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Credit Scores and Car Loans: What Drives Your Interest Rate?

If you want to finance a new or pre-owned vehicle, you may wonder how your credit will affect the terms of your loan.

Credit matters when it comes to car financing, but it’s possible for someone with no financing history or shaky credit to finance a car. Be prepared to pay a higher interest rate, and be sure to make all of your payments in a timely manner to build credit and an excellent credit score.

We talked to Alex Ghim, a finance manager at a car dealership in Oregon, about the relationship between car financing and credit.

Which scores are pulled?

There are a lot of different types of credit scores, from FICO to proprietary scores, for each of the credit reporting bureaus — Experian, Equifax and TransUnion. Car dealerships typically pull auto-enhanced scores from up to all three reporting bureaus, according to Ghim.

Auto-enhanced scores range from 300 to 900 and put a greater emphasis on how you’ve handled car financing in the past. For instance, it will take into account whether you’ve made any late payments on auto loans, had any car repossessions, and settled or declared bankruptcy on an auto loan. This information is included in your regular FICO score, but auto-enhanced scores give it more weight.

Keep in mind that these scores are different from the credit-specific auto insurance scores that many insurance companies use.

What happens if you have a poor — or an excellent — credit score?

If you have a poor credit score, you may get rejected for a loan or get a loan at less favorable terms (read: high interest rate). Dealerships offer financing through credit unions, banks and manufacturers. People with a low credit score will likely have the hardest time financing through credit unions.

Individuals with low credit scores are also more likely to be asked for a down payment. Those with lower credit scores are generally approved for a smaller loan-to-value allowance and will need a down payment to cover the difference. Loan-to-value is the amount of the loan you’re approved for in relation to the value of the asset you’re purchasing.

Generally, credit unions and banks use a tiered system that dictates your rate in relation to your credit score. Those with excellent credit scores are more likely to get the best rates — depending on other financing qualifications, like income.

Does credit matter that much? What about a stable income?

While credit matters, it isn’t the only thing, according to Ghim. A stable income and a low debt-to-income ratio — the amount of debt you have in relation to how much you make — are also very important. For people with shaky credit, these factors play a larger role in whether or not they get approved for financing.

I have bad credit. Should I buy or lease?

Leasing and purchasing have similar credit qualifications, so getting approved probably shouldn’t be a factor in your lease vs. buy decision.

I’ve never financed a car, will I be able to get approved?

If you’re afraid that the old paradox “You need to have credit to get credit” will keep you from financing a car, you shouldn’t be. It can be harder to get a car loan when you’ve never had one before, but income stability and good credit should be enough to get you approved.

That said, you may have to pay a higher interest rate than those with good credit and a car-financing history. You may also need to provide a down payment.

This article was updated April 20, 2017.

4 Perks of Solo 401(k) for Business Owners and Freelancers

By Dmitriy Fomichenko

“Save your money. You’re going to need twice as much money in your old age as you think.” — Michael Caine

If you’re self-employed and trying to boost your retirement savings, Solo 401(k) plans are a potential option.

Solo 401(k) plans are qualified retirement plans for self-employed professionals and business owners with no employees other than a spouse. These plans have gained popularity because of investor-friendly features and higher contribution limits than traditional retirement accounts.

The biggest limitation on a Solo 401(k) plan is its eligibility criteria. You must have some sort of partial or full-time self-employment, and you can’t have any full-time employees — except your spouse — working in the business. Having such eligibility criteria rules it out for business owners with employees.

For an owner-only business, it presents an option for ensuring your savings are sufficient to fund your retirement years.

Is a Solo 401(k) is right for you? Here are four reasons it’s worth considering.

1. High contribution limits

Unlike individual retirement accounts, which limit contributions to $5,500 (or $6,500 for those age 50 and older), you can contribute up to $54,000 to a Solo 401(k) account in 2017 ($60,000 for 50 and older).

2. More investment options

Relying on the stock market for retirement, as many retirement plans do, may not sit well with investors who prefer to have more flexibility and freedom to choose different types of investments. With a specific kind of Solo 401(k) called a self-directed Solo 401(k), you can invest in alternative assets including real estate, tax deeds, tax liens, mortgage notes, private equity, personal lending, precious metals and even regular stock-bond investments. Make sure to ask your Solo 401(k) provider about the availability of these investment options upfront.

3. Roth, minus the income limits

According to the current IRS regulations, if you’re a single filer earning more than $132,000 in a calendar year, you’re not eligible for Roth IRA contributions. The phasing out starts at $117,000, limiting your options for after-tax contributions. A Roth Solo 401(k), which doesn’t have income limits, allows you to make annual after-tax contributions of up to $18,000, or $24,000 if you’re over 50, giving your money an opportunity to grow tax-free.

4. Ability to borrow

The IRS allows borrowing from a Solo 401(k) plan, just as it allows borrowing from 401(k) plans. This means no one can turn you down and you can spend the money the way you want. Just make sure you follow IRS rules about repayment to avoid taxes and penalties. And loans from a Solo 401(k) hold one advantage over loans from a regular 401(k). With a 401(k), if you leave your current employment, the loan will become due in full. That kind of job change is not a factor with a Solo 401(k) loan.

Dmitriy Fomichenko is president and founder of Sense Financial, a provider of self-directed retirement accounts.

3 Questions to Answer Before Taking out Student Loans

By Brett Tushingham

Learn more about Brett on NerdWallet’s Ask An Advisor

America has a student loan problem. Default rates are more than 11%, and based on recent research those numbers might be understated. Student loans should be the last option when funding an education. However, they appear to be the first option for many people.

The good news is that each family can develop its own strategy to pay for college, one that reduces the reliance on student loans and the overall cost of an education. It starts by answering three questions.

1. Are you being flexible enough in your college selection?

If your child insists on going to one particular school, your chances of finding an affordable way to fund higher education may be limited. The more flexible you are in the selection process, the greater the opportunity to reduce your need for student loans.

>>MORE: How to know if your college choice is affordable

Begin by researching schools to determine where your child will be a good fit and how their academic profile compares with those of current students. College Navigator is a great resource for assessing this. If a school finds your child academically desirable, he or she is more likely to be accepted and awarded financial aid in the form of grants and scholarships.

Community colleges are also an excellent option, as they can offer quality education and flexibility at a fraction of the cost of most other schools.

2. How will your selected schools assess your finances for aid purposes?

After you find schools where your child will likely be accepted, you will need to determine your eligibility for financial aid. Colleges use one of two aid applications, the Free Application for Federal Student Aid (FAFSA) and CSS Profile.

Each application has its own aid methodology that produces your expected family contribution, or EFC.

Your EFC is the minimum amount that you will be expected to contribute each year toward your child’s education. Two schools might produce a dramatically different EFC, so it’s important to do research and determine beforehand what your EFC will be. The cost of attendance minus your EFC will produce the amount of need-based financial aid, if any, that you qualify for.

3. What financial return can you expect from obtaining your degree?

Not all gains can be measured in dollars, but for now let’s focus on the financial aspect of the return on your investment in your education. We are told that earning a degree will open the door to more career opportunities and greater income. And although I generally agree with this statement, there are a number of caveats.

College is an investment, and like any other investment you have initial costs. Keeping your upfront costs to a minimum should logically help boost that return.

Once you confirm your initial costs, you can then calculate a future salary based on your degree. PayScale offers salary projections for specific majors and offers a return-on-investment calculation based on future income and college costs. Students pursuing advanced degrees might have greater upfront costs, but their starting salaries after graduation generally justify the expense.

Almost anybody can qualify for student loans nowadays, regardless of credit score or future income potential. For this reason, most students neglect to consider their ability to pay them off or the impact they can have on meeting their goals. Be proactive, establish a college planning strategy, start saving early and make education your greatest investment.

Brett Tushingham is a financial advisor and the founder of Tushingham Wealth Strategies in Wilmington, North Carolina.

From Stone Age to Drone Age: Debt Collection Goes High-Tech

Zoey, a collections avatar by BeGuided Inc.


Behind on bills? Brace yourself. Debt collectors are adopting high-tech tactics to boost payments. Watch your smartphone for avatars that coo and voicemails that arrive without a sound.

Collections agencies are evolving from the financial stone age of dunning letters and manually dialed phone calls into an era more like drone combat. New collections techniques save labor and skirt rules of engagement.

The inventive approaches surprise debtors and rile consumer advocates. But company managers contend their innovations actually benefit consumers as the industry performs its unpopular but necessary role.

Prepare for these new gambits:

Ringless voicemail drops

Debt collectors have long chafed at regulations that restrict how often they can call consumers, and require debtors’ consent to be called. New software lets collectors sidestep those rules, inserting voicemails into phones by the thousands without a ring.

Technically the stealth communiques aren’t calls at all, but messages sent to phone companies’ servers that show up as voicemails.

Companies such as Stratics Networks maintain that because no phone calls are made, regulations prohibiting auto-dialed collections calls don’t apply. Attorney Billy Howard, of The Consumer Protection Firm in Tampa, Florida, disagrees.

“They’re trying to torture the language of the Telephone Consumer Protection Act,” says Howard, referring to the law that forbids call-center reps from harassing consumers. He doesn’t buy the argument that “all of a sudden if it doesn’t ring, it’s not a call.”

But Paul Gies, senior sales vice president of voicemail technology company VoApps Inc., says consumers like his firm’s “DirectDrops” ringless messages because they can respond on their own timetables instead of feeling ambushed. In fact, he says, debt collectors say these unannounced voicemails work almost too well.

“Clients tell us that they overwhelm their call centers with inbound volume,” Gies says. “So we have what we call pacing features” for voicemail delivery.


Animated cartoon characters like Zoey, a virtual collections agent who shows up in borrowers’ email inboxes, tirelessly smooth-talk debtors into payments. A borrower sees Zoey’s photo in an email and clicks a link to a site where she talks them through payment. Borrowers dealing with “warm, friendly” avatars are three times more likely to pay than debtors visiting conventional sites, says Tom Gillespie Jr., chief executive of BeGuided Inc.

Collections managers design personalities of avatars, who speak multiple languages and weigh debtors’ credit scores when negotiating payments. Avatars save consumers the embarrassment of being hounded by real people, Gillespie says.

Gillespie also runs a collections company, Access Receivables Management Inc., whose slogan, “nice people collect more,” represents a departure from threats and insults that have hurt the industry’s reputation.

“In the last year we’ve sent out millions of emails” bearing avatars, Gillespie says. “We’ve had zero consumer pushback.”

Speech analytics

Cussing out a debt collector? Advanced language-recognition programs not only track keywords during phone conversations but identify emotions of debtors and collection agents. Prompts generated by CallMiner Inc. software help steer conversations back on track.

Supervisors using the speech-analytics company’s system see color-coded boxes on call-center computer monitors. Small green boxes represent routine conversations. During those calls, agents are remembering, for example, to recite mandatory “mini-Miranda” statements that inform consumers of their rights.

But a box turns red and expands when a call contains expletives or long silences as a hapless agent fumbles for information. “A supervisor can consider barging in and taking over the call, or whispering into the agent’s side of the call,” says Scott Kendrick, CallMiner marketing vice president.

CallMiner’s Eureka program can tell whether an agent expresses appropriate empathy when a debtor says he’s bereaved. The system can guide negotiations, identify phrases that produce payments and score results to rank top collectors.

FidoTrack LLC software helps guide agents’ calls. Gamification

They don’t know it, but some debtors are pawns in video games designed to motivate call-center reps. Agents earn prizes for fastest, highest recoveries.

Former call-center managers in Vermont run FidoTrack LLC, a company that uses video games and prizes to motivate collections agents in a business notorious for apathy and absenteeism.

“You figure a lot of people who are actually collecting are maybe on the other end of the phone in their personal life,” says Brett Brosseau, FidoTrack president and founder. “It sucks to ask people for money.”

FidoTrack aims to make collecting fun, running competitions that challenge agents to duels and centerwide competitions as they race to recover money while complying with regulations. Prizes can be choice call-center parking places, team pizza parties, televisions or dinners with bosses.

Debtors don’t get to play. But Brosseau says collection agencies can boost revenues by 19%, increasing productivity while reducing turnover and consumer complaints. Consumers benefit, he says, as calls shorten and agents become more responsive.

Skip tracing, spoofing and scrubbing

Debtors are losing games of hide and seek. In a practice called skip tracing, collection agencies mine databases to find borrowers who’ve skipped out on debts.

Some collectors track debtors on Facebook and other social media sites. A Texas agency is linking Social Security numbers to social media accounts, raising privacy concerns.

In a tactic known as spoofing, some agencies insert local area codes in caller-ID displays, baiting the person being called to answer. The Consumer Financial Protection Bureau, a federal watchdog agency, proposes to ban the practice.

Consumers who feel unfairly treated can complain to the CFPB or sue. In that instance as well, debt collectors have an advanced tactic, called “scrubbing.”

Legal sleuths at WebRecon LLC scour lists of borrowers, removing litigious debtors known in the trade as “banana peels.” Amid the high-tech arms race, collectors still step warily to avoid conventional hazards.

Richard Read is a reporter at NerdWallet, a personal finance website. Email: Twitter: @RichReadReports.

How to Monitor Credit in (Exactly) 250 Words

Why should I monitor my credit? Regularly checking your credit reports and credit scores can help you catch and fix errors or detect identity theft. It also lets you see progress as you improve your credit.

Who needs to do it? Everyone, even people with no credit activity. If someone has your Social Security number, he or she may have applied for credit in your name.

How do I start? Get your free annual credit reports from the major credit-reporting bureaus, Equifax, Experian and TransUnion. Access them on

What am I looking for on my reports? Make sure:

  • Information is accurate and up to date
  • Accounts listed are actually yours
  • No one else’s information has gotten mixed into your file

What if I find errors? You can ask the credit bureaus to correct them.

Then what? Once you’ve made sure the credit bureaus have correct information, keep an eye on your credit score and watch for new information on your reports. You can use a personal finance website that offers free credit scores and credit report information, such as NerdWallet. Some credit card issuers also offer free scores.

What do I watch for with my score? Make sure good credit habits are accurately reflected. Paying on time and whittling down balances should build your score. A big swing you don’t expect could indicate identity theft.

How often can I check without hurting my score? As often as you like. Checking your own credit does not affect your score.

Bev O’Shea is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @BeverlyOShea.

How Long Should You Keep Your Tax Records?

If you think your tax work is done once you file your return, think again. Now you need to file your tax records.

Keeping your tax returns and the documents you used to complete them obviously is critical if you’re ever audited. The statute of limitations on IRS audits is a key factor in deciding what to keep and for how long. Good record-keeping also could help if you need to file an amended return because you discovered a mistake or learned of a tax break you should have claimed.

So what tax-related records should you hang on to and for how long? Let’s look at what the IRS recommends based on how long it has to come back at you with questions.

Three years

In typical tax-filing situations, the IRS has three years to decide whether to audit — or, as the agency prefers to call it, examine — your return. That means you should keep your records for three years from the date you filed the original return.

This is good practice, too, because you generally have three years from when you filed your return — or two years from the date the tax was paid, whichever is later — to claim a refund or credit from the IRS.

You also should hang on to tax records for three years if you file a claim for a credit or refund after you filed your original return. The limit here could be shifted to two years from the date you paid any due tax, if that date is later than the three-year limit.

» MORE: Know what you owe with a tax calculator

Six years

The three-year audit period and associated record-keeping guidelines apply in standard filing circumstances. If, however, you don’t include all your earnings on your 1040, the IRS gets a longer window to decide on a potential audit, so you need to keep your tax records longer, too.

Specifically, tax law says that if you under-report your income by more than 25%, the statute of limitations is doubled: The IRS then has six years to decide whether to audit your return. To deal with any questions, you would need to have those six years worth of tax documents on hand.

Seven years

Sometimes a stock bet doesn’t pay off. In such cases, you can write off the loss from the “worthless security.” If you do, hold those records for seven years. That’s how long the IRS has to come back with questions about your bad investment. The same time frame applies to deductions for a bad debt.


There are some instances in which to keep tax records perhaps forever.

Say someone — not you, of course — commits tax fraud. There is no statute of limitations on tax fraud audits. When the IRS suspects someone entered illegal information on a return, it can investigate at any time, not just within the standard three-year window.

You also need to keep documentation of why you didn’t file a tax return. Yes, that sounds like trying to prove a negative, but if, for example, you took a year off to take care of a sick relative and didn’t earn enough income to require that you file, proof of that will short-circuit a detailed IRS examination of your missing tax year.

What records to keep


IncomeW-2 form(s)1099 form(s)Bank statementsBrokerage statementsAlimony receivedK-1 form(s) Expenses & deductionsReceiptsInvoicesAlimony paidStatements from charitiesGambling losses HomeClosing statementsPurchase and sales invoicesInsurance recordsProperty tax assessments Retirement accountsForm 5498 (IRA contributions)Form 8606 (nondeductible IRA contributions)401(k) statementsDistribution recordsAnnual statements Other investmentsTransaction data (including individual purchase or sale receipts)Annual statements

Even after the statute of limitation passes and you get rid of supporting documentation, keep a copy of each year’s tax return that you file. This includes not just the 1040 itself, but also any associated schedules that you sent to the IRS that year. These often are needed when you apply for a loan or other financial assistance, such as money for college.

How to keep your records

OK, you’re probably wondering just where you’ll store all that paper. That’s not a problem.

The law doesn’t require any special record-keeping system for all taxpayers. You can keep your records in any manner that works best for you, as long as it allows you to produce the material if the IRS asks. For most taxpayers nowadays, that means accessing records in digital form.

Converting your tax and other key financial records to an electronic format can save you a lot of space. All the IRS requires is that your electronic record storage meets the same standards that apply to hard copies. That means when you replace the paper versions, you must maintain the electronic storage systems for as long as they might be needed under the tax statutes of limitation.

Kay Bell is a contributing writer at NerdWallet, a personal finance website.

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