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There are nine states that don’t tax workers’ wages. But just because a state doesn’t have income taxes doesn’t necessarily mean it’s an affordable place to live.

If a state doesn’t charge income tax, it must find revenues elsewhere, which explains why other tax rates tend to be high in these locations. What’s more, the cost of living in some states with no income tax has soared in recent years, often as a result of skyrocketing home insurance prices related to climate change, as well as higher housing prices in general.

The point is: Moving to a state with no income tax is not a slam-dunk strategy to save money. In fact, if you don’t do the math to factor in other local living expenses, it can seriously backfire. (FYI, the states with no ordinary income tax are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.)

“The correlation between the cost of living and the absence of income tax in a state is relatively weak,” Andrey Yushkov, a senior policy analyst with the Center for State Tax Policy at the nonpartisan nonprofit Tax Foundation, explains to Money via email. “Many other factors affect the cost of living, including property and sales taxes, excise taxes and home insurance. Therefore, the absence of income tax does not necessarily imply that it is cheaper for everyone to live there.”

Rising home insurance and car insurance costs

The state with the highest home insurance rates happens to be one with no income tax. According to the online insurance marketplace Insurify, Florida has the nation’s costliest homeowners insurance, with the average annual policy running $10,996 in 2023. Home insurance in Texas, another destination celebrated for having no state income tax, averages $4,436, good for fourth-most expensive in the country.

These rates are far more expensive than the national average ($2,377 as of 2023), and homeowners in many states are growing accustomed to soaring insurance premiums. Texas saw the nation’s biggest rise in insurance costs in 2023, up 23% year over year, according to S&P Global data.

It’s also simply getting harder to find coverage, period.

Many home insurers are leaving states where climate change is causing costs to soar, including Florida, Louisiana, California and Colorado. This spring, a Texas Monthly writer lamented “What the Bleep Is Going on With Texas Home Insurance?” while rehashing his experiences repeatedly getting denied insurance on a new home, along with tales of other homeowners being hit with premium hikes of 60% or 80%.

It’s a similar story for car owners, who saw average auto insurance prices rise 24% in 2023. And, yes, according to Insurify, many of the states with the highest car insurance prices are places with no income taxes: Nevada has the nation’s second most expensive auto insurance costs (averaging $2,975 for full coverage in 2024), and Florida ($2,917) comes in third.

The takeaway is that insurance cost differences around the country can have a major impact on a household’s budget and lifestyle.

“If someone is considering moving to a state without income tax to save money, they should look into the auto and home insurance market in that area first,” says Cassie Sheets, a data journalist at Insurify. “Some states are seeing bigger increases than others, and several states with no or low income tax are among the most expensive.”

Consider property taxes, sales tax and other expenses

Homeowner property taxes vary dramatically in different parts of the country. There are many counties in rural states where the typical property tax bill is under $300 a year, per Tax Foundation data. Meanwhile, median residential property taxes in several suburban counties in New York, New Jersey and Virginia are over $10,000.

Property taxes are assessed as a portion of a home’s assessed value. So instead of looking just at property taxes in raw dollars, it’s important to consider the rates charged in order to understand their real impact on owners.

New Jersey has the nation’s highest property tax rates (2.23%), followed by Illinois (2.08%). But next on the list comes New Hampshire (1.93%), which stands out in New England for having no general sales tax or taxes on wages. Texas, another no-state-income-tax state, has the sixth-highest property tax rate, at 1.68%.

As for sales tax, two states with no income tax are ranked among top 10 for highest rates: Tennessee charges 7%, while Nevada tacks on 6.85%. The sales tax rates in Texas (6.25%) and Washington (6.5%) are high in the grand scheme, as well.

Depending on your consumption habits, sales taxes in these states can add up to hundreds, if not thousands, of dollars in your budget each year.

As the Tax Foundation’s Yushkov tells Money, “for high-income individuals, income taxes may be one of the most important factors” in deciding where to live, assuming they’re aiming to keep as much of their earnings as possible. If you’re not super wealthy or your wealth is not based on income, however, the financial benefits of living in a state with no income tax are less clear.

Before deciding to move to a state with no income tax, you should examine your individual circumstances, including “job opportunities, family considerations, climate, infrastructure, educational system” and various local taxes, Yushkov says.

In addition to taxes on property, purchases and ordinary income, people should find out whether a state charges tax on capital gains, dividends and Social Security benefits, too. It’s worth looking into recurring expenses too, like utility bills: Research indicates that New Hampshire has the highest average utility bills in the mainland U.S. (adding up to about $4,500 a year), while Wyoming has the highest residential energy costs.

Living expenses in states with no income tax

Using data from Insurify, the Tax Foundation, Zillow and other sources, here are some location-specific factors to consider before moving to a state with no income tax:

Alaska

State sales tax rate: 0%
Property tax rate: 0.40%
Average home insurance per year: $1,116
Average car insurance per year: N/A at Insurify due to insufficient data
Other factors: Cities can charge local sales tax up to 7.5%; Alaska also collects significant revenues from the oil industry.

Florida

State sales tax rate: 6%
Property tax rate: 0.91%
Average home insurance per year: $10,996
Average car insurance per year: $2,917
Other factors: Home values have soared, up 70% in five years.

Nevada

State sales tax rate: 6.85%
Property tax rate: 0.59%
Average home insurance per year: $1,224
Average car insurance per year: $2,975
Other factors: Nevada collects significant revenues related to gambling.

New Hampshire

State sales tax rate: 0%
Property tax rate: 1.93%
Average home insurance per year: $1,225
Average car insurance per year: $1,010
Other factors: Charges tax on dividends and interest (but not ordinary income or capital gains), utility bills are very high too.

South Dakota

State sales tax rate: 4.5%
Property tax rate: 1.17%
Average home insurance per year: $2,562
Average car insurance per year: $1,751
Other factors: Charges sales tax on items that are often exempt, such as groceries.

Tennessee

State sales tax rate: 7.0%
Property tax rate: 0.67%
Average home insurance per year: $2,470
Average car insurance per year: $1,572
Other factors: Charges sales tax on items that are often exempt, such as groceries.

Texas

State sales tax rate: 6.25%
Property tax rate: 1.68%
Average home insurance per year: $4,456
Average car insurance per year: $2,359
Other factors: Texas collects significant revenues related to the oil industry.

Washington

State sales tax rate: 6.5%
Property tax rate: 0.87%
Average home insurance per year: $1,437
Average car insurance per year: $1,853
Other factors: Charges 7% tax on capital gains over $250,000.

Wyoming

State sales tax rate: 4.0%
Property tax rate: 0.56%
Average home insurance per year: $2,159
Average car insurance per year: $1,528
Other factors: Charges sales tax on diapers and feminine hygiene products, residential energy costs are very high too.

Article originally published Jul 03, 2024 by Brad Tuttle on Money.com

In many ways, managing your money comes down to keeping track of numbers, and few figures are quite as important to your personal finances as your credit score.

For lenders, your score is a quick way to assess your creditworthiness. Those with the highest scores qualify for the most attractive rates on everything from credit cards to auto loans to mortgages. A lower score means you could pay much more in interest or not qualify for credit at all.

So what’s the ideal score, exactly? Financial institutions make it a little tricky to tell. Borrowers are rated on a scale of 300 to 850, and credit agencies generally break things down as follows:

• Poor: 300 to 579
• Fair: 580 to 669
• Good: 670 to 739
• Very good: 740 to 799
• Exceptional: 800 to 850

The average American has a score of 717, according to FICO, so if your score is higher than that, you can consider yourself not just “good,” but officially above-average.

At that level, though, you’re likely not getting the best offers. Luckily, you don’t need to get all the way to “exceptional” to get them either, says Ted Rossman, a senior industry analyst with Bankrate.

“Once you’ve hit the mid 700′s you’re good. To get the best rates [on credit and auto loans] the line is often 740 or 750,” he says. “It’s closer to 760 or 780 for mortgages. But the point is, you don’t need a perfect 850.”

How to optimize your credit score

If you’re a little short of the optimum score, it’s not the end of the world, says Rod Griffin, senior director of consumer education and advocacy for Experian.

“There is no need to panic over a below-average credit score,” he says. “It may act as a good wake-up call to take a closer look at your financial situation, but the good news is you can always work towards increasing your credit score over time.”

Here are three ways the pros say to do just that.

1. Check your credit report

Before you start trying to improve your score, you need to know what exactly is impacting it, says Griffin.

“First and foremost, you need to know what is in your credit report,” he says.

You can access reports from all three credit agencies by visiting AnnualCreditReport.com.

By analyzing your credit history, you can get an idea of what may be holding you back, says Rossman. You may even discover a quick fix.

“It depends what’s dragging you down. True, negative payments stick with you for seven years, but you could get errors corrected,” he says. “An easy fix is if it’s an error and not a legitimate late payment.”

2. Fix the factors that affect your score the most

When you get your score through FICO or one of the credit agencies, “you should also get a list of the risk factors from your credit history that are most affecting that score,” says Griffin. “By addressing those factors, you can improve your credit scores over time.”

The biggest one: paying your credit card off on time and in full each month. “Falling behind on payments has a quick and serious impact on your credit score,” Griffin says. “Payments must always be made on time to have good credit scores.”

You’d also be wise to pay attention to your credit utilization ratio, found by dividing your outstanding balances by your total available credit. If you run a $5,000 balance on a credit card with a $10,000 limit, for instance, your ratio is 50%.

To boost your score, credit experts recommend keeping your ratio under 30%, and ideally as low as 10%. That might mean cutting back on spending, asking your credit card company to raise your limit or opening a new credit card — as long as it won’t encourage you to spend more.

3. Add more good information to your credit history

Even if you have blemishes on your credit history, “you can offset them by filling up your report with good things,” says Rossman.

He recommends signing up for a service that can expand what gets counted in your credit report, especially if you have an otherwise thin credit file.

By signing up for Experian Boost, for instance, you may be able to get credit for on-time payments of rent, utilities, streaming services and phone bills. Or consider UltraFICO, which can help boost your score by sharing evidence of financially sound banking data with credit reporting agencies. 

“You can also get on a parent or spouse’s card as an authorized user and piggyback off their positive payment history,” Rossman says. “There are things you can do — you just can’t be passive about it. If you actually follow through on some of these things, you can see meaningful change [to your score] in six months.”

Original article published Wed, Jun 19 20249:00 AM EDT by Ryan Ermey on CNBC.com

Running the numbers

It is the biggest financial decision for many younger adults: Should I rent a home or buy one? The decision is especially difficult these days, with both interest rates and rents having risen in the past few years.

To help people understand the trade-offs, The Times has just relaunched its popular rent-versus-buy calculator. Even if you already own your home — or are a committed renter — you may enjoy playing with the calculator and learning a few things about the real estate market. I did.

The calculator, which The Times’s Upshot section built, has been updated in several important ways, including to take into account the 2017 tax law that affected the mortgage-interest deduction.

Ultimately, the calculator can’t tell you whether you should rent or buy. That decision depends on the future paths of home prices and rents, which are unknowable. It also depends on your life stage — a factor that too many people fail to consider when making this decision. If you know you will move again a few years from now, for instance, buying is almost certainly a mistake.

Here are a few other points that the calculator helps highlight:

It’s OK to rent

I know that many people feel guilty about renting — as if it’s an inherently inferior decision that wastes money. That’s wrong (as I explained on a recent “Daily” episode). When house prices are high, as they are in most parts of the U.S., buying often wastes more money because of broker’s fees, mortgage interest, house repairs and other costs of owning.

“At this time, in the majority of circumstances, renting likely makes more economic sense than buying,” said Mark Zandi, the chief economist at Moody’s Analytics, who has advised our work on the calculator over the years. He notes that the typical monthly mortgage is about $2,000 today, more than double what it was when the pandemic hit in early 2020.

Rents have risen, too, but not nearly as much. And many new rental units are coming on the market, which should hold down rents in the near future. The new units include higher-end, multifamily developments, like a 15-story, 1,111-unit complex on South Broad Street in Philadelphia.

An overrated deduction

The 2017 tax law reduced the advantages of owning a home in a way that many people have not fully recognized, said my colleague Francesca Paris, who helped build the new calculator. Francesca, who’s a renter, told me that she herself didn’t understand this dynamic until she worked on the calculator.

First, a bit of background: Taxpayers must choose between taking one large deduction, known as the standard deduction, and a series of individual deductions, known as itemized deductions, like the one for mortgage interest. If the standard deduction is more valuable to you, the itemized deductions become irrelevant.

The 2017 tax law, which was Donald Trump’s main domestic legislation, was mostly a tax cut, and it increased the value of the standard deduction. But the law also effectively reduced the value of itemized deductions in states with high taxes, like California, Illinois and New York. (Doing so created an incentive for states to cut their own taxes, a longtime goal of conservatives.)

This combination means that many homeowners now save more money by taking the standard deduction rather than itemized deductions. For them, the mortgage-interest deduction has become irrelevant.

The break-even rate

The calculator allows you to see the break-even mortgage rate that would make buying or renting more affordable (if the economy followed an expected path). In many situations, that break-even rate is between 4 percent and 5 percent, Francesca noted.

The average rate on a 30-year fixed mortgage is 7 percent today, up from less than 3 percent in early 2021 — which is a big reason that renting is often the smarter choice now.

When to buy

Buying will still make sense for some families. Home prices in large parts of the country — including New Orleans, Pittsburgh, St. Louis, upstate New York — are more reasonable. And even in expensive markets, families that are confident that they are going to remain in the same home for a decade or longer may prefer to own even if doing so costs extra.

For people tempted to buy, Zandi encourages looking at new construction. Prices of older homes haven’t fallen much as mortgage rates have risen, because owners can simply decide not to sell if they don’t get an offer they like. Developers are more likely to cut a deal. They lose money when homes sit empty, and many have cut the price of newly built homes, as the financial writer Wolf Richter has noted.

Use the calculator to explore these dynamics. As the housing market changes, you can check back to see how your calculations change.

If you have more than $250,000 in deposits at a bank, you may want to check that all of your money is insured by the federal government.

The Federal Insurance Deposit Corporation, or FDIC, implemented new requirements for deposit insurance for trust accounts starting April 1.

While the FDIC’s move is intended to make insurance coverage rules for trust accounts simpler, it may push some depositors over FDIC limits, according to Ken Tumin, founder of DepositAccounts and senior industry analyst at LendingTree.

The FDIC is an independent government agency that was created by Congress following the Great Depression to help restore confidence in U.S. banks.

FDIC insurance generally covers $250,000 per depositor, per bank, in each account ownership category.

If you have $250,000 or less deposited in a bank, the new changes will not affect you.

How FDIC coverage of trust accounts has changed

Under the new rules, trust deposits are now limited to $1.25 million in FDIC coverage per trust owner per insured depository institution.

Each beneficiary of the trust may have a $250,000 insurance limit for up to five beneficiaries. However, if there are more than five beneficiaries, the FDIC coverage limit for the trust account remains $1.25 million.

“For those who do go above $1.25 million under the old system, they definitely should be aware that changed,” Tumin said.

That may cause coverage reductions for certain investments that were established before these changes. For example, investors with certificates of deposit that are over the coverage limit may be locked into their investment if they do not want to pay a penalty for an early withdrawal.

“If you’re in that kind of shoes, you have to work with the bank, because you might not be able to close the account or change the account until it matures,” Tumin said.

The FDIC is also now combining two kinds of trusts — revocable and irrevocable — into one category.

Consequently, investors with $250,000 in a revocable trust and $250,000 in an irrevocable trust at the same bank may have their FDIC coverage reduced from $500,000 to $250,000, according to Tumin.

“That has the potential of causing loss of coverage, too,” Tumin said.

The agency is also revising requirements for informal revocable trusts, also known as payable on death accounts. Previously, those accounts had to be titled with a phrase such as “payable on death,” to access trust coverage limits. Now, the FDIC will no longer have that requirement and instead just require bank records to identify beneficiaries to be considered informal trusts.

“The bank no longer has to have POD in the account title or in their records as long as the beneficiaries are listed somewhere in the bank records,” Tumin said.

To amplify FDIC coverage beyond $250,000, depositors have several other options in addition to trust accounts.

That includes opening accounts at multiple FDIC-insured banks; opening a joint account for two people, which would bring the total coverage to $500,000; or opening accounts with different ownership categories, such as a single account and joint account.

Read original article here.

Some aspects of money management can get confusing at times, and one area that many people struggle with is building credit.

We all know that we should try to have an excellent credit score because we may have to provide it when applying for a loan in the future. However, figuring out how to build credit and what goes into a credit score can be challenging.

Vanessa Alfaro is a financial expert and regional sales leader at OneAZ Credit Union. She shared the most common myths about credit scores that must be debunked.

What are common myths and misconceptions that people have about their credit scores?

Myth No. 1: You Can Hurt Your Credit by Checking Your Credit Score

“It’s commonly believed that checking your credit score harms your credit,” Alfaro said. 

What’s the Truth About Your Credit Score?

“Routinely monitoring your credit score is imperative when trying to build credit to ensure you’re on the right track,” Alfaro explained. “Additionally, checking your credit score allows you to see what goes into the number itself, including amounts owed, payment history, new credit, credit mix and length of credit history.”

If you don’t check your credit score, you won’t know where you stand so you can make moves to improve it. While you don’t want to check your credit score often, knowing what it is helps you accurately measure your situation. 

What Should You Look Out For?

“Different types of credit checks can potentially damage your credit score,” Alfaro warned. “Hard credit checks occur when you apply for a new line of credit and lenders do a credit check to determine if you are eligible. Other types of credit checks are called soft credit inquiries, which do not affect your credit score in any way. Soft inquiries are only available on consumer disclosure reports, which are credit checks you do on yourself.”

Fortunately, several personal finance websites offer free credit scores and free credit reports to monitor information being added to your credit. Some include:

• AnnualCreditReport.com
• FreeCreditReport.com
• FreeCreditScore.com
• CreditSesame.com

By monitoring your credit score and checking your credit report, you can easily see in what category you’re lacking.

Myth No. 2: Your Credit Report Is Always Correct

“Another misconception is that your credit report is always accurate,” Alfaro said. 

When you check your credit report, you may feel like you have to accept the information provided. 

What’s the Truth Here?

“A Consumer Reports study found that a third of Americans discovered errors in their credit reports,” Alfaro said. 

You can’t always rely on your credit report being completely accurate. This is why you must look into this occasionally to ensure that everything has been updated to reflect any changes. You also have to consider that human error is possible when inputting data. This is why the onus is on you to check your credit report to verify all of the information. 

Myth No. 3: You Can’t Change Information on Your Credit Report

On a similar note, a common misconception is that you can’t change the information on your credit report since it has been reported to the credit bureaus. 

What’s the Truth?

“Every American can get a copy of their credit report every 12 months from each of the three credit bureaus: Equifax, TransUnion and Experian,” Alfaro explained. “Once you have your three credit reports, you can look for debts you didn’t sign for, mistakes with missed payments or errors in the amount of outstanding debt. If you find any errors, you can contact the credit bureaus to dispute the mistakes online, by phone, or by mail.”

It’s essential that you review the information on your credit report as it directly impacts your credit score. If you find inaccurate or incomplete information about a specific account, you can contact the lender to fix this situation with the source. You also can file a free dispute with a credit bureau if you notice any incorrect information. They have 30 days to investigate and report back to you.

Myth No. 4: Your Bank Account Balance Determines Your Credit

“A common misconception is that credit scores are directly related to one’s amount of money,” Alfaro said.

You might think you can’t build your credit because you’re not rich or that having money in your bank account will automatically improve your credit score. 

What’s the Truth About Your Credit Score?

“If you stopped borrowing money for a long time, you would have no credit score,” Alfaro said. “No matter where you are financially, your credit score has to be monitored and maintained.”

The logic that a higher credit score means you’re wealthy is a myth because that would mean that only rich people would have excellent credit. You can always improve your credit score, even when your income isn’t as high as you would like. This is why it’s crucial to build strong financial habits, such as proving that you can be trusted with credit by making your payments on time from an early age.

Myth No. 5: Minimum Payments Are Enough To Maintain Your Credit Score

“It’s frequently believed that paying the minimum amount on your monthly statement is sufficient for maintaining your credit score,” said Alfaro. 

While you may feel confident about making minimum payments on your debt, it’s essential to note that this alone isn’t enough to build or maintain your credit. 

What’s the Truth About Making Payments?

“Payment history matters as it’s worth 35% of your FICO score,” Alfaro said, “and paying the minimum amount due each month can prevent late payments and protect your credit score from damages.”

However, multiple factors make up your credit score, and your payment history isn’t the only aspect that matters. You don’t want to get into the habit of borrowing money just to make timely payments because you could end up with too much debt. 

“Scoring models also consider other factors, such as the amounts you owe or credit utilization — the correlation between your credit card balance and credit limit,” Alfaro said. “These amounts owed make up 30% of your FICO score. A good rule of thumb is to keep credit utilization below 30%.”

Myth No. 6: Poor Credit Scores Make You Ineligible for Loans and Credit Cards

“Another myth is that a low credit score disqualifies you from any loan or credit card,” Alfaro said. 

What’s the Truth About Your Credit Score?

“While you might not get approved for an exclusive platinum card with a low credit score, there are plenty of other options that people with lower credit scores can qualify for,” Alfaro said. 

You’re not out of luck if your credit score isn’t where you want it to be. You don’t have to feel stuck with a low credit score indefinitely. 

How Can You Improve Your Credit Score? 

“If you have bad credit and want to take care of your debt,” Alfaro said, “make a repayment plan and apply for credit cards that you will likely get approved for, as having multiple lines of credit makes up 10% of your FICO score.”

Closing Thoughts

“Building credit can be an intimidating process,” Alfaro said. “Between obtaining a credit card, understanding appropriate card utilization and maintaining a high credit score, there’s a lot to juggle. That said, it’s important to be aware of the common misconceptions surrounding credit to best position your financial well-being.”

While building your credit can be complex at times, the good news is that you can always make small changes today that will positively impact your credit score in the future. 

Read original article here.

“Remind me why you still have a mortgage?”

Our financial planner posed that question to my husband and me about a decade ago. He pointed out that we weren’t getting much of a tax benefit from carrying the debt because such a big percentage of our payments were going toward the principal at the tail end of our 15-year loan. He could also see that we had the cash; it was sitting in our Vanguard municipal money market fund earning much less than our 2.875% mortgage rate. In other words, mortgage paydown promised a higher return on our money than it was earning in our investment accounts. We had been hanging on to the mortgage because a mortgage rate of less than 3% seemed like a great deal (and it certainly was relative to our very first mortgage of 8.75% in 1994). But the numbers and our household balance sheet argued otherwise.

A spike in inflation and 11 Federal Reserve interest-rate hikes later, the calculus around mortgage paydown has changed meaningfully. People with newer mortgages with higher interest rates may still want to accelerate mortgage paydown versus steering more into their investment portfolios. But many homeowners with more seasoned loans will want to hang back. That’s because now that yields and expected returns on safe investments are also higher, they can readily earn a higher return by investing than they could earn with debt paydown.

If you face the very common conundrum of whether to pay extra on your mortgage or invest in the market, ask yourself the following questions.

1. Do you need the liquidity?

A key starting question is whether you might need access to your money in the future. If you do, that argues against steering a big share of your available funds toward paying down a mortgage. You can tap home equity via a home equity line of credit if you need to, but it’s obviously much simpler to dip into a brokerage account if you have a cash need.

2. How do the ‘returns’ compare?

Next ask and answer: How does the ROI of a mortgage paydown compare with investing in the market?

The core “return” from debt paydown is straightforward: whatever your mortgage interest rate is. What’s interesting is that mortgage holders today hold loans with a broad range of interest rates, depending on when they took out the loan or last refinanced. Interest rates dropped significantly during the global financial crisis of 2009 and dipped lower still during the pandemic, making it a wonderful time for borrowers to secure new loans or refinance existing ones. In mid-2023, for example, Redfin reported that eight in 10 homeowners had mortgage interest rates under 5%, and one fourth had a rate below 3%. Mortgage rates began to climb in early 2022, however, and the average rate for a new 30-year mortgage is now close to 7%. That means that borrowers with newer loans will have to clear a higher hurdle with their investments than will people with older mortgages and lower rates.

Deciding on what type of return to assume for your investments is tougher. Because the “return” you earn from mortgage paydown is guaranteed, the most conservative investment comparison is with an investment type that’s similarly guaranteed. That’s the benchmark that my husband and I used when we decided to pay off our mortgage: We had cash in our account that was earning an interest rate substantially lower than the rate on the debt we were servicing.

With today’s higher yields on cash and bonds, however, mortgage paydown might not add up for people with older loans. In my recent roundup of capital markets forecasts, for example, most investment firms were forecasting a 10-year return for bonds of 5% to 6%. Forecasts for cash returns are generally lower than for bonds, largely because cash yields can be ephemeral; today’s higher cash yields may not persist into the future, especially if the Fed starts cutting interest rates later this year.

3. What’s your life stage?

In a related vein, life stage and time horizon can affect the attractiveness of debt paydown versus investing. More risk-tolerant types—specifically, younger people with very long time horizons until retirement—might avoid mortgage prepayment in favor of stock investing. While stock returns are not guaranteed, history suggests that over a several-decade period, they’ll likely be higher than even today’s higher mortgage rates.

But if you’re getting close to retirement, that means that your time horizon until you’ll need to begin tapping your portfolio has also shortened. It also likely means that your investment mix has gotten more conservative and your expected portfolio return has declined. In that instance, your investments might not necessarily outearn your mortgage rate. Moreover, permanently (or at least semipermanently) reducing your fixed expenses by paying off your home can be more impactful to your plan than making additional investment contributions later in life.

4. What are the tax implications?

Also, factor in tax implications—any tax breaks that you’re receiving to carry the mortgage as well as any tax incentives that you might take advantage of to invest or tax penalties you might pay to access your funds.

A key point here is that the tax advantages of carrying mortgage debt are much less than they once were. Beginning in 2018, the standard deduction amounts increased substantially. In addition, there’s now a cap on the deductibility of interest for new mortgages that exceed $750,000. The net effect of both of these changes is that more than 90% of taxpayers now use the standard deduction rather than itemize. And because mortgage interest is an itemized deduction, many mortgage holders aren’t able to earn a tax break on their interest. By extension, there’s rarely a tax benefit to hanging on to a mortgage.

At the same time, if you invest in the confines of a tax-sheltered vehicle, tax incentives can effectively boost whatever return you’re able to earn. For example, if not paying off your mortgage enables you to make higher pretax contributions to your company 401(k) plan, whatever return you earn there is effectively boosted by the tax break on the contribution as well as the tax-deferred compounding you enjoy while your money is in the account. (How much of a boost depends on your tax bracket, the account type that you choose, what you invest in, and your anticipated holding period.)

If you need to tap tax-sheltered assets or appreciated taxable assets to pay down a mortgage, be sure to get some tax advice before proceeding. That’s generally a negative in the “prepay” column.

5. What are your other carrying costs?

In addition to the mortgage interest that you’re paying, also factor in any other costs associated with the mortgage. A big one is private mortgage insurance, which is typically required for borrowers who have less than 20% equity in their homes. If you’re paying PMI, you have a strong incentive to pay down your mortgage to eliminate the extra expense. Alternatively, if you’ve seen significant appreciation in your home’s value since purchase, having the home reappraised could lift your equity above the limit.

6. Will your mortgage have a prepayment penalty?

While prepayment fees are less common than they once were, some lenders charge prepayment penalties to discourage early mortgage payoff. Contact your lender or read the fine print in your existing mortgage documents to see if this applies to you. It shouldn’t stop you from prepaying if doing so ticks some of the other boxes, but it’s a factor.

7. Do you need peace of mind?

If the math around whether to prepay a mortgage is kind of squishy—for example, your mortgage rate and your expected portfolio return are both about 5%—peace-of-mind considerations are a good tiebreaker. What brings peace of mind varies with each individual, though. Being debt-free feels great to my husband and me, but I recently suggested mortgage paydown to a friend who is between jobs, has the cash, and is over 60. She shuddered and told me that she hated the idea of pulling down her principal that much and felt confident her portfolio would outearn her 5% mortgage rate. And that, I think, is the right call for her.

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Odds are, the last time you went shopping online, you had the option to use a “buy now, pay later” (BNPL) app at checkout. Affirm, Afterpay, Klarna, Sezzle, and Zip are just a few of the companies that offer consumers a way to pay for their purchases through a series of fixed installments—without added interest.

According to the Federal Reserve Bank of New York, 20% of Americans surveyed used a BNPL app in the fourth quarter of 2023, and many did so to fund their holiday shopping. Klarna, Afterpay, and Zip all posted double-digit year-over-year usage increases, with $940 million in BNPL purchases taking place on Cyber Monday alone.

More and more consumers are turning to BNPL apps as a way to finance bigger-ticket purchases without adding debt to their credit cards—which, according to Experian, now carry an average balance of $6,501. This makes sense given the Fed’s current money-tightening stance, which has caused the average interest rates on credit cards (APR) to skyrocket to 28%, an all-time high. Retailers of all stripes are rolling out BNPL payment options to their customers, including big names like Amazon and Walmart; even credit card companies are now offering their own versions of BNPL, and the sky’s the limit on the kinds of items that you can purchase, including everything from fast food items to airline tickets.

So, what’s the catch? There is one. While the ease and convenience of “buying now, paying later” can’t be beat, if you’re not careful, missed or late payments could incur fees that add up to more than you’d pay if you had used a credit card in the first place. Plus, customers who default on certain types of BNPL payments could eventually be penalized with lower credit scores, so it’s worth understanding just what you’re getting into before you click “accept.”

What is “buy now, pay later?”

The concept of “buy now, pay later” is just like it sounds: Interest-free loans that are usually payable in four installments spread out every two weeks. These loans are typically offered to online shoppers as a payment option when they check out, but they are also available in stores.

For example, if you are making a $100 purchase, you could pay for the item (or items) in four installments of $25 with 0% interest.

According to the Federal Reserve, there are two types of BNPL users:

• People with low credit scores (620 or less) who have been denied a credit application in the past year. This group makes frequent, small purchases valued at $250 or less that they might not otherwise be able to afford.
• Financially stable users who use BNP on a sporadic basis on bigger-ticket items (between $1,750 and $2,000) in order to avoid paying interest.

Credit matters to both users, but in different ways. The “financially fragile” group chooses to “buy now, pay later” because they have little or no credit, while the financially stable group doesn’t want to incur the interest that comes with making a purchase on a credit card. For both groups, BNPL offers benefits.

How does “buy now, pay later” work?

To be eligible for a BNPL loan, you must fill out an application, including your name, email address, date of birth, and phone number. You also need to have a debit card, credit card, or bank account to make your online payments. In addition, you must be at least 18 years of age.

“Buy now, pay later” companies make money from the fees they charge—both to customers as well as the businesses they partner with. BNPL apps charge businesses setup fees and transaction fees. They also charge customers late fees and additional fees for missed payments, which we’ll get to next, since those can play a role in determining your credit score.

How do BNPL apps affect your credit score?

Some people think that just because BNPL apps don’t ask you to provide your Social Security number, your information won’t be shared with a credit agency—but that is not true.

BNPL companies often run a credit check on their customers, and depending on which type they conduct (especially if you take out a longer-term loan), they could report your payment history to a credit bureau, which could impact your credit score.

• A soft credit inquiry includes a review of your credit file and other limited information that does not affect your credit score.
• A hard credit inquiry, or a “hard pull,” is a request for your full credit report, which stays on your credit file for two years. This has a small (5-point) impact on your credit score. However, consumers with several hard inquiries over a short period are viewed by lenders as being credit risks, giving the impression that they are desperate for loans that they may not pay back.

In 2022, Forbes reported that the country’s three major credit reporting agencies, TransUnion, Equifax, and Experian, had incorporated BNPL data into consumer credit files, but this information had yet to be included in credit scoring models—but that’s most likely a matter of when, not if. Each tagged BNPL data separately from mortgage and credit card lending reports; Equifax said it has been conducting tests that will eventually allow lenders to receive this information as part of a consumer’s credit file.

BNPL users should note when their payments will be due; late fees on missed payments can range from a few dollars to up to 25% of the amount of the loan. And if you default on a loan and the balance is sent to collections, credit bureaus will be notified.

Need to return the item you purchased? If you used a BNPL app, things could get complicated. In a comprehensive report detailing the risks of BNPL, the Consumer Financial Protection Bureau said that 5% of BNPL consumers surveyed had difficulty obtaining a refund for an item they purchased or never received, because they couldn’t stop the payments.

How can you safely use a BNPL app?

The allure of using a “buy now, pay later app” is just how easy it is to finance whatever you want to buy. That makes it particularly easy to overspend, if you’re not careful. Stripe, the payment terminal company, reports that businesses who offer BNPL services enjoy an astounding 27% increase in sales volume.

So that’s why it’s worthwhile to reiterate a few best practices:

• Before you accept the terms of your BNPL loan, be sure to read the fine print. That way, you’ll know when your payments are due, the price you will need to pay, and what the penalties are.
• Try to pay off your BNPL loan in full as soon as you can.
• And, as always, don’t buy what you can’t afford.

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