Generation X Finance » Credit Cards

The New Credit Card Statements Are Here

Jeremy — Tue, 16 Mar 2010 13:01:45 +0000

New Credit Card Statements Help You Get Out of Debt

The new laws from the CARD Act have created a number of changes for credit card holders. Teenagers now find it very hard to get a credit card, card companies can’t stick your past balances with a higher interest rate, and new credit card statements make it easier for consumers to see the consequences of their actions. The new statements are something I want to quickly touch on today as most of you should begin seeing something similar hitting your mailboxes this month if you haven’t seen them already.

In the past, credit card statements were not very user friendly. They contained a detailed list of card activity, your balance, minimum payment amount, and the due date. That’s about it. It was then up to you to decide how much to pay, and since most of the time people would see the minimum payment as the amount due, that’s what they paid. Paying the minimum credit card payment is a big mistake. The minimum can literally cost you thousands and take over a decade to get the balance paid off.

Thankfully, the new credit card laws make some important changes to credit card statements that will go a long way in helping people get out of debt. To give you an idea of what you’ll see on the new statements I took a picture of one of our recent card statements:

This is a big box prominently displayed right on the front page of the statement. There’s no way to miss it, and that’s good. There are a few things that make this new box so important. First, it recaps the balance, minimum payment, and the due date right at the top. These are the three most important pieces of information regarding your credit card bill, so it makes sense to highlight them again. But even better is the paragraph just below that, the late payment warning. Here, in very clear terms it tells you exactly what will happen if your payment is late. It tells you how many days you have as a grace period, what the late fee will be, and what will happen to your interest rate. Try getting this information on your old statements! It was impossible because it wasn’t there and you instead had to sift through the fine print of your credit card agreement to find it.

Even better, look at the minimum payment warning. Now instead of making the minimum payment seem like that’s all you should be paying they actually attach a warning to it to hopefully show people how bad of an idea that is. In my case, our balance is $1,600 and if I were to just make the minimum payment each month it would take 13 years to pay it off. That’s right, 13 years! Think about that. If you go out and buy a $1,600 TV and then only make the minimum payment on the card you used the TV will probably have died or gone obsolete years before you’ve ever paid for it.

I like how it also shows you how if you pay a little extra each month you can shave literally a decade off of your repayment and save nearly $1,000 in interest. For this card, the minimum payment right now is $40, so it shows that just by paying $12 more and continuing that payment can yield huge savings. I know at the top it says the minimum payment due is $79, but that’s because I was deliberately late so that I could test some of the new features from the credit card law. I wanted to see if it triggered any additional warnings on the statement and make sure they did not immediately jack up the interest rate, assess fees, etc. So far it looks like everything is working as promised.

Finally, there’s help for those who need it. At the bottom they offer a toll-free number for credit counseling services. In the past, people basically had to see this information out on their own and might not know where to turn. Now, they have a number they can call right on their statement. If they see the numbers and realize they are in over their head, help is just a phone call away.

The New Statements Are a Great Change

If anything good came out of the new credit card laws, it had to be the new statements. No longer are important details hidden within fine print and people don’t have to go and find a credit card payment calculator online just to see how long it will take them to pay off their balance. This information will be right in your face each month, and if seeing that it might take you over a decade and cost thousands to pay off just a small balance doesn’t kick your butt into gear, I don’t think anything will. It will be a while before we begin to see the effects of this statement change, but I’m certain that in the coming years we’re going to see decreasing credit card balances across the board and a group of informed consumers that finally understand how costly credit cards can be.

About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.

The New Credit Card Statements Are Here

8 Tips to Keep Your Credit Card Information Safe When Shopping Online

Jeremy — Wed, 24 Feb 2010 15:18:35 +0000

How to Keep Your Credit Card Safe Online

Using your credit card to buy something online has become an almost daily habit for most people. Even so, there are many people who are still uncomfortable with submitting their credit card information online. Their fears aren’t completely unfounded. Scams are everywhere and the techniques scammers use are constantly evolving so it’s true that you are taking on a little bit of risk if you punch in your credit card number online.

Luckily, with some common sense on your part and some technological advances it is incredibly safe to shop online. That isn’t to say there aren’t potential dangers out there, but if you are able to follow a few basic tips and procedures you can make sure your credit card information is safe.

Just like you should be aware of your surroundings and be on the lookout for suspicious looking characters when withdrawing money from an ATM, you should know how to recognize the warning signs of online scams and take steps to avoid being a victim. Don’t just blindly click on links or emails and keep your eye out for things that just don’t quite seem right.
Ensure your browser and operating system are running the latest versions and you have applied all of the recent updates. These online scammers are constantly changing their tactics and companies must update their software over time to combat their attacks. If you’re running a version that’s a year old you may be vulnerable.
Watch for the padlock icon on the status bar at the bottom of your browser window, which indicates that the site is secure. You will also want to look for an ’s’ added to the usual http at the beginning of the web site’s URL when you get ready to submit your purchase information. The https indicates a secure server that is using SSL, which means your information is being encrypted. Without the https or other secure transmission you open yourself up to having your credit card information snagged by a thief during the transaction.
Before submitting personal information to a site, read their privacy policy to find out how the information may be used and whether it will be sold or shared with other businesses. If you don’t like what you read, shop somewhere else. Most sites will obviously have a solid privacy policy, but if it’s a site you’ve never used before it is worth double checking.
Don’t provide personal information such as address, telephone number, Social Security number, bank account number, or e-mail address unless you know who you’re providing the information to, why it’s being requested, and how it will be used. If an online store is requesting more information than you’re used to, stop and think about why it is asking.
Use a credit card, not a debit card, for online purchases. A debit and credit card may look the same, but they aren’t. You have more protection in the event of a fraudulent purchase if you use a credit card. Besides, your debit card is linked to your bank account, so if your information gets stolen you could find your account wiped out!
Carefully review your credit card and bank statement each month for unauthorized charges and notify your credit card company or bank immediately if you notice any charges you didn’t authorize. Not only that, but you should be monitoring your credit score and report on a regular basis. Sometimes the goal is to steal your information so that a criminal can create a fake identity, not necessarily steal your money. So looking at your bank statements might not alert you to identity theft.
Finally, make sure your computer is secure. If you use a wireless network at home you need to be sure you have it locked down with at least some sort of WEP or WAP protection. Avoid transacting business on wireless networks that are not your own. And make sure your computer’s anti-virus and spyware software is updated and keeping your computer safe. One way scammers can get your information is by loading trojans or other hidden programs on your computer that silently take your personal information even if you don’t realize it.

Credit Card and Debit Cards No Longer Have Automatic Overdraft and Over Limit Protection

Jeremy — Mon, 22 Feb 2010 14:14:34 +0000

New Credit Card Law Puts a Hold on Over Limit Charges

As you have probably heard by now, the CARD Act takes effect on February 22nd. Many of these changes are part of the law, but a lot of banks are also making voluntary changes to their programs. There are a lot of changes to help credit card users stay out of trouble and avoid ridiculous fees. Most of these changes happen automatically, but there is one thing you may have to take action on if you’d like some of the services to remain in effect.

If you have ever been in a situation where you charged something on your credit or debit card and gone over the preset limit you may remember that the charge probably still went through anyway. That’s because in the past, most cards automatically turned on features that allowed you to go over your limit rather than be declined outright. Then, you got charged a stiff fee for this feature. Card companies billed this as a convenience since they said it would be better to allow you to purchase what you needed rather than flat out decline that purchases. The problem is that you could literally spend $1 over your limit and then get socked with a $35 over limit fee.

Being over the limit is also bad for your credit score. So, by ensuring you keep your balance under the limit you can effectively improve your credit score, even if by just a few points. That could translate into lower interest rates on other loans in the future that could end up saving you thousands.

You Now Have to Opt-In For This Service

To help curb the excessive fees that credit card companies were raking in off of this service the new law now makes this an opt-in service. Going forward, you will need to call your card company and request the ability to allow overdraft or over limit coverage or charges that go over your credit card limit will be declined. This is good news for the millions of people who unexpectedly get hit with these fees for an innocent mistake, but for those who may want to keep this safety net in place, it’s one more step that needs to be taken if you want to continue to use the feature.

Keep an eye on your mail in the coming weeks if you haven’t received a notice like this from your card company already. I know most people see an envelope with the name of a bank or credit card on it and it goes right to the shredder, but it may contain important information about the features on your account and changes that are important to you.

I just received a notice from Chase regarding the debit card overdraft coverage. It states that I need to call them to turn this feature on since it is no longer offered automatically. It also outlines how it works in plain English, which is surprising considering how confusing the fine print on these things usually are. But basically, it states that:

It’s free to turn this feature on.
If I overdraft my checking account with a debit card purchase and make a deposit to cover it the same business day there’s no fee.
If I overdraft my account and don’t make a deposit there will be a $35 fee for each time I use the card over the limit, up to 3 fees per day.

For me, I don’t see a need for this service, so I don’t think I’m going to bother turning it on. I don’t regularly run my checking account balance that low, but more importantly, I already have true overdraft protection set up with a linked savings account. So, if I do accidentally overdraft the checking the money is automatically pulled from savings to cover the transaction and I’m not charged $35 to do so!

But this did get me thinking about my other credit card accounts and I do think I’m going to enable this feature on our credit card reserved for emergencies. While it’s one of those things we never hope to use, if it’s a true emergency and the only option available is to use a credit card for something I think it would be nice to know that the charge is going to go through if I’m a little over the limit instead of not going through at all. I’ll probably never need it, but it’s a small insurance policy just in case. Between our emergency fund in a high-interest savings account, regular checking and savings, and credit cards, we should be adequately covered in any emergency.

Do You Need This Protection?

I’d argue that most people do not need, and shouldn’t have the option for automatic overdraft and over limit protection on their cards. If you’ve never received an over limit fee before and don’t carry a balance on your credit cards, then it might make sense to have this on one of your cards for a rare emergency like I mentioned above. But if you’re someone who’s all too familiar with overdraft and over limit fees, keeps your checking account balance pretty low, or keeps a high balance on credit cards, then you should almost certainly steer clear. You should be focusing on how you can improve your finances so that you can eliminate the need to go over your limit, not continue to make it easy to go over the limit and get hit with stiff penalties.

Instead, create your own safety net. First, establish an emergency savings account. Use this as a source of funds if there is an emergency or if money gets tight. It won’t cost you anything and your money will actually be working for you and earning interest. Next, set up true overdraft protection on your checking account. You can almost always link a checking account with a savings account to use as protection in the event you go over your account balance. In some cases this may be completely free, but some banks may charge you something like $5 to $10 per overdraft. It’s still far better than the up to $39 they can charge you now. Finally, consider getting a 0% or low-interest credit card that you can transfer one of your balances from or simply keep that card tucked away for emergencies only. This way if you do find yourself in a bind you have a source of funds that’s available and you won’t have to worry about whether or not there’s enough room on the card or worry about getting hit with a big fee for going a few dollars over.

Credit Cards and the Minimum Payment – Don’t Fall Into the Minimum Payment Trap

Jeremy — Thu, 21 Jan 2010 16:12:49 +0000

To some, credit cards represent everything that is evil. It’s true that credit cards have done their fair share of damage to people’s finances, but they are also a useful tool. But what makes credit cards bad for most people is the minimum payment. That’s it. High interest rates don’t help, but it’s when you are stuck paying just the minimum payment each month where the high interest rates eat you alive.

This is the trap that most people who find themselves in debt fall into. You take a simple purchase and put it on your credit card. Maybe you even have the intention of paying off the balance in full at the end of the month, but if that doesn’t happen, don’t worry. The credit card companies make it incredibly easy to keep the payment affordable and only require to make a minimum payment each month to stay current. That can certainly help your cash flow situation out, but it’s doing far more damage than you might imagine. Credit cards aren’t evil, but it’s the minimum payments that are evil.

Understanding How Minimum Payments Are Calculated

Each card can be different, but generally speaking the minimum payment is simply a set percentage of your balance. Some cards are as low as finance charges plus 1% while others may base the minimum amount upwards of 4-5% of the balance. What you have to realize is that with a typical credit card APR that the minimum payment will generally cover only a little more than that month’s finance charges, meaning at best only half of your payment is going towards paying down the balance.

For a very simple example, let’s take a look at a credit card balance of $1,000 with an APR of 18%. If you break the APR down to a monthly rate you are effectively being assessed a finance charge on the balance of 1.5% per month. Lets also assume that the minimum payment is calculated by using 2.5% of the balance.

This means your minimum payment in the first month is $25, or $1,000 x 2.5%. With the APR at 18% and an effective finance charge of 1.5% that means of that $25 you paid, $15 is simply paying the finance charge leaving only $10 actually applied to the balance.

So the next month your remaining balance is $990, or $1,000 – $10. Your next minimum payment is $24.75. For this payment you will see $14.85 going towards the finance charge and only $9.90 going towards the balance. Your new balance is now $980.10. You have sent the credit card company nearly $50 of your hard earned money and have only reduced your balance by $19.90. That is quite a raw deal for you, but a great deal for the credit card company.

Ultimately, using this example if you continue to only make the minimum payments for the life of the balance it would take you 153 months or 12 years and 9 months to pay off the card and you will have paid $1,115.41 in interest; even more than the original amount you borrowed! In reality, it probably wouldn’t take this long because most card companies have a flat rate minimum if the calculated minimum payment is under say $10 or $5. Even so, it would still take years to pay off a $1,000 balance if you only paid the minimum each month.

Don’t Get Caught in the Payment Mindset

Today you can get financing for anything, from the cheapest electronics to new furniture for your house. All too often we are lured in by commercials that state how low your monthly payments can be. When you look at purchases as monthly payments as opposed to what they really cost you are setting yourself up for a very long payment plan and significant additional costs in the way of interest.

Even if you do use credit responsibly you can still fall into this trap. I see people who have the money available to pay more than the minimum amount each month but they don’t. They want to keep the cash flow available for other things. They end up treating this minimum payment as simply a monthly bill and find themselves just budgeting for it. Once this becomes habit you may find yourself paying the minimum for a long time without realizing how much it is actually costing you.

Try to Pay More Even if it is Only a Little

Clearly it would be ideal to pay the balance in full every month but that simply isn’t possible for many people. By taking baby steps and applying a little extra it will help. It won’t be instant gratification but doing so can shave years off of the repayment and save literally thousands in finance charges. The faster you can repay the credit cards, the faster you’ll get out of debt and improve your credit score. Remember, just because they give you a minimum amount doesn’t mean you should pay them that amount. Doing so will only cost you far more in the long run.

New Law Makes it Harder for Teens to Get a Credit Card Starting February 22, 2010

Jeremy — Wed, 13 Jan 2010 14:34:40 +0000

Good or Bad, The New Law Makes it Harder for Teens to Obtain Credit

You may recall that back in May of 2009 the President signed into law the Credit Card Accountability, Responsibility and Disclosure Act of 2009, or CARD. This act was packed with all sorts of new credit card rules and regulations that would hopefully lead to more responsible borrowing. While this was big news back when it was introduced in May, it has somewhat fallen off the radar even though it’s scheduled to take effect on February 22nd.

One of the highlights of the new law has to do with teens and credit cards. We’ve known that over the years college students have been prime targets for credit card companies. They would flood college campuses during the first few weeks of school and run all sorts of promotions and give away freebies in order to get kids to sign up for credit cards. While this may not seem like that big of a deal, a lot of these young people soon received cards in the mail and were granted credit limits of a few thousand dollars. Unfortunately, without a steady source of income and understanding the consequences of racking up a credit card balance these students soon found themselves in trouble as they had minimum payments coming due.

Get a Job or a Co-Signer

In the past the only requirement to qualify for a credit card was to be at least 18 years old and to have a heartbeat. Credit card companies would give a card to just about anyone. Today, lending has already tightened up, but it’s going to get even worse (or better?) for teenagers. When the new laws take effect you will need to be at least 21 years old to get a credit card without a co-signer or verifiable income. Teens will still be able to apply for a credit card once they turn 18, but to qualify they will need to either have their parents or guardian co-sign or have a job earning enough income to qualify for a card. Sorry, kids. Looks like the days of accepting every credit card offer that comes through your dorm room mailbox and having the best spring break ever are over.

Good News / Bad News for Parents

The new credit card law is a mixed bag for parents. First, the bad news. Your teen’s credit problems now become your problem. In the past if your teenager got a credit card and racked up an unpayable balance there was no legal obligation for the parents to step in and help out. Not any more. Now that you’ll have to co-sign your teen’s card you’re on the hook for their mistakes. This could be as benign as having to help them out with payments if they can’t afford them to actually having your credit destroyed if they get into serious trouble, make late payments, default, etc.

There’s also some good news. You now have a little bit of control over your teen’s spending and you don’t have to worry as much about whether or not they are racking up thousands in debt that you don’t know about while they are away at college. Now you can make sure they only have a credit card with a low interest rate, an appropriate credit limit, and keep tabs on how much they spend and their ability to pay the bill each month. Parents should use this as a teaching moment to help their teens learn how credit cards work, the importance of establishing credit, and making those payments on time.

Good News / Bad News for Teens

Even though most teens won’t like it, there is a lot of good that will come from these changes. It will now be a lot harder for teens to carelessly rack up substantial debt and ruin their credit at such an early age. I know firsthand how easy it is to get into credit card trouble while in college. Been there and done that! So, now that you’ll need a job that pays enough to afford credit card payments or put your parents on the card with you it’s far less likely that major credit card problems will arise.

That being said, it’s not all good. If a teen’s parents already have bad credit it might be impossible for them to even qualify for a credit card they can co-sign on. That could mean they are out of luck until they turn 21. Most credit card opponents would say this is still good news. But let’s not forget reality. You need to establish a credit history at some point as it plays a very important role in your life. From getting a mortgage, a car, getting a job, or even renting an apartment, your credit score can make or break you. If you can’t get a credit card until you’re 21 that means you have lost three years of potential credit history. As a 21 year old is graduating college and getting ready to set out on their new life it can be that much harder if you’re trying to also establish credit for the first time.

Strategies for Teens and Parents

If you’re under 21 and currently don’t have a credit card but have been thinking about getting one, you may want to apply for a good 0% rewards card before the February deadline. No, this doesn’t mean all teenagers should rush out and just start applying for credit. But, if you were already thinking about getting a card, be it for emergencies or just to establish some credit history, it might make sense to get one before the new restrictions take effect. If you are thinking about getting a card you should treat it as if the new restrictions were already in effect. Talk to your parents about it and let them know you’re going to get a credit card. They can help you make the right decision and share some wisdom so that you can avoid the mistakes they may have made.

Parents, it’s also time for you to start thinking about how these changes will affect you and your teen. If you already have a teenager or have children that will be turning 18 in the coming years, you better be prepared for them to start asking you about credit cards. Decide what your policy regarding credit cards will be and determine how you’re going to teach your kids how to use them responsibly so that you don’t end up in credit trouble yourself. And while you’re thinking about that, you should probably check your credit score and make sure your credit is good enough that you can help your kids out when the time does come. Have credit trouble? Here are some tips to help you improve your credit score.

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Blue Cash® from American Express
American Express® Preferred Rewards Gold Card

Are You a Credit Card Junkie? Learn How to Kick the Habit

Jeremy — Wed, 25 Nov 2009 00:52:38 +0000

Are you a credit junkie? Millions of Americans are, including our favorite relative, Uncle Sam. We usually think of junkies as drug addicts or drug peddlers, but a junkie is any person who derives inordinate pleasure from or who is dependent on something. For many people, that’s buying things with credit. In other words, spending money on things they can’t afford. Getting addicted to credit is just as easy as becoming addicted to anything else. At first you give it a try and maybe you buy something on a new credit card. Like magic, you just purchased something yet your bank account didn’t go down. What a wonderful feeling! So you buy something else on credit, and then even more stuff gets thrown on the credit card. Hey, it’s like free money, right?

Until the bill comes. Suddenly you get your statement and see just how much you spent, but guess what? You only have to make a minimum payment of $50 for the month. Who can’t afford $50 when you just cleaned up and brought home $2,000 worth of new merchandise? And things usually just get worse from here as the credit card balance increases, the minimum payments go up, and the finance charges take up virtually all of your payment. You’ve now become a credit junkie.

The Credit Junkie Quiz

How can you tell if you’re a credit junkie? Keep track of how many of the following questions you answer with “yes.”

You have more than two or three credit cards and carry a balance on them.
You pay the minimum or less on your credit cards.
You’ve reached the credit limit (or are very close) on your credit cards.
You juggle other bills in order to pay the minimum monthly payments on credit cards.
You charge items you used to pay for with cash (food, gas, etc.)
You incur late fees or over-the-limit fees on credit cards.
You’ve taken out one or more debt consolidation loans to pay off credit card balances, but then charge to the credit cards again.
You take out cash advances on your credit card to pay other bills or expenses.
You use your bank overdraft protection to cover checks you’ve written that you don’t have the money to cover yet.

If you answer yes to any of the questions, you may be a credit junkie. If you answer yes to more than three, you have a confirmed diagnosis. For treatment options, continue reading.

Treatment Plan for Credit Junkies

Now that you know the symptoms of being a credit junkie, it’s important to be aware of the risk factors that can cause this condition or make it worse. The first rule for avoiding any disease is to take precautions to reduce your exposure. For credit junkies, this includes:

Can the Credit Card Offers – If you were an alcoholic, you wouldn’t keep a bottle of Jim Beam on your kitchen counter where you had to look at it every day, would you? If you’re a credit card junkie, why subject yourself to the temptation to overindulge by allowing yourself to be inundated with credit card solicitations in the mail?Credit card companies send out over three billion credit card solicitations each year, but that doesn’t mean you have to be one of the recipients. Call 1-888-5-OPTOUT (567-8688) toll free to request that the credit reporting bureaus stop selling your name and address to lenders. This request is good for two years. You’ll be asked for personal information, including your name, telephone number, and Social Security number.
Avoid Shopping Malls – For a credit junkie, cruising the malls without a definite plan in mind is like taking a dieter to a giant smorgasbord and telling them not to eat anything. Limit your exposure by planning your shopping trips ahead of time. The fewer trips you make to the mall or other stores, the less impulse buying you’ll do.
Cancel the Catalogs – The more you order from catalogs, the more your name gets sold to other catalog companies and the more catalogs you receive. These visual reminders of all the things you could buy (whether you need them or not) is extremely difficult for a credit junkie to resist. Know where to go to just say no. Opt-out of junk mail to reduce the number of catalogs and other unsolicited mail you receive for the next five years by writing to the Direct Marketing Association (DMA), Mail Preference Service, PO Box 643, Carmel, NY 10512, and asking to be removed from their marketing lists, or register online at . If you continue to receive catalogs, call each catalog company and ask to be removed from their mailing list.
Reduce Visits to Online Stores – Like catalogs, online stores stimulate your desire to buy things you don’t need and didn’t even know you wanted. If you shop online, prepare a list of what you need ahead of time and stick to it.
Be Aware of Advertising – Our addictions to spending start with the hundreds of advertising messages we’re bombarded with each day from multiple media, from television and radio to billboards and email pop-ups. Awareness is the first line of defense. You may also receive a lot of spam that’s actually email you like to receive. Are you getting weekly emails from Pottery Barn because you signed up for email alerts on new sales? While technically not spam, you’re subjecting yourself to unnecessary advertising. Take a few minutes to go through your inbox and cancel all of those subscriptions.

How to Break the Minimum Credit Card Payment Mindset

Jeremy — Thu, 17 Sep 2009 12:56:01 +0000

I’ve been spending a bit of time lately discussing credit cards and debt because it’s an important issue for many people. Unlike a lot of bloggers I’m not against credit cards completely. They are a financial tool just like any other. They can be a powerful tool when used correctly, but they can also cause you harm if used incorrectly. The problem is that credit cards are designed for failure by default. The features that are built into a card such as high interest rates and low minimum payments mean that even if you make all of your minimum payments on time you’ll still be doing more harm than good.

What happens with many people who get in over their head with credit card debt is they underestimate the impact that making the minimum payment each month has. Think about it. If you borrow $1,000 and your monthly minimum payment is just $25 it’s easy to write that off as an insignificant payment that you can easily afford. This way of thinking is extremely dangerous because it usually leads to racking up more debt and then spending the next ten years paying a ton of interest. So to really get ahead in the debt game you need to break the minimum payment mindset.

Understanding How Minimum Payments Are Calculated

Each card is different, but generally the minimum payment is simply a set percentage of your balance. Some cards are as low as finance charges plus 1% while others may base the minimum amount upwards of 4-5% of the balance. What you have to realize is that with a typical credit card APR the minimum payment will generally cover only a little more than that month’s finance charges, meaning at best only half of your payment is going towards paying down the balance.

For a very simplistic example, let’s take a look at a credit card balance of $1,000 with an APR of 18%. If you break the APR down to a monthly rate you are effectively being assessed a finance charge on the balance of 1.5% per month. Lets also assume that the minimum payment is calculated by using 2.5% of the balance.

This means your minimum payment in the first month is $25, or $1,000 x 2.5%. With the APR at 18% and an effective finance charge of 1.5% that means of that $25 you paid, $15 is simply paying the finance charge leaving only $10 actually applied to the balance.

So the next month your remaining balance is $990, or $1,000 – $10. Your next minimum payment is $24.75. For this payment you will see $14.85 going towards the finance charge and only $9.90 going towards the balance. Your new balance is now $980.10. You have sent the credit card company nearly $50 of your hard earned money and have only reduced your balance by $19.90. That is quite a raw deal for you, but a great deal for the credit card company.

Using this example if you continue to only make the minimum payments for the life of the balance it would take you 153 months or 12 years and 9 months to pay off the card and you will have paid $1,115.41 in interest; even more than the original amount you borrowed! (Of course this assumes the company allows small payments. In some cases they will impose a $10 minimum payment even if the calculated minimum is less than that)

Don’t Get Caught in the Payment Mindset

Today you can get financing for almost anything, from the cheapest electronics to new furniture for your house. All too often we are lured in by commercials that state how low your monthly payments can be. When you look at purchases as monthly payments as opposed to what they really cost you are setting yourself up for a very long payment plan and significant additional costs in the way of interest.

Try to Pay More Even if it is Only a Small Amount

Understandably, times can get rough and your only option may be to pay the minimum. That’s ok, just try not to make it the norm. Get into the habit of sending a bit more than the minimum each month. If your minimum payment is $25, try sending in $40. If it is $100, send in $150 or something. It may not seem like it makes much of a difference but it does over the course of time. Just applying an extra $20 to a $25 monthly payment can cut the length of time it takes to pay off the balance by more than half and potentially save you hundreds or even thousands in interest.

Clearly it would be ideal to pay the balance in full every month but that simply isn’t possible for many people. By taking baby steps and applying a little extra it will help. It won’t be instant gratification but doing so can shave years off of the repayment and save literally thousands in unnecessary interest. Remember, just because they give you a minimum amount doesn’t mean you should pay them that amount. Doing so will only cost you far more in the long run.

If You’re Going to Consolidate Debt Then You Have to Stop Using Credit

Jeremy — Wed, 09 Sep 2009 14:32:53 +0000

When it comes to paying off debt there’s one useful tool that can not only simplify your finances but also reduce the amount of interest you pay. Debt consolidation takes some or all of your small debts and combines them into one loan or line of credit. This results in just one payment and if you can get a lower interest rate, can add up to big savings.

While this is a good idea, there’s also a big problem. Many people will consolidate their credit card debt but then fall back on the habit of using the now open credit lines to make purchases again. This is bad news because now you’re just making your debt problem even worse. What happens is that people have a hard time breaking habits. If they are consolidating debt then there must be a reason there is debt to begin with. So when this consolidation now frees up more available credit these habits can creep back in and make the debt problem even worse.

Be Careful if Using Home Equity to Consolidate Debt

Tapping into home equity has been a common debt consolidation method over the past few years, but you should really think twice before going this route. I don’t need to remind you about the problems right now regarding falling home prices, but there’s another danger when you go this route.

Credit cards are unsecured debt meaning there is no collateral backing the card. If you fail to pay off your credit card you might have to put up with collection calls and damage to your credit score, but that’s about the extent of it in most cases.

If we’re talking about a mortgage or car loan we’re dealing with secured debt. This just means that the underlying asset is used as collateral for the loan. Now if you fail to make payments the bank is going to take your house away. If you can’t repay the home equity loan or line of credit you might be forced to sell the house so the bank can recover the money. If you find that you start racking up more credit card after you’ve tapped the equity in your home to consolidate your existing debt you could be faced with losing your home thanks to your credit card problems.

To Close or Not to Close

You may be thinking that simply closing or canceling the old credit cards will be a great solution so you won’t find yourself tempted to use the card again. Not so fast. Some of the factors in your credit score have to do with the length of time you’ve had accounts and your credit utilization ratio.

When you close out an account you will not only hurt your credit ratio but you may be eliminating years of credit history from your account. Before closing any accounts you should carefully examine your credit report to see what, if any cards should be canceled. If it is a new department store card you opened last Christmas to get a discount and had a limit of $500 it may make sense to just get rid of the card. But the last thing you want to do is cancel a card you’ve had for a few years with a higher credit limit. That may ultimately do more harm than good.

How to Stop Using Old Cards

So, if you don’t want to cancel all of your old cards what can you do to ensure you don’t get into the habit of using them? The simplest and most dramatic thing you can do is to simply get a pair of scissors and cut the card up. Problem solved. The account is still open but you can’t just swipe a new purchase. Of course if this was a card for emergencies that may not be the best idea.

Some people find it useful to lock their cards up in a lock box. If you have one at home you can do that, but an even better way that makes them even harder to get to is to lock them up in a safe deposit box at your local bank. Either way, if they aren’t in your wallet and aren’t easily accessible you are far less likely to use them.

Use Debt Consolidation Wisely

Don’t fall into the endless cycle of debt. If you are thinking about consolidating your debt make sure you stop using the old credit that you are trying to consolidate. Consolidation can be a great step towards getting rid of debt, but simply continuing to use credit will just dig you into a deeper hole. It seems like common sense, but leaving those cards in your wallet or even considering that open credit line as a means for buying something will just perpetuate the cycle.

How to Shop for the Best Home Loan – Finding the Best Mortgage

Jeremy — Mon, 24 Aug 2009 14:30:51 +0000

Finding the Best Mortgage Can Save You Thousands

Buying a home is one of the largest purchases you’ll ever make. Because it’s such a large purchase and there is a lot of money at stake it only makes sense to get the best possible financing. After all, most home loans last for decades, so a poor choice up front can end up costing you for years to come. The problem is that not all lenders are created equal, and even trying to compare similar loans can make your head spin. So, let’s take some of the confusion out of shopping for a mortgage and make sure you’re getting the best possible deal.

Most people assume that finding the best interest rate is the most important aspect of finding a loan, but that is only part of the overall picture. Interest rates are very important, but what looks like a good rate on the surface might be overshadowed by excessive costs or unfavorable terms elsewhere in the loan that aren’t immediately apparent. If you know what to look for you can be sure you’re comparing apples to apples. Having just gone through the process of trying to find a loan to buy a house there are a lot of things I noticed over the past few weeks that can help you save money when shopping for a mortgage. Here’s what you need to do to find the best possible home loan.

Check Your Credit

Before you even start shopping around for loans you should first check your credit. If you haven’t already, it’s a good time to use your free annual credit report from annualcreditreport.com. You are entitled to a free credit report from each of the three main credit bureaus each year. The idea here is to make sure your credit report is accurate and if there are any errors, you have enough time to fix them before applying for loans. If you do encounter an error, use this time to call the creditor and see what you can do to get it rectified. In many cases it could be just an honest mistake, but it could also be an indication of something more serious.

You are going to want to check your credit about 30 to 60 days before you begin applying for loans if at all possible. This is because many creditors only update their records once a month, meaning even if you are able to fix an error right away it may still take another month or so before it gets updated on your credit report. It’s easier to wait for an error to be dropped from your report than to go to a lender with a blemished report and then try to explain the situation to them.

It’s also a good idea to get your credit score prior to applying for a loan. Yes, once you apply for a loan you’re going to have your credit pulled by the lender anyway and you will likely get a copy of your score, but a lot of pre-qualifications (not pre-approvals) are done with rough estimates of your income, debt, and estimated credit score without actually pulling your credit. This helps when you’re shopping rates and simply making quick phone calls to various lenders as you can give them an idea right up front as to what your credit score is so they can have a better idea of what you might qualify for. Of course, the score they actually pull once they go through the application will be what is used, but you can make things a little easier by giving them as much information as possible up front.

You won’t get your credit score with your free credit report, so this is something you’re going to have to do separately. Two of the best options for obtaining your credit score are myFICO and Credit Karma. Credit Karma is free and provides some neat features to help you monitor your score and make improvements. I used Credit Karma while we were applying for our mortgage and one thing I did notice was that there was a huge discrepancy between my wife’s score that the banks were obtaining and what Credit Karma was showing. The difference was nearly 100 points. At the same time, Credit Karma was showing my credit score as dead on. So, just keep that in mind. You can get a credit report and credit score from myFICO for around $15 so it’s also not a very steep price to pay if you want to go that route.

Know What You Need and What to Expect

Before shopping for your home loan you should have a good idea of what you need. This means understanding what types of loans are out there and what your specific situation warrants. Do you want a 30-year or 15-year fixed mortgage? Do you qualify for FHA or will you need to seek another type of loan? Do you have 20% to put down to eliminate PMI or will you piggyback your mortgage with a second loan to eliminate PMI? These are all questions you should ask yourself before heading to a lender because if you can tell them exactly what you’re looking for, they can better find what they have available for you. Do your homework ahead of time so that you can narrow your search. If you go to the bank and simply say you want to buy a house for X amount of dollars they might come back and give you a handful of different loan options that may or may not be appropriate for you and it just makes things more confusing for you.

Not only do you need to know what you want, but you should know what to expect in the current market. First, you should check on current interest rates. One of my favorite sites for a quick update is simply bankrate.com. There you can find the average interest rates for a number of loan types. After all, if you don’t know what the going rates are, how will you ever know if the quote you get from the bank is a good one or not? This is also where knowing your credit score can come in handy. For example, if you have a score under 700 it’s safe to assume that you probably won’t be able to get the lowest rate out there. Knowing this, if you see a bank come back with a quote for a very low interest rate it might be a red flag that points to a loan that’s padded with points or other fees that ultimately make it a bad deal for you. So, if you can go into the mortgage shopping process by having some expectations of what you might qualify for and for what rate, you can better determine whether or not your quote is a good deal or not.

Start Shopping Around

Once you’ve determined what you want and know what to expect in the current market, it’s time to start checking with various lenders to see what they can offer. At this stage you should expect to inquire with at least 5-10 different lenders. A lot of people are concerned that this could be detrimental to their credit score because of all the credit inquiries, but don’t worry. Hard inquiries made during the most recent 30 days are not factored into your current credit score. In addition, any inquiries within the 14-day period before that only count as one inquiry. So, as long as you plan ahead and do your loan shopping within a month or so you’ll have no negative impact on your credit score.

To start, you might as well check with the institutions where you currently have your finances. Whether it’s a bank or credit union, existing customers can often get slight discounts. Plus, since you already have a relationship with them it’s easy enough for them to pull a lot of your information and see what you might qualify for. This doesn’t mean you’ll get the best rates, but it’s a good starting point.

After you’ve talked to your current bank you might want to make a few phone calls to other local banks that you might not currently do business with. Banks and credit unions are always looking for new business and will be more than happy to take your call. So, see what kind of rates they can offer and see if it’s worth pursuing.

Finally, thanks to the internet you have a vast number of lenders available at your fingertips. You can look to banks that might not even be in your area or find lenders that otherwise would have gone undiscovered if you stuck to your local yellow pages. Again, this doesn’t always mean you’ll get the best deal with a company you see online, but it can at least be worth a shot. You might also want to look at lendingtree.com for some good comparison shopping.

Assemble Your Documents

After you go through a quick phone call or initial meeting with a lender the next step will be to submit various financial documents that the bank will use to get you pre-qualified. Generally speaking, the bank wants to see verified sources of income, debt obligations, employment history, and so on. To make both your job and the lender’s job easier, you should start getting these documents prepared ahead of time and make multiple copies. If you’re going to be applying with a half dozen lenders you don’t want to rely on one set of originals and have to wait for each bank to get those back to you before applying with another.

Documents typically requested:

W-2 forms from the past two years.
Tax returns from the past 1-3 years.
The last two months of bank statements (both checking and savings accounts).
The most recent statements for all investment accounts (IRA, brokerage, 401(k), etc.).
Employment history and current employer contact information.

If you have all of these documents ready to go you’re going to save yourself a lot of time. And the sooner you can present these to the lender, the sooner they can get you pre-approved. The lender will appreciate the fact that you’re prepared and this can help ensure your application gets through the process as fast as possible.

Pre-Qualification vs. Pre-Approval

It is very important to note that during your initial shopping stages you will most likely be doing a pre-qualification and not pre-approval. There is a big difference and both consumers and lenders often mix and match the words. Pre-qualification is simply when a lender asks you for some basic information such as income, debt levels, assets, and estimated credit score to determine if you’ll likely qualify for a loan or not. At this stage nothing is verified, no credit reports are pulled, and the loan officer is simply trying to see if you might be someone they can do business with. Getting pre-qualified does not mean the bank will lend you the money, but it gives you a rough idea of what you might qualify for with that specific lender.

When you get to the process of actually having the lender pull your credit report, submit W-2s, tax returns, verify employment, and fill out all of the disclosures, then you’re looking to get pre-approved. Once you’re pre-approved that means based on the information you’ve provided and subsequently verified by the bank, the lender is willing to lend you the money baring any major changes to your credit or income and the appraisal and title search on the house you wish to buy come up ok. It is at the pre-approval stage where you will receive a good-faith estimate and can tell sellers and real estate agents that you’re a qualified buyer.

Comparing Loans With the Good Faith Estimate

Once you go through the application process if you come back approved, you’ll typically get what’s called a good faith estimate. There is where you’ll begin to see the nuts and bolts of the loan and can hopefully spot what makes one particular lender’s offer better than another. Generally speaking, they must provide this to you within three days of applying for the loan.

The GFE will contain a lot of information regarding the closing or settlement costs. As I mentioned above, getting a good interest rate is important, but even more important can be the closing costs and how the fees are structured. The closing costs are also where a lot of lenders make their money by sticking it to borrowers with inflated or unnecessary fees and then just rolling them into the loan. Your GFE should itemize all of the closing costs, how much you’re being charged, and who is responsible for paying them. Some of the fees you might encounter are:

Property appraisal
Credit report
Lender’s inspection
Mortgage insurance application
Assumption
Mortgage broker fee
Tax-related service fee
Application
Commitment
Rate lock
Processing
Underwriting
Wire transfer
Abstract or title search
Title examination
Document preparation
Notary
Attorney
Title insurance
Recording
City/county tax stamps
Transfer tax
Survey
Pest inspection
Condominium application
Prepaids items such as interest, hazard insurance, property taxes, mortgage insurance and flood insurance

If you’ve never purchased a home before this list might scare you. Yes, there are a ton of fees that are involved with buying a home, and as you can see, a lot of opportunities for the bank to make money on your behalf. So, it’s when you get your good faith estimate that you need to scrutinize each quote to see what kind of a deal you’re really getting. Is that 0.25% lower loan such a good idea when it’s padded with excessive fees at closing that ultimately get rolled into the loan? That’s what you need to determine.

As an example, while we were looking over our loan offers last week I was simply shocked to see how different banks are when it comes to some of the fees. For instance, one lender only charged $12 for the credit check while another listed it at $60. One lender had a wire transfer fee of $20 while another had it listed at $125. And even the appraisal itself often came in more than $100 different between lenders. If some of these fees seem out of line, they may be negotiable so it doesn’t hurt to ask.

Finally, keep in mind that the good faith estimate is just that, an estimate. While it should be reasonably close to what you finally expect to pay, things can change.

An Informed Shopper Makes Better Decisions

I hope this has helped you understand some of what is involved with shopping for a mortgage. It can be a time-consuming and tedious process, but the more you know and the more prepared you are, the better off you’ll be. This is a major financial decision in your life so it pays to put in a little work to make sure you’re getting the best deal available to you. If you know what kind of loan you want, what terms to expect, and know how to spot the features of a low-cost loan you’ll be well on your way to finding the best mortgage.

Where to Go for Help With Getting Out of Debt – Credit Counseling and More

Jeremy — Mon, 18 May 2009 13:14:07 +0000

There is Help Available, but be Careful to Avoid Scams

Have you tried to get a handle on your debt yourself but still can’t seem to make any headway? First of all, it’s OK and there’s nothing to be ashamed about. If you find that you just can’t get back on track yourself, there are people out there who can help. At the same time, you must be careful when selecting your help because there are those who prey on people in debt and seeking help. Some programs may end up costing you a lot of money to simply do what you’ve already been doing, and others are downright scams targeted at taking advantage of you.

To help you understand what type of help is out there, we’re going to talk about the different assistance programs typically offered, what kind of services they provide, and what you can expect from them. There are four basic types of resources to help you get a handle on your debt:

1. Debt Settlement Companies

Debt settlement companies negotiate with lenders to accept only a portion of the amount owed and forgive the remaining debt. They often charge a considerable fee and claim to be able to obtain an immediate reduction in monthly payments. The reality of debt settlement is that the consumer is told to stop paying bills and make payments for a few months while they negotiate with the creditors. The debt settlement company then tries to negotiate a payoff amount with each creditor and uses the threat that you’re heading into bankruptcy as a negotiating tool. This often appears legitimate since you’ve been missing more payments, so it can help reach a settlement with the creditors for an amount much lower than what you owe. Then you use the money that you hopefully saved over the past few months to pay off the negotiated payoff amount.

For example, let’s say you owe $10,000. Instead of making your regular monthly payments on this debt, you stop and put that money aside and find you’re able to save up $2,500 over the course of four months. The debt settlement company charges you a $500 fee to negotiate this debt on your behalf and is able to get the creditors to agree to settling the debt for $2,500. That’s great, right? You were able to get out of paying most of your debt! Not so fast. Remember how you were told to stop making payments on the debt? Those negative marks usually aren’t going away and have now caused significant damage to your credit history and will be there for seven years. And the fact that you settled the debt doesn’t make it appear as if you paid off your debt. That alone will show up on your credit report as “settled” and is also a significant negative mark on your history that will be with you for years. Unless your credit score is already at rock bottom, you’re already months behind on your payments, and you’re staring bankruptcy in the face, this is usually not a good option.

2. Bankruptcy

That brings us to the next ugly alternative — bankruptcy. Under bankruptcy, all or a portion of your debt can be absolved by the courts. Bankruptcy is typically held as the last resort since a bankruptcy will stay on your credit history for ten years and make it quite difficult to obtain lending for a while. In addition, the legal fees associated with filing bankruptcy can be fairly steep. You’ll often hear stories about people who are too broke to even afford to file bankruptcy because the attorney fees alone can run into the thousands of dollars.

Things can get complicated depending on whether you have secured or unsecured debt, own property, have equity, and what type of investment accounts you have, and what chapter bankruptcy you file. The potential complications and legal issues surrounding bankruptcy go far beyond this article, so it’s certainly worth your while to consult legal assistance if you feel that bankruptcy is your only option.

3. Debt Consolidation

So, we’ve talked about two of the least attractive options, but now it’s time to focus on the two potentially better options. First, you may be considering debt consolidation. Here, you’re not negotiating out of any debts, settling for a smaller amount, or absolving yourself of any debts through legal proceedings. Instead, you’re simply consolidating all of your debts into one or two more manageable payments.

We’re not magically fixing any debt problems, but just making it easier to make payments and hopefully reduce the amount of interest paid. For example, if you have six outstanding credit cards with interest rates from 20-30%, consolidating these into a single loan or credit card that has a 12% interest rate can not only reduce the number of payments each month, but it could potentially save thousands in interest.

A few words of caution. Be careful when seeking out a debt consolidation company. Some will advertise debt consolidation only to pressure you into some sort of debt settlement program after meeting with you. Others will offer a consolidation loan that doesn’t have a very good interest rate and may be lined with fees that make it so you aren’t actually saving any money. And finally, the biggest problem when consolidating debt is that people don’t change their behaviors and end up right back where they started and in even more debt a few years later. Remember, debt consolidation doesn’t pay off your debt, it simply shuffles it around. If you consolidate your debt and now have all of this available credit on your credit cards, you have to make sure you don’t start using that credit or you’ll find that you’re going to be in even more trouble.

4. Credit Counseling Services

This brings us to credit counseling services. There are two different ways that a credit counseling service can help you if you are burdened with debt. First, a good credit counseling service works closely with you to help provide financial education and tools that can help you get your finances under control. They may work with you to create a budget and assist in helping with the emotional baggage that comes with excess debt.

The second method of assistance is through a debt management program, or DMP. Through a DMP, the credit counseling organization works with you and with your lenders to find a way to manage the debt and pay it off. Unlike a typical debt settlement, a DMP will usually focus on working with the creditors to reduce interest rates, waive late fees, and establish a more affordable monthly payment before trying to negotiate the amount of the debt entirely. Because of this, being on a DMP generally won’t hurt your credit score. Even so, there may be a note on your credit history indicating that you used a DMP to assist in paying off the debt, and future lenders could use this to decide whether or not to extend credit to you. At any rate, this is still better than having months of late payments and a debt being shown as settled on your credit history.

The problem is that not all credit counseling services are created equal. First, there are two primary types: for-profit and non-profit debt counseling services. For-profit services are almost always a bad idea, and in some states for-profit credit counseling companies are illegal. So, your first step should be to determine whether or not you’re looking into a non-profit agency or not. Unfortunately, just finding a non-profit counseling agency is not enough. Every organization is different and there will be different fees and services associated with each. In some cases you may be able to have the fees waived, but you certainly want to make sure you understand what you’re getting for your money if it does cost anything. Be wary of any company that promises a lot but charges a high monthly fee.

More about Debt Management Plans

As I mentioned above, many credit counseling services will offer a debt management plan (DMP) to help you in getting out of debt. One thing you need to understand is that these plans aren’t typically like debt settlement companies and won’t cancel out existing debt, nor is it a consolidation loan. It’s actually a plan put together that helps the creditors get their money while allowing you to make payments on time.You’ll also want to note that most DMPs will only address unsecured credit, so if your primary concern is a home or auto loan, there won’t be much a credit counselor can do other than help you budget those payments.

With a DMP your credit counselor will work directly with each of your lenders to see if they accept a DMP and if they can work with you to make sure that you stay current on your payments and possibly even reduce the interest rate. In some cases a credit card company will temporarily reduce the interest rate while on a DMP. I’ve seen people get their rates reduced all the way down to about 6% in the past.

The other benefit of a DMP is that it can often simplify your monthly payments. Most credit counseling services will take over sending monthly payments to each individual lender so you’re left with only making one single payment to the credit counseling agency. They usually schedule these for monthly or bi-weekly through automatic debit with your bank account so it can ensure you don’t miss a payment. As you probably know, it’s a lot easier to make and keep track of one or two fixed payments a month rather than a bunch.

A Few Final Thoughts

As you can see, there are options out there to help you manage your debt problems if you find you can’t handle it yourself. Aside from bankruptcy, you can accomplish most of the tasks that these services provide on your own for little or no extra cost. Understandably, not everyone has the time or resources available to follow through with their plans and this is when seeking assistance from a third-party can be beneficial.

While you explore your options, be sure to look at all the alternatives and make sure you’re dealing with a reputable company. There are people out there who realize the amount of stress someone with debt problems is under and they will sometimes try to take advantage of this situation. If anyone is promising seemingly incredible results, know that there is no magic bullet for getting out of debt. Each avenue has its own pros and cons, and some may have a lingering impact on your credit history that will be with you for years, so don’t take the decision lightly.