You’ve found the house you’ve been dreaming of. What do your credit reports look like? Even borrowers with good credit should check their credit reports. This means regular checks to ensure reporting accuracy from the three credit bureaus. Most people may think they have only one credit report and one credit score.
Compare Credit Repair Companies >>HERE
In fact, they really have three, and each credit report can differ. You should check all three reports regularly. We want your good credit to be ready when you need it. We will cover how to do that in this great article! You have two choices in fixing your credit. Do it on your own or find a credit counselor.
How Can I Tell a Credit Repair Scam From a Reputable Credit Counselor?
As in most industries, there are people and counselors who can help you with your credit report, and others who take your money but don’t help you.
Recognizing a credit repair scam is fairly easy, if you know how. Warning signs for credit repair scams include companies that ask you to pay before providing services.
The company may claim that it can guarantee a specific increase in your credit score or eliminate any negative credit information in your credit report.
How Do I Find a Credit Counselor?
Most credit counselors offer services through local offices, online, or on the telephone. You can find a list of approved credit counselors online from the most trusted source available in the United States.
That being the Department of Justice. Here is a great resource. It’s the Department of Justice website.
It includes approved credit repair and counseling agencies by the DOJ: https://www.justice.gov/ust/list-credit-counseling-agencies-approved-pursuant-11-usc-111
Once you’ve developed a list of potential counseling agencies from the Department of Justice, you could even go a couple steps further and check them out with your State Attorney General’s office, and local consumer protection agency.
Finally, ask the counselors for free information about their services and what they provide.
How Can I Fix My Credit On My Own?
If you’re thinking how can I repair my credit myself, then you need to know that repairing your credit on your own only gets done if you’re willing to put in the time along with the detailed effort by using physical mail, email and telephone.
Through these communication methods, you are going to explain and communicate your case. You will send personal letters and emailed responses in reply to credit agency questions about your specific situation.
Expect it to take some time to get everything up to par if you have poor existing credit.
You can find several how to guides here: https://www.consumerfinance.gov/consumer-tools/credit-reports-and-scores/answers/how-to-guides/
My Application For Credit Was Denied Because Of My Credit Report
If you were turned down for a loan or a line of credit, technically the lender is required to either give you a list of the major reasons for this denial or direct you to resources telling you how to get the main reasons.
Finding out what caused the lender to turn you down is critical. If a lender rejects your application, it’s required under the Equal Credit Opportunity Act (ECOA) to tell you the specific reasons it rejected your application or tell you about the right to learn the reasons, if you ask within 60 days.
It will probably take some work on your part to find out why you were turned down. You can use the resources on this page along with what they give you to ensure the reason/s.
If a lender rejects your application based on your credit report, it also requires the lender to:
1) Provide you with the numerical credit score it used in taking the adverse action and the key factors that affected your score.
2) Give you the name, address, and telephone number of the credit reporting company that provided the report.
3) Tell you about your right to get a free copy of your credit report from the credit reporting company that provided it within 60 days of your adverse action notice.
4) Explain the process for fixing mistakes on your report or adding information to make your report more complete.
If you find information in your credit report that you believe is inaccurate, you can dispute what is in the report with the credit reporting company and the company that provided the information.
Look ahead in this article, where this is covered in more detail. It requires the credit reporting company to investigate and correct any errors it finds.
If after the investigation you still believe that the report is wrong, you have the right to have a statement added to the report stating that you dispute the information.
If it denied you because of an “insufficient credit file”, or needing to build your credit for the first time, look at this free download called Building Credit From Scratch report. https://files.consumerfinance.gov/f/documents/201612_cfpb_credit_invisible_checklist.PDF
Request Your Free Credit Reports
If you’re not ready to speak to a specific credit counselor or not ready to look further into their services, then Federal law allows you to get a free copy of your credit report every 12 months from each credit reporting company.
The three credit agencies are Experian, TransUnion and Equifax. These free reports do not show credit scores though, so keep this in mind.
Ensure that the information on all of your credit reports is correct and up to date. Visit some tools on the Consumer Finance website for more help. https://www.consumerfinance.gov/consumer-tools/credit-reports-and-scores/
Related content:
- 8 Ways To Increase Your Credit Score
- Credit Score Hacks: Tips and Tricks for Raising Your Score
- How to Improve My Credit Score Fast
- Credit Score Factors: Understanding the Components and Their Impact
- How to Increase Your Credit Score by 200 Points
- How to Raise Your Credit Score Quickly
- Improve Credit Fast: Score Basics and Tips for Boosting
- Understanding Your Credit Score and 5 Tips to Improve It
What Is a Credit Report?
Let’s get down to the facts about what a credit report really is. Many people think they only have one credit report.
Some banks call it the beacon score. That’s only a partial credit report. It may be good enough to get a credit card or a minor line of overdraft protection, but for large credit lines you’ll get checked out through the three big agencies.
We know these as Experian, Equifax and TransUnion. We call that credit report a Tri-phase credit report.
In the credit industry, there is something called the Three C’s of Credit. These are Character, Capital and Capacity. These are areas a creditor looks at before deciding to decide about whether to take you on as a borrower.
Credit reports may affect your mortgage rates, credit card approvals, apartment requests, or even your job application.
Reviewing credit reports helps you catch signs of identity theft early as well.
Details such as how much credit you have, how much you owe, and how often you pay affect your credit scores.
When Should I Review My Credit Report?
You should check your credit reports at least once per year to make sure there are no errors. These could keep you from getting credit or best terms on a loan.
You should also check your credit report before making a major purchase that may involve a loan, like a house or a car.
Before applying for a new job is a good time to check your credit report. As mentioned earlier, many companies look at your credit history when hiring employees to get an idea of character, since it is one factor and part of the three c’s that determine your credit score – in this case to take you on as an employee.
You also want to check your credit regularly to guard against identity theft. Identity theft happens when someone uses your personal or financial information to commit fraud.
What Are Common Credit Report Errors That I Should Look For On My credit Report?
When reviewing your credit report, check that it contains only items about you. Be sure to look for information that is inaccurate or incomplete. Some common errors in credit reports are:
- Identity errors.
- Errors made to your identity information (wrong name, phone number, address).
- Accounts belonging to another person with the same or a similar name as yours (this mixing of two consumers’ information in a single file is called a mixed file).
- Incorrect accounts resulting from identity theft.
- Incorrect reporting of account status.
- Closed accounts reported as open.
- They report you as the owner of the account, when you are actually just an allowed user.
- Accounts that are incorrectly reported as late or delinquent.
- Incorrect date of last payment, date opened, or date of first delinquency.
- Same debt listed more than once (possibly with different names).
- Data management errors.
- Reinsertion of incorrect information after it was corrected.
- Accounts that appear multiple times with different creditors listed (especially with delinquent accounts or accounts in collections).
- Balance Errors.
- Accounts with an incorrect current balance.
- Accounts with an incorrect credit limit.
If you find errors, contact the credit reporting company who sent you the report, and the creditor or company that provided the information (called the “furnisher” of the information). Your credit report includes directions about how to dispute inaccurate or incomplete information, or you can use our sample dispute letters for furnishers and credit reporting companies.
How Do I Dispute An Error On My Credit Report?
If you find something on your credit report that’s not supposed to be there, then you should do this. Look at this credit report dispute instruction sheet: https://files.consumerfinance.gov/f/documents/092016_cfpb__CreditReportingSampleLetter.pdf
…and model this as your letter format: https://files.consumerfinance.gov/f/documents/092016_cfpb_CreditReportingDisputeLetter.docx
It is important to dispute inaccurate information with both the credit reporting company that created the report and the company that first reported the inaccurate information, often called the furnishing company.
While this packet provides information about disputing inaccurate information with a credit reporting company, you can find information about disputing inaccurate information with a furnishing company at: http://files.consumerfinance.gov/f/documents/092016_cfpb_FurnisherSampleLetter.pdf
Spot Identity Theft Early
Suspicious activity or accounts you don’t recognize can be signs of identity theft. Review your credit reports at least once per year to catch problems we just mentioned in this article very early.
If you use this article’s advice, then there is plenty of positive reason you should be on your way to getting close to a near perfect credit score. Do you know what the highest credit score anyone can get is? The answer is 850.
How to Build and Establish Credit in the Hispanic Community
When CreditCards.com in Austin, Texas, compiled data and analyzed credit card users by race, gender, age and income level, it reveals 87% of white consumers, 72% of Black Americans and 76% of Hispanics had at least one credit card in 2020.
While the most Hispanics have and use credit cards, it’s still below the average across U.S. adults. This kind of credit access inequality can lead to other types of financial inequalities, like lower credit scores and higher interest rates.
Members of the Hispanic community have made strides toward financial equality, but CreditCards.com’s recent data show that 15% of Hispanics have no credit history and still experience challenges in the personal finance space. To help overcome this issue, Creditcards.com has created a guide to help Hispanics prepare for their financial future properly by providing expert advice on:
- Financial barriers and solutions
- Credit basics and how to build your credit
- Managing and avoiding debt
- Hispanic Credit Cards
- Why and where to find a Hispanic credit union
- Hispanic credit solutions
Here are resources to look into that will show you the easiest ways for members of the Hispanic community to improve their finances and access to credit.
https://www.creditcards.com/credit-card-news/hispanics-and-credit/
Their experts have translated their guide to accommodate our Spanish-speaking readers. Here’s the link to their fully translated version in Spanish:
https://www.creditcards.com/credit-card-news/hispanics-and-credit-spanish/
What Is An Online Bank?
Online banking is one of the biggest trends in the financial services industry. Online banks, or internet banks, are institutions that operate primarily on the internet as a virtual financial bank.
They allow you to manage your accounts from a computer or mobile device from anywhere twenty-four hours a day and seven days a week.
Branch access is limited or not available for online banks, while some online divisions of brick-and-mortar banks or hybrid banks will still offer the option to step into a branch location.
Because online banks rarely incur the costs to open and operate a network of branches, online banks offer higher rates on deposit accounts and lower fees.
Keep in mind that this trade-off means you often can’t walk into a branch if there’s a problem. Instead, you’ll be communicating over the phone, via email or online chat to resolve any issues.
What Are The Best Online Banks?
The best online banks are those that meet your needs, and I will cover some specific needs you’ll want to include in a second.
If you’re happy with your current banking relationship but want to earn more interest in your savings, consider finding an online bank with a competitive high-yield savings account.
There are many online banks to choose from and certainly will be more in the future. And don’t forget your current bank may have an app or offer online only service, which could offer you lower fees and an overall sleeker experience.
If you’re looking to replace your current bank however, focus on the overall package. Look for an online bank that keeps fees and minimum requirements low, offers high APYs and provides easy access to your money via ATMs and their mobile apps.
Seek a bank with excellent customer service also, since you’ll want support later on as your life changes and income and investments grow. Here is a substantial list of 32 best online banks: https://www.moneycrashers.com/best-online-banks/
What Should I Look For In An Online Bank?
Here are some tips on what to look for when deciding on which online bank to choose.
1. Lots of Fee-Free ATMs.
Many of the best online banks offer access to extensive networks of ATMs. Most of the time access to these ATMs are offered without charging you ATM fees for getting cash out of your account. Ally Bank, for example, offers access to over 55,000 Allpoint ATMs, and Chime offers access to a network of over 38,000 ATMs that don’t charge fees.
Other online banks may not offer any ATM access, especially if your account is an online savings account. American Express Personal Savings is an example of an online bank that does not provide ATM cards or debit cards.
Think carefully about your goals for using your online bank and decide which features are most important to you. Refer back to the link above of the 32 best online banks to get a better idea of what you’re really looking for.
Do you want to be able to use your online bank account for ongoing expenses and accessing cash, or do you just want a place to put your savings to earn a higher APY?
2. FDIC Insurance.
The Federal Deposit Insurance Corporation (FDIC) https://www.fdic.gov/ helps make sure people’s deposit accounts (checking, savings, money market accounts and CDs) are insured against bank failure, protecting you for up to $250,000 per depositor, per ownership category, in FDIC member institutions.
The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress to maintain stability and provide public confidence in the United States’s financial system.
The FDIC insures deposits all the while examining and supervising financial institutions for safety, soundness, and consumer protection. Check their site https://www.fdic.gov/ for more information about how they protect you and your assets.
Banks and savings associations are insured by the FDIC. Credit unions have similar protection provided by the NCUA.
Most online banks are FDIC insured. If they are FDIC insured, they will show you this information on their websites (“Member FDIC”).
But before you deposit money, make sure you check the fine print to confirm your online bank account is protected by the FDIC by using its BankFind tool. It is your responsibility to make sure your bank is FDIC insured.
3. Multiple Banking Products.
Some of the best online banks are expanding their offerings to include more than just checking accounts.
You are offered ATM or debit cards, certificates of deposit, money market accounts, credit cards, currency transactions, loans and even other financial services. Almost all include their own apps you can download on your phone for quick bank access.
We know these as Fintech apps. Fintech describes any company that provides financial services through software or other technology and includes anything from mobile payment apps to cryptocurrency.
These apps make it is possible to manage funds, trade stocks, pay for food or manage insurance through this technology on your computer and often on your smartphone.
4. Helpful Financial Management Tools.
One of the major selling points of Fintech apps and online banks is that they offer innovative tools along with innovative features that help people manage their money more effectively.
There are several money-saving Fintech apps that offer specific ways to help their users save more money.
One example is rounding up the purchases to the nearest dollar and sending those cents to a savings account automatically.
Of course there are alerts and warnings when checking accounts get low, thus helping prevent overdraft charges.
There are helpful savings apps like Digit. This app lets you save money on the go without thinking about it.
It uses complex algorithms to analyze your spending patterns throughout the month and automatically save the perfect amount every day. One attractive benefit is how you can use Digit to set savings goals or pay off debt.
5. High-Yield Savings Accounts.
Since online banks don’t have the overhead costs of conventional brick-and-mortar banks, their cost of doing business offers customers an advantage.
One of these is that online savings accounts typically can afford to offer higher yields on cash savings than their brick-and-mortar competition.
Make sure you understand the terms of any account of an online bank you choose.
For example, some high-yield savings accounts will require a higher minimum deposit to open the account and included will be an ongoing automatic monthly deposit to be made into the account or a minimum balance to be maintained in the account.
Understand the rules and requirements for your account in order to qualify for the best APY rate.
Another example may be, if you want to have an ATM or debit card for your account. Many of the highest-yielding accounts may not offer that option.
6. Investment Help.
Another form of online financial service that has become popular in recent years is online investment management, also called robo-advisors.
These companies use AI (artificial intelligence) technology, or robo as in robotic, to help manage clients’ investments.
This type of service includes using data feedback to program machine learning and helps people invest in a balanced portfolio of stocks and bonds to suit their financial goals and risk tolerance.
An advantage of using robo-advisors with machine learning is the service can help save and invest for retirement or to get better returns on your short-term savings than you could get from a conventional bank.
Some online banks using robo-advisors have offered savings accounts, which can be FDIC insured, and can allow you to invest in low-risk assets like investment-grade corporate bonds that tend to pay a higher yield than most other online savings accounts.
Are Online Banks Safe?
Every bank has its weaknesses, including your local or even a small town community bank.
Online banks are safe when they do their best to protect your money and when you do your best to stay protected. When both happen, you can take advantage of the benefits of online banking, like the lower fees and higher interest paid.
How To Stay Safe Using Your Online Banking
Yes, online banking is safe, but only if you follow some procedures. The number one thing to be aware of no matter what kind of bank you choose is being aware of how hackers get your information and avoiding their pranks.
Here are a few things to do to ensure your online banking experience is safe.
1. Change passwords regularly. Changing your passwords regularly is a hassle.
Who can keep up with all the different passwords you use on many online accounts? Social media, email, school websites, banks, dating sites. The list can be huge.
I recommend a service I’ve been using for over ten years called Roboform. It’s been keeping several hundred passwords safe for me for over a decade now, and with zero problems.
It’s really inexpensive and even has a free version and highly trusted with digital marketing companies that deal with thousands of passwords in their businesses.
Another idea if you don’t have over fifty passwords is to stay away from technology altogether when remembering your passwords.
Just keep them written on paper or get a tiny pocket-sized notebook to write them down on. That way you can see when you crossed out your previous password and even date them to keep up with a regular password changing process.
Leave your note pad or paper at home as well. Imagine losing all your passwords at a coffee shop. Keep them safe some place at home and update the changes regularly.
2. Be careful with your debit card. Be careful not to say your PIN number out loud as you type. Try not to keep your PIN number in your wallet. Don’t post pictures of your actual debit card on social media.
You may ask who would do that, but some people have. That’s just inviting a hacker to break into your account. Also, when buying gas just use your other hand to cover your PIN entry on the keypad in case there is an overhead camera around.
Do everyone a favor and report suspicious activity around an ATM machine. A few months ago, I saw a man parked directly in front of the ATM. I waited five minutes for him to leave and he didn’t.
Sometimes people can use devices to mingle with the software and steal your card number and PIN. I chose to use a different ATM, just in case.
3. Don’t do your banking on public Wi-Fi. If you’re at a coffee shop, diner, or the library using their service, someone could record everything you are typing. It’s called keylogging.
Don’t forget these places usually have video cameras and thieves can hack into the video stream and get your information that way.
4. Choose an online bank with great security. When you go to the online bank’s website, you want to see the letters “https” (rather than “http”) at the beginning.
That little S means it is a secure address. If the bank passes this first test, then keep researching it. Another thing to find out is whether it has two-step verification to get into your account.
Online banks and other businesses use this technique (also called two-step authentication).
This second step requires you to provide additional information, often the answer to a question like, “What is the name of your first pet?”
How To Get Approved For a Loan With Bad Credit
Everyone tells you to have good credit, good employment, and excellent assets to get approved for a loan.
That is the case in most situations because they want to know how you can repay your loan. So you go to the bank and give them lots of documents.
Answer all their questions and hope your credit score is good enough and give them references most times.
After all this work and sweat you find out you’re not approved. To make matters worse, they won’t even tell you why.
As a mortgage consultant for many years, and having worked directly with lenders, I got to see thousands of credit reports.
Sometimes I felt a client was going to get a loan with no problem after speaking with them, but later in the process came to find out they got disapproved. You can’t judge the book by its cover.
If they have disapproved you, don’t get down about it. Now is the time to find out why and how you can get on track to having a stellar credit rating for your future.
We know they’re looking for someone with good credit, good employment, good income, and excellent assets.
The reason is not to judge anyone but to simply ensure the borrower has what it takes, the capacity and willingness to repay the loan.
Keep in mind lenders are looking for five things. Put yourself in their shoes and think about the risk of losing money and not getting paid back.
They call these five things lenders are looking for the 5 C’s of Lending: Collateral, Capacity, Credit, Character and Conditions.
Each of these carries weight when a lender looks into lending you money. It’s not just one or two. It’s all five.
The first thing you need to do is find exactly what your credit says about you, so you will know how lenders are looking at you.
You can get a good idea by going to this link that follows but it won’t actually give you credit scores. It will however show what may be harming your credit. Go to: https://www.annualcreditreport.com/ for a free credit report.
But how do you get approved for a loan with bad credit? We will cover two options.
One is for a personal loan, but to work on your credit score for now and wait a little while until the fixes are complete.
The second is to use a business loan. That’s right, a business line of credit for your business. Don’t have a business currently? No problem.
We cover that here too. Let’s get started and you’ll learn how in this article.
How Can I Get a Loan With Bad Credit?
Assuming you don’t have bankruptcies, evictions or judgements against you, then you should spend a couple months getting credit repair or credit restoration.
This can make a big difference and change things fairly quickly. Keep in mind it could take a couple months to get things aligned so you can qualify for a significant loan, however.
To get started just google credit repair and credit restoration.
If you’re looking to get a car or house right now, then I suggest a different route.
In this case, you should get a Business Credit loan. Keep reading because we will get more into this later here.
If you have bad personal credit, then you may want to perform the first option of credit repair also, but with business credit you won’t need to rely on that while it’s in the correction process.
You can quickly get out of this situation and never need to lean on personal credit ever again. This will allow you to get a car or house quickly.
How To Navigate Through The Process If You Have Bad Credit
Start building a solid business credit profile. You can do it whether you’re an entrepreneur or current business owner or just getting started.
The first thing you need to do is to set up a business that can get funded. Many times this can be done is as little as one day. Here are the steps:
1) Name your business if you don’t already have one. You will want to choose whether to use an LLC, S corp or other type. We won’t be covering that here.
2) Get a business address. I’ve seen people use a box at a UPS store. I’m not saying to do this, but it’s a street address that receives mail and if your business doesn’t require a physical office, then this can work.
Also, you can use your personal residence address but ensure you report it on your taxes.
3) Go to IRS.gov and get your EIN number. It’s the social security number for your business. EIN stands for Employer Identification Number.
Getting away from your personal social security number is important, so don’t skip this step.
4) Get a business checking account. This is a big step because it unlocks many options to get funding for your business.
You need to know during this step they are going to ask for your personal social security number but don’t get too worried.
You’re still going to be able to build business credit if your personal credit isn’t very good and possibly get offered lines of credit on the spot.
Many times the business checking account will trigger offers for loans from many sources that you will receive in your business mailbox as well.
If you’re in the US, then there are lots of sources that are set up by the government to fund small businesses since they are the backbone of the US economy.
5) Get a business phone number. It’s also great, but not required immediately, if you can get a website up with several pages of good content on it. This content is what customers will gain value from.
Also get the required pages on your site which include links in the footer for the Privacy Policy page, Contact Us page, Terms of Service page, Cookies Policy page, GDPR page, and an About Us page.
This helps give your business credibility. Also, if you want to run ads later, they will be required to get online ads approved and running.
If you want to begin building business credit today take a look at this recommended resource.
Start Building Business Trade Lines
You will want to start getting some business trade lines added to your business.
There are three main types of business trade lines when it comes to business credit.
They are vendor credit, store credit, and cash credit. The vendor credit reports to Dunn and Bradstreet, and once this happens, the other two will start building. This is easy to do and can be done in weeks instead of years.
If you’re having a problem getting your business checking account set up because of terrible personal credit, then go to these companies that help business startups right now.
NorthOne Banking for small businesses and freelancers: https://www.northone.com/
NAV: helps you get business funding, go here: https://www.nav.com/pricing-2/
Nav Business Boost and Business Manager, go here: https://app.nav.com/registration/b-f-bi
Another company I’ll refer you to is called Five Star Processing. They can give you a merchant processing account and help you get business credit.
Loans For People With Bad Credit
If you really don’t want to do the business credit plan, then there are many options to get loans for bad credit.
A bad credit personal loan is a short-term financial fix for consumers who need to borrow money but have a bad credit score or poor credit history.
If you really want to use your personal bad credit history instead of a business loan, then here is how.
Keep in mind a bad credit loan is not a perfect fix. Interest rates on bad credit loans are higher.
In most cases, they are considerably higher. The terms are short, usually one to five years.
But for people whose credit score is poor and have significant financial needs, may find this loan can help them get their feet back on the ground.
Finding a bad credit loan can be a challenge so stick to the endeavor. If you put in steady due diligence, it will reward you.
The loan could come from your regular bank, but more affordable interest rates and flexible qualifying requirements probably can be found with, and not limited to, these following options:
Family or friends. It’s easier to qualify and hopefully has lower interest rates. Credit history also may not count as much.
Find a co-signer. Use someone else’s high credit score to sign along with you on the loan to lower your interest rate.
I used my dad’s credit for my first car as he co-signed for me. Of course if you default then they are held liable to pay in your place.
Credit unions. Which loan company is best for bad credit? You will just need to shop around.
Typically, they have more flexible lending standards than banks and may be willing to offer a small personal loan. Membership is easy to get, although you may need to be referred from a current member.
Some state credit unions work that way. In most cases, you can simply apply and usually get a membership on your own.
Peer-to-Peer Loans. These are loans from an individual or group of individuals rather than a lending institution. Terms will differ from companies. It could take some time to find one who will work with you.
Online Loans. This is a vast market of lenders, and they can be flexible in terms.
Be cautious of scams, however, because many will advertise with a promise like bad credit loans guaranteed approval or urgent loans for bad credit.
In a case like this, they will probably require you to provide names of people you know to be used as references and lots of other information.
Just be careful and don’t hand them too much cash to process a loan for you if they ask for it. Many times they will take your money and be gone like a leaf in the wind.
Negotiate an agreement with Your Bank. Chances are you have a checking account currently. Use a long-term relationship with your bank to get a short-term loan at reasonable rates.
Borrow from the equity in your home. Credit score is not usually a factor. If you have equity in the house, this is an easy loan option.
Compare Credit Repair Companies>>HERE
Cash advances. Of course, this requires having credit cards already. I do not advise this because it is an expensive option and should only be used to get emergency cash immediately if you have bad credit.
What Is An Index Fund?
What is an index fund simple definition: An index fund is a portfolio of stocks or bonds designed to mirror the makeup and performance of a financial market index.
To mimic, simulate, and closely resemble an index market like the Standard and Poor’s 500 Index or the Dow Jones Industrial Average.
An index fund is a pooled investment vehicle that passively seeks to replicate the returns of some market index like the S&P 500 and/or the DJIA.
Owning an index can only be accomplished indirectly since it’s not possible to own an index because an index is basically an imaginary portfolio of securities representing a particular market or a portion of it.
An index mutual fund can provide broad market exposure, include low operating expenses, and have a low portfolio turnover.
An index fund follows their benchmark index regardless of the state of the markets. As the index market the fund is following changes, so shall the index fund.
A manager must go in and change the allocation of the index fund to match the index market it imitates.
Mirroring or mimicking the actual indexes is most commonly accomplished through index funds & ETFs (exchange traded funds.)
We can also do it either through self indexing or index derivatives but to keep it simple we will only talk about index fund investing in this article.
How Does An Index Fund Work?
“Indexing” is a form of passive fund management. It is where the fund manager builds a portfolio where the holdings mirror the securities of a particular index.
We take this strategy rather than actively stock picking and trying to time the market. It’s the opposite of day trading, that is choosing securities to invest in and strategizing when to buy and sell.
By mimicking the profile of the index of the stock market as a whole, or a broad segment of it, the fund will match and mirror its performance.
Where Did The Idea Of Index Funds Come From?
The creator of index funds is the late Jack Bogle. He devised the index fund in 1975 as a way for retail investors to be able to compete with the pros.
Rather than put together a group of stocks into a mutual fund hoping to beat the market, Bogle found a way for investors to approximate the performance of the market.
They could do this at a much lower cost than the mutual fund, which has higher fees.
Jack Bogle had many critics, and it took a quite a while for the strategy to catch on in the mainstream. The idea would soon revolutionize investing dramatically.
What Exactly Is An Index And How Does It Work?
An index is an indicator or measure of something. In finance, it typically refers to a statistical measure of change in a securities market.
With financial markets, stock and bond market indexes comprise a hypothetical portfolio of securities representing a particular market or a segment. (You cannot invest directly in an index.)
The S&P 500 Index and the Bloomberg Barclays US Aggregate Bond Index are common benchmarks for the U.S. stock and bond markets, respectively. Regarding mortgages, it refers to a benchmark interest rate created by a third party.
Each index related to the stock and bond markets has its own calculation method.
In most cases, the relative change of an index is more important than the actual numeric value representing the index.
For example, if the FTSE 100 Index is at 6,670.40, that number tells investors the index is nearly seven times its base level of 1,000.
However, to assess how the index has changed from the previous day, investors must look at the amount the index has fallen, often expressed as a percentage.
Is It Good To Invest In Index Funds?
Investing in an index can only be done indirectly, but index mutual funds and ETFs are now very liquid in the case one would need to cash out in an emergency.
They are cheap to own and often come with zero commissions. They are what we can call a set-it-and-forget-it investing option.
Index fund investing is the best and safest way to go. It’s the closest thing to passive investing there is.
If you have time to read a brilliant book on how to allocate and manage your portfolio, then pick up a copy called The Simple Path To Wealth by J.L. Collins.
He started blogging many years ago about investing and wrote many articles to his daughter about how she should manage her money. After years of accumulated writings, he compiled his articles into this outstanding book with tons of wisdom.
What Are The Returns Of An Index Fund?
Like all stocks, the S&P 500 will fluctuate. Over time, however, the index has returned about 10 percent annually.
That doesn’t mean index funds make money every year, but over long periods of time that’s been the average return of an S&P 500 index fund.
Over long periods of time, the index typically produces better returns than actively managed portfolios, especially after considering taxes and fees.
The S&P 500 Index continues to be alluded to as the standard by which we measure all investment performances.
They pay investment managers a lot of money to generate returns for their portfolios that beat the S&P 500.
It needs to be said that on average, less than half do so.
In his 2014 annual letter to shareholders, Warren Buffett included an excerpt from his will that ordered his children’s inheritance to be placed in an S&P 500 index fund because the “long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions, or individuals who employ high-fee managers.”
Can You Lose Money In An Index Fund?
No one can truly predict what the stock market will do, and yes, an investor can lose money just like any other investment in the financial markets.
It’s good to note that there is almost zero chance any index fund could ever lose all its value.
This is because index funds are low-risk investments. People who invest in them will not make the large gains they might from high-risk individual stocks. Yet conversely they wouldn’t lose all they have either.
The investing strategy to follow with index fund investing is to be in it for the long term. The market goes up and comes down.
Historically, it’s always went up more than it has gone down. When your index fund investments are in a down cycle, don’t panic.
It’s actually a good thing because that is a time to be investing more money and doing what Warren Buffett calls getting the equities on sale.
As far as single stock investing strategy goes, it’s best to glean from what the Vanguard creator himself said as we alluded to Jack Bogle earlier in this article.
He recommended never using over 5% of your total portfolio value to invest in individual stocks.
I would call this the play money. Sort of like gambling money one would take to Las Vegas on a weekend.
What Index Fund To Invest In?
After lots of research and careful consideration, I would personally choose the Vanguard (VTSAX).
It’s the Vanguard Total Stock Market Index Fund. It began trading in 1992.
The Vanguard Total Stock Market Index Fund provides investors with exposure to the entire U.S. equity market, including small, medium, and large-cap growth, including value stocks.
The fund’s key attractions are its low costs, broad diversified characteristics, and for its tax efficiency.
Investors looking for a low-cost way to gain an overall exposure to the U.S. stock market who are willing to accept the volatility that comes with stock market investing may want to consider this fund as either a core investment or the only domestic stock fund in their investment portfolio.
There is a minimum amount to invest. At the time of this article, it is $3,000 to get started. You can be certain Vanguard is among the lowest in fees and the actual creator of index funds with its founder, Jack Bogle.
Another substantial fund is Vanguard S&P 500 ETF (VOO). As its name entails, the Vanguard S&P 500 tracks the S&P 500 index, and it’s one of the largest funds on the market with hundreds of billions in the index fund.
This ETF began trading in 2010, and it’s backed by Vanguard, the creator of the index fund and still one powerhouse of the fund industry.
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Advantages:
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▶ This is a 6-week training. So, it’s long enough to give you a solid foundation and understanding of what needs to be done… but it’s not so long that you lose interest.
▶ The Super Affiliate System has been around for 4 years and it’s still an online bestseller. This is testimony to how good the course is.
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Disadvantages:
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Why I Don’t Like Dollar Cost Averaging
If you’ve ever taken stock advice anytime during your life, then surely you’ve been led to believe dollar-cost averaging is the smartest way to invest.
Upon setting up my first Schwab account in 1988 in Oakland, CA, this was one term I heard often.
That’s when we could walk into the brokerage, and the large ticker with bulbs above the long front desk would continuously scroll the stocks.
Too bad I didn’t take pictures. Before we go any further on this important topic, let’s ensure we agree while clarifying our premise and answering the following question.
What Is Dollar Cost Averaging?
By definition, dollar-cost averaging (DCA) is an investment strategy where the investor will divide up the total amount to be invested along periodic purchases.
Dollar-cost averaging is a tool an investor can use to build savings and wealth over a long period of time. It is also a way designed for an investor to neutralize and try to reduce short-term volatility in the broader equity markets.
An investor will choose any asset on the exchange, such as a single security, an ETF or index fund, in an effort to reduce the severity of volatility on their overall purchase.
The purchases occur no matter what the asset’s price may be, and they make the purchase at regular and predetermined equal intervals.
The core purpose of this strategy removes lots of the detailed work of attempting to time the market in order to make purchases of funds at the best prices.
Dollar-cost averaging can also be called and known as the constant dollar plan.
Let’s say you have $60,000 to invest. First you select a time period over which to deploy your $60,000, let’s say the next 12 months. Then you divide your money by 12 and each month you invest $5,000.
By using this approach, you are creating a protective barrier. So, if the market plunges right after your first investment, you’ll have 11 more periods that your total investment might perform better. Sounds great, right?
What Is Dollar Cost Averaging Really Saying?
By dollar-cost averaging (DCA) you are really saying the market is going to drop.
That you aren’t putting all your money in at once because you believe the market is too high.
By dollar cost averaging and betting the market will drop, the true premise is in saving yourself some pain.
For any given year, the odds of this happening are only 23%. This percentage odds also assume you’re putting your money into an index fund.
If you’ve read some of my other articles and papers, then you know my advice is to almost never choose one single stock to invest into in the first place.
Why Is Dollar Cost Averaging Not Good?
Two downsides of dollar-cost averaging are first, buying more frequently adds to trading costs. Yet, with brokerages that charge very little to trade, this expense becomes mostly negligible.
If you’re investing longer term, these fees should become very small relative to your overall portfolio. This is assuming you are buying for the long term and not trading in and out of the stock markets.
Second, the big negative is that by dollar-cost averaging, you may not capitalize on gains you otherwise would have earned if you had invested in a lump-sum purchase while the stock rises.
As we talked about earlier, the success of that large purchase relies on timing the market correctly. We know investors, including myself admittedly, are historically terrible at predicting short-term movement of a stock or the market, unless you’re Warren Buffett.
By using our example, we talked about in previous paragraphs of investing the $60,000 over 12 months with allotments of $5,000 does eliminate the risk of investing all at once.
However, the problem is that it only works as long as the market drops and the average cost of your shares over the 12 month investing period remains on average below the cost of the shares the day you began.
If the market rises, you’ll surely come out behind. You are, basically, trading one risk (that the market drops after you invest) with another risk of the market continuing to rise while you DCA therefore ending up paying more for your investment shares.
This scenario has most people asking the question of which risk is more likely?
If you’ve read my earlier posts, books or papers, then you know that the market always goes up but it is a rollercoaster and no one can really predict what it will do on any specific day, week, month or year.
The other principle of good and sound investing to know is that it goes up more often than it goes down.
Simply look at the period between 1970 and 2013, the market was up 33 out of 43 of those years. That’s 77% of the time the market was up.
DCA Can Work For Or Against
There are many scenarios of DCA floating around in social media circles and on other blogs and websites.
The crucial point and key takeaway is that it’s a strategy assuming the market will drop more than it will rise over the time period we purchase the equities during the DCA period.
Does this really make sense? We know the market rises more than it falls.
The best way to look at our question is to break our investment down into specifics. If the investor is buying only one stock, then DCA may have a greater chance of resisting losses.
However, if an index fund is chosen to use the DCA strategy with, then the method is probably going to work against the investor.
Of course like any investment nobody really knows for sure and if they say they do then beware.
In most scenarios, a lump-sum purchase beats dollar-cost averaging.
Generally speaking, however, dollar-cost averaging provides several key benefits that can result in better returns. DCA can benefit you by:
- Avoid losses when not timing the market properly
- Take roller coaster of emotions out of investing
- Help you think longer term when investing in the equities market
All in all, dollar-cost averaging helps investors stay away from their psychological biases. If you are a very emotional investor then this is where you can surely benefit from dollar-cost averaging.
Investors generally swing between fear and greed and are prone to making emotional trading decisions as the market oscillates.
Keep in mind, however, if you’re using the dollar-cost averaging strategy, you’ll be buying when people are selling on fear because of the predetermined choice to buy no matter what.
You will be getting a good price and setting yourself up for strong long-term gains. The market tends to go up over time as we previously discussed.
Although lump sum investing is better overall than dollar-cost averaging, you can recognize that if in a bear market, it is a great long-term opportunity, rather than a threat.
What To Do Instead Of Dollar Cost Averaging
One of the most significant people in the world of investing was John Bogle. He has probably done more for the personal investor than anyone who has ever lived.
He’s earned this recognition by allowing us to bypass the large fees and to educate us on how the stock market works early on.
He founded Vanguard. The one fund I totally recommend of theirs above all is the index fund VTSAX.
Take a look at it and get on board with Vanguard. Their fees are super low, keeping your margin favorable and on your side pays off big time in the long run.