, if you wanted to pay off a purchase over time, you generally needed to charge it on a credit card and carry your balance forward. But that would usually mean racking up interest on that sum.

Now, there’s another way to finance purchases without subjecting yourself to interest charges from the get-go. It’s called signing up for a “buy now, pay later” plan, or BNPL plan.

Research from The Ascent found that 50% of U.S. consumers have used a BNPL plan. And these plans tend to be more popular among younger consumers than older ones.

With a BNPL plan, you’re given a limited window of time to repay a purchase in installments — usually 12 weeks or less. If you stick to your repayment plan, you won’t face interest charges, and you’ll get the option to spread out payments on a purchase so you’re not forced to empty out your bank account in one fell swoop.

But there’s a big drawback to using BNPL plans. If you fall behind on your payments, the consequences could be quite unfavorable.

When you don’t keep your end of the bargain

With a BNPL plan, you’re generally required to make a down payment on your purchase, but you usually get to pay the bulk of it off over time. If you don’t stick to that schedule, though, it will cost you in different ways.

First, in that situation, interest and penalties will apply. Now, the specifics there will depend on the terms of your BNPL plan agreement, so you’ll need to read the fine print before signing up. But either way, you’re looking at some sort of direct financial penalty.

You’ll also face an indirect financial penalty in the form of credit score damage. If you fall behind on your BNPL plan payments, you’ll be reported as delinquent to the credit bureaus, the same way that would happen if you were to fall behind on your credit card payments, or payments for a loan you’ve taken out.

Once that happens, your credit score could take a big hit. And that could cost you in the form of higher interest rates when you go to borrow money next.

In some cases, credit score damage from late BNPL plan payments could make it so you’re not even able to qualify for a loan at all. So all told, falling behind on your payments is a pretty bad thing.

Should you sign up for a BNPL plan?

BNPL plans are generally best reserved for two scenarios:

You have an emergency purchase you can’t put off, like a new fridge for your home because your current one has broken and can’t be fixedYou have a lump sum of money coming your way within weeks, like a bonus from work, and you’re certain you can pay off your purchase with it

Otherwise, it’s generally best to steer clear of BNPL plans, because they might lead you to buy things you really can’t afford. And even if you don’t fall behind on your payments in that scenario, you might end up straining your budget and causing yourself unnecessary financial stress.

Alert: highest cash back card we’ve seen now has 0% intro APR until 2024

If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.

In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.

Read our free review

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.

 Read More 

Biden’s billionaire tax would levy a minimum 25% tax on Americans whose net worth is greater than $100 million. How will this work and will it pass? 

Ever since taking office, President Biden has been on a mission to bring greater equity to America’s tax code. As he has said numerous times, a system that taxes teachers and firefighters at a higher proportion of their wealth than multimillionaires is a system badly in need of reform.

Last month, Biden gave another hoorah to this mission as he laid out a number of wealth taxes in his 2024 fiscal budget. One of these, dubbed the “billionaire tax,” would levy a minimum 25% tax on Americans whose net worth exceeds $100 million.

What exactly is this billionaire tax and how would it work? Let’s take a closer look.

What is Biden’s billionaire tax?

The billionaire tax would ensure that the richest 0.01% of Americans — those whose net worth exceeds $100 million — pay at least a 25% federal income tax on all personal income, including unrealized capital gains.

The Biden administration estimates that America’s multimillionaires pay an average tax rate of 8.2%. Wealthy Americans can maintain such a low rate because they often hold most of their wealth in assets, like stocks and real estate, which are not taxed until sold. They can also borrow against these assets — often with ridiculously low interest rates — without paying taxes.

Biden wants to treat these assets as if they were personal income and tax all unrealized gains at a minimum of 25%.

That’s huge. Never in the history of the American tax code has the IRS levied taxes on unrealized gains. But, by doing so, Biden believes wealthy Americans will pay taxes at an equal proportion to their wealth.

How would Biden’s billionaire tax work?

Basically, multimillionaires would pay the billionaire tax through an annual “top-up” payment. These top-up payments would equal the difference between what they’ve already paid in taxes and what is 25% of their personal income for that year.

Let’s look at Jeff Bezos as an example.

According to a notable study by ProPublica, Bezos paid $0 in federal taxes in 2007. In the same year, Bezos’ net worth gained $3.8 billion due to the nearly 200% increase in his shares of Amazon. If Biden’s billionaire tax had been policy back then, Bezos would owe the complete 25% on that $3.8 billion unrealized gain — or $950 million in federal taxes.

How Bezos would pay that $950 million is where things get complicated.

He could pay it like most Americans pay their tax bills: in cash. Of course, this is a tax on an unrealized gain, meaning Bezos doesn’t exactly have $3.8 billion in cash sitting in his checking account. Instead of paying cash, then, the Biden administration would let Bezos — and other multimillionaires — defer the payment until a later day. They would pay interest, of course. But they wouldn’t have to cough up a payment immediately.

Will Biden’s billionaire tax pass?

No, probably not.

The Republican-led House, which holds the keys to Biden’s budget proposal, has no interest in levying higher taxes on America’s wealthy. To them, the answer to the federal deficit isn’t higher taxes but decreased federal spending. Their budget, which is due in the middle of April but will probably arrive in May, will most likely exclude any mention of a 25% minimum tax on multimillionaires.

Even so, many state governments are coming up with their own versions of Biden’s billionaire tax. For instance, Massachusetts now has a “millionaire tax,” which levies an extra 4% tax on high-income earners whose taxable income exceeds $1 million in a year. Other states are also set to introduce their own millionaire taxes, including California, Connecticut, Hawaii, Oregon, and New York.

Alert: highest cash back card we’ve seen now has 0% intro APR until 2024

If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.

In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.

Read our free review

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.

 Read More