How to set up an emergency fund
You never know when you’ll need extra cash for an unexpected emergency. Be sure to set aside enough.

U.S. families rank saving for emergencies as the second most important reason to save, according to The Federal Reserve Board’s most recent Survey of Consumer Finances. Yet its estimate of the rate of saving by U.S. households indicates a significant drop in recent years, both in levels and as a percentage of disposable income.

Few Americans set aside enough to weather even a mild financial storm. According to a 2004 poll by the American Payroll Association, 68 percent of Americans think they would fall behind on their mortgage, rent or other bills if even a single paycheck were to be delayed.

Don’t be caught off guard. Use the following tips to prepare for occasional financial setbacks by setting up a rainy day fund.

How much to save

A standard rule of thumb for emergency funds is to set aside three to six months’ salary. If your income is irregular, it’s wise to save a little more. Estimate the number of months you could be out of work and multiply it by your standard monthly expenses. These should include things such as rent or mortgage payments, utilities, car or transportation expenses, grocery bills and insurance costs. It should also be enough to cover any deductibles on your car or health insurance.

How to get there

One of the easiest ways to save is to have your bank set up an automatic withdrawal plan whereby a fixed percentage of your paycheck is transferred regularly to an investment account. A good amount to try to save each month is about a twelfth of your income (a little more than eight percent). This will enable you to save at least one month’s income every year. You can also increase your savings with any unexpected income you receive such as gift money, employment bonuses or inheritance funds.

Keep it accessible

Be sure to invest your emergency fund in a way that enables you to have access to it should the need arise. Your best bets are either a savings account with a bank or credit union or a money-market mutual fund. Savings accounts are insured by the Federal Deposit Insurance Corporation for up to $100,000, but typically pay only a low rate of interest. Money-market mutual funds aren’t insured but they provide a higher return. And they seldom drop in value as they invest only in short-term debt such as commercial loans, CDs and Government Securities. Be sure to talk with a financial planner about your situation before you invest.

Remember to review

Once you’ve established a rainy day fund, remember to review it periodically. Such things as the purchase of a new home, or the birth of a child, may cause your income need to increase. Be sure to keep yourself protected by adding money accordingly. With careful planning, you shouldn’t have to worry about paying for emergency expenses.

If a situation arises where your rainy day fund doesn’t provide you with enough money, however, a home equity loan or line of credit is a good alternative. Some lenders will advance you as much as 125 percent of the appraised value of your home, less existing mortgages. Make sure to shop around for the best rate.

Good debt: What do lenders look for?
Taking out loans and repaying your debts can appeal to potential creditors.

It can be smart to take out a bank loan or charge credit card debt. Here’s why: U.S. lenders rely on a credit report to decide whether to loan you money, to determine the interest rate they will charge you and, even, to establish your automobile or home insurance premium. If you have no track record demonstrating that you repay your debts, you may not qualify for a loan.

Credit reports are developed by one or more of three credit bureaus: Equifax, Experian and TransUnion. Each bureau sums up your credit history into a single three-digit number, known as your credit score. Most people’s scores range from 300 to 850. Generally, scores below 620 are viewed as risky, while those over 750 are excellent.

The following information is used to calculate your credit score:

• Your past payment history. Whether it’s credit cards, bank loans or your telephone bill, your creditors are happiest when you make regular payments — even if they are minimum payments — on all your debts. A single missed payment can lower your score. Bankruptcies, collections, judgments, defaults, liens, foreclosures, or repossessions, will lower your credit score.

• Current debts. The less money you owe, the better. Your debt ratio — the percentage of your paycheck that you spend repaying debt — should be no more than 40 percent of your take-home income. If you and your partner take home $5,000 per month, for example, potential creditors prefer that your debt repayments, including your mortgage payments, be no higher than $2,000 per month.

• Length of your credit history. Creditors prefer you to have a long and consistent track record of repaying loans.

• The number of new credit accounts you’ve opened or applied for. Every application for credit shows up on your credit report, telling lenders that you may be taking on new debt.

• The types of credit you have. Creditors look more favorably on some types of credit than others. They’d prefer you to have a mortgage secured by your home, for example, than longstanding credit card debt.

Loans that appeal to creditors:

• A mortgage can look good to potential creditors, as long as you’ve kept up your payments. As an added bonus, the interest on mortgage payments may be tax-deductible up to the first million dollars (though you should consult a tax advisor about your particular situation). And, hopefully, real estate is an asset that will appreciate in value.

• Automobile loans will not harm your credit rating provided you shop around for a reasonable interest rate. But it pays to keep in mind that a car is an asset that tends to depreciate in value the minute you drive it off the lot.

• Bank loans won’t hurt your credit rating as long as you repay them regularly and on time. If you borrow to pay for your education, it’s assumed you’ll get the money back in the form of a better salary.

• Credit cards can be a good thing in the eyes of creditors, as long as you make regular payments and don’t apply for many new cards within a short period of time. But creditors don’t like to see you carrying a credit card balance of more than 80 percent of your available limit. In other words, if your total credit card limit is $10,000, your total credit card debt should be well below $8,000.

• A debt consolidation loan could be a good signal to creditors — as long as it’s a one-time event, demonstrating that you’re serious about getting yourself out of debt. You may be able to get a debt consolidation loan at a lower interest rate than your current lenders are charging, which would also lower your monthly debt payments.

Credit scores: What the numbers mean
How high or low is your credit score? You could be paying a price for not knowing.

Your credit score is a measure of your past ability to make payments on time and manage your credit. It’s designed to help lenders determine how likely you are to pay back your loan. The number is calculated using a formula created by Fair Isaac Corporation, which is why it’s also referred to as your FICO score. is nearly impossible to achieve — the average score in the U.S. is about 675.

But what do these figures really mean? How do they affect the type of loan you qualify for? And what about other parts of your financial life? Here’s a rough guide to the numbers:

720 and above: You have excellent credit and will likely be eligible to receive a lender’s most favorable rates. In fact, you’re in a position to shop around and demand the best possible conditions. Lenders will often allow you to borrow more than 80 percent of the value of your home, and may not require private mortgage insurance. You will likely be able to get a home equity loan or line of credit with an interest rate equal to the prime rate, or even below it. You can also look for a credit card that will reward you with a low interest rate — while many cards charge 18 percent, you should be able to obtain a rate under 10 percent.

675 to 719: Once your credit score dips below 720, you may no longer be approved for the lender’s best rate, but you should have little difficulty finding a good loan. On a 30-year fixed-rate mortgage, expect to pay up to half a percentage point more than someone in the top category. If your principal is $150,000, the difference between 6.5 and 7 percent works out to about $18,000 over the life of the loan.

620 to 674: With a below-average credit score, your options will be reduced, and you’ll pay a premium on your loan — perhaps as much as 2 percent more than borrowers with excellent credit. You may need to provide more documentation than those with higher scores, including a formal appraisal of your home’s value. But if you make your payments regularly and work to improve your credit score, you should be able to refinance at a better rate, which can save you money over the life of the loan.

Below 620: A credit score under 620 puts you in the category of a “sub-prime” borrower. The good news, however, is that there are now more lenders offering sub-prime loans than ever before, with rates adjusted to reflect the added risk. If you are approved for a mortgage with a credit score this low, you’ll likely pay about 3 percent more than someone with excellent credit. If you’re looking for a home equity loan or line of credit, expect to pay double-digit interest rates. Of course, once again, if you make regular payments on the loan and get control of other areas of your financial life, you should gradually be able to improve your score and qualify for a lower rate.

Your credit score can also affect the rate you pay for car insurance. People with low credit scores are statistically more likely to make accident claims, and as a result, many insurance companies take this into account when they set your premiums.

Poor credit may even hamper your job search. While a company interviewing you is not permitted to access your score, they are allowed to request (with your written consent) a modified version of your credit report to see whether you have a history of meeting your financial responsibilities. Potential landlords may also access your credit report before you sign a lease.

Check your own credit report
Request your free online credit report and score from LendingTree.

Creating a debt consolidation plan
Follow our four simple steps to take control of your finances and pay off your creditors.

If you’ve got a mountain of high-interest debt, you may benefit from taking out a debt consolidation loan. This involves taking out a single, lower-interest loan (often a home equity loan) and using it to pay off all your creditors. That way you can concentrate on one monthly payment and pay off what you owe much faster, at a lower interest rate.

Consolidating your debt can help you get closer to financial freedom. But it takes careful planning and the discipline to follow through. You can make it work by following these four steps:

Step 1: Determine Your Debt Load
Make a list of all of your current debts, excluding your mortgage, and determine what you’re paying on these accounts each month.

Let’s say you have a bank-issued credit card that charges 18% and a department store credit card with a rate of 20%. Two years ago, you also took out a $25,000 car loan with a five-year term at 8%. Here’s what your debt might look like:

Now add up the monthly payments you’re making on these accounts. For your credit cards this may vary, so use an average of your last six months or so. We’ll assume you’re paying 5% of the total balance on the bank-issued card and 10% on the department store card:

Now you’ve got a clear picture of your situation: when you consolidate your debts, you will need $30,000 to pay off your creditors, and you’ll want your monthly payments to be less than $1,400.

Step 2: Shop for the Best Loan
There are several types of loans to consider when consolidating debt:

• Home equity loans and lines of credit offer the lowest interest rates, because they’re secured with your house. And because they’re a type of mortgage, the interest you pay may be tax-deductible. Following through with the above example, you might consider taking out a home equity loan for $30,000. At 7.5% interest over five years, the monthly payment would be just $600 — less than half of what you’re currently paying.
• Cash-out refinancing is another option. It involves taking out a new mortgage on your home that’s larger than your current one. For example, if you have a $90,000 mortgage and your house is worth $180,000, you could take out a new mortgage for $120,000 and use the extra $30,000 to pay off your credit cards and car loan. Even if your monthly payment increases, it will still be less than your combined loan payments were before and the amount of interest you’ll pay will be greatly reduced.
• A personal loan can also be used to consolidate your debt if you don’t own a home, or you don’t want to use your home as collateral. The interest rates on these loans are higher than those of a home equity loan, but are usually lower than credit card rates. With a three-year loan at 10%, you could pay off $30,000 with less than $1,000 a month.

When you’re shopping for loans, don’t forget to factor in upfront fees and points as well as interest rates. The loan’s annual percentage rate (APR) is a good benchmark for comparison.

Step 3: Commit to a Timeline
After you’ve found the best loan, sit down and figure out a timeline for paying off your debt.

Home equity loans and personal loans have a fixed term, so you’ll know exactly how long it will take to retire your debt. If you’ve decided to consolidate with a home equity line of credit (HELOC), however, you’ll be required to make only a small minimum payment every month. But paying the minimum will not reduce your debt.

Instead, determine how much you can afford each month, and use the LendingTree Debt Consolidation Calculator to estimate how long the loan will take to pay off at that rate. For example, if you borrow $30,000 on a HELOC at 6.5% and feel you can afford $700 a month, you will pay back the loan in about four years. (Remember, though, that the interest rate on a HELOC is variable, so this calculation won’t be exact.) To help you stick to your timeline, consider setting up an automatic monthly withdrawal from your bank account.

Step 4: Control Your Spending
This may the most important step of all. Consolidating your debt only works if you resist the temptation to run up your credit cards again. Getting out of debt is not easy, and it won’t happen overnight. But the rewards of being debt-free are worth the effort.

Get a LendingTree Guide to Home Equity Loans when you request a home equity loan through LendingTree.com.