Manage Your Credit & Identity

When should you use a credit card?

When should you use a credit card? I get asked this all time. There is no simple answer for everyone. Only you know what kind of spender you are.

Here are some general guidelines:

You can charge anything within your monthly budget if you pay your credit card bill in full each and every month.

However, you should think twice before using your card if you are paying down your debt and are currently incurring interest on your credit card bill.

Some people feel that you should never use a credit card. I disagree. Credit cards can actually help you maintain a good credit rating if you stay within your means. And, some credit cards offer benefits like consumer protection. These benefits should come with the card at no cost, or minimal cost, to you. Here are some examples:

American Express offers travel insurance at a minimal cost when you charge an airline ticket.
Some credit cards offer purchase protection on lost or broken merchandise.
Some credit cards offer an extended on purchases.
Some offer insurance coverage on rental cars.

Know all the perks that come with your credit card, that can help you decide whether to make a purchase on credit. If you’re not sure what benefits your card offers, call them for details.

My gift to you for the year 2012

You’ve heard me say how important it is that you check your credit report. You’ve also heard me say that you can check your credit report for free – 3 times per year. That’s because each of the three major credit reporting agencies must give you access to their version of your report.

But, how many of you remember to order your credit report even once, let alone 3 times?

I promise to help you remember. As my blog subscriber, you will receive three reminders this year: one in January, one in May and one in September. Each reminder will tell you exactly how to order your report and which agency to choose. Easy!

Do you want to share this gift with your friends? Simply share this post and allow them to sign up for free credit report reminders, too! There are many ways to subscribe:

Debit or credit?

Which should you use: a debit card or a credit card? You all know the difference between the two – a debit card uses your own money and a credit card means borrowing with interest.

Here is what I recommend:

Use a debit card when…

You make everyday purchases in person. These are items that are part of daily living: groceries, doctor co-pays, restaurant meals, etc.

Use a credit card when…

You are purchasing big ticket items, anything with a warranty, travel reservations, online purchases, etc. Using a credit card will (usually) give you extra consumer protection for little or no additional cost.

More about that added layer of protection:

When you travel, certain credit cards give trip insurance for items such as lost luggage protection. If you are purchasing electronics, some credit cards extend the warranty period. If you purchase something online and it never arrives (or arrives broken), you can dispute the charge with your credit card company after you have attempted to resolve this with the merchant. You should check with your credit card issuer to see what benefits you have with your credit card. Then make your purchases where you will get the most benefits.

Should you pay off your credit card debt with a mortgage refinance?

In our last Quick Tips, we talked about refinancing your mortgage. I hope you did your homework. If you decided that refinancing is right for you, you may be tempted to pay off your other debts by financing them into your mortgage.

Should you do it? Follow these steps to find out.

List all your debts

If debt is a problem for you, take a closer look. Make 5 columns:

Column 1: Write down the name of each creditor (credit card companies, auto dealership, bank, hospital, etc.)

Column 2: Write down why you took a loan or used a credit card. This will help you see how you came to be in debt. Were these essential expenses like a car or a hospital emergency? Or, were these items you could have saved for, like a vacation, clothes, or furniture.

Column 3. Write down the interest rate.

Column 4. Write down the current payment amount.

Column 5. Write down when it will be paid off at the current payment rate.

I know that this can be scary, but you need to know. Congratulate yourself for doing this. This is a huge step forward.

Why is it important to really look at your debt? If your debts just disappear into your mortgage, you could forget where they came from. Most people who consolidate their debt this way have credit card debt again in just a few years. My assistant told me that it happened to her, and she regrets it. Not only was her mortgage increased, but it delayed the real cure: fixing the leaks in her budget.

Refinancing may not be the answer, but knowing how and why you spend will help you stay out of debt in the long run.

Consider the downside of consolidating credit card debt into your mortgage

Credit card debt is unsecured, so you would be taking unsecured debt and betting your house on it (securitizing it).

When you have credit card debt and can’t make payments, that’s a problem – but, your creditors cannot take your home. On the other hand, if you can’t make your mortgage payments, then you could lose your home in foreclosure. If you increased your mortgage loan in order to cover credit card debt, you could end up with a larger house payment – one that you can’t afford! That’s why I don’t recommend refinancing your unsecured debt into a mortgage.

Consider the long term outcome when refinancing secured debts into your mortgage

Secured debt has a physical object that can be repossessed if you don’t pay: it could be a car, or even a home equity loan or line of credit. Here are three questions you should ask before making your decision:

1. If you combine your mortgage with your home equity will this mean you need to pay mortgage insurance? Mortgage insurance is added when the total amount of your mortgage is equal to, or over, 80% of your home’s appraised value. That will increase your monthly mortgage payment.

2. Will you need the home equity line in the future? It will be difficult to get a new line in these economic times.

3. Is it better to pay off your debts yourself, and have a tight budget for the short term? Or combine them with your refinance and have a bigger mortgage in the long term?

Think long and hard about what you put into your new mortgage. Consult with your tax preparer for an objective opinion.

Protecting your child’s credit

If you have been a reader of this column, you know how important it to maintain good credit. Unfortunately, it is not enough to monitor your own credit, you must protect your child’s credit as well.

Good credit is as important to your child’s financial future as GPA and SAT numbers are to career goals. Recently, I was asked by the parents of a newborn what they could do to keep their child’s credit /identity safe.

Unfortunately, the answer is not a thing. You probably don’t like that answer. But it does make sense – let me explain.

To protect your personal credit / identity, I recommend that you place a credit freeze on your credit report so that no one (not even people you authorize) can view your credit without you unfreezing your credit. You have to pay for the service, so you should only do it when you don’t think you will have a need to finance something in the immediate future. Freezing and unfreezing can be costly to your wallet.

Well, you can’t freeze a newborn’s credit, or for that matter, a child’s credit. If you think about it, your child has a social security number shortly after birth, but they do not have credit yet. You cannot freeze credit if there is no credit to freeze.

To protect your child’s credit / identity, you will have to order their credit report at www.AnnualCreditReport.com periodically to make sure that no one has requested credit under your child name and social security number. Don’t wait until they are ready for their first loan or you may find out someone stole their identity years ago.

Is Refinancing Right for You?

“Refinance, refinance, refinance!” That’s what everyone is saying. Yes, rates are low – maybe the lowest they’ll be. You can never tell… until they go up and you’ve missed your chance.

How can you know if refinancing is right for you? You need to ask yourself these questions before deciding:

Question 1. How long do you plan on living in your current home? If the answer is “not long” then it’s probably not worth the cost of refinancing. Do the numbers test below.

Question 2. Are you refinancing to pay off your mortgage faster or to lower your monthly payment? You really should know the answer to this question before you refinance your home. Lower monthly payments are going to look awfully tempting if you’ve got a big wish list or a tight budget. Let’s look at your options.

Let’s say you have a 30 year mortgage, but you’ve been paying on it for 10 years. That means you have 20 years left. You could refinance into a 20 year mortgage to keep the terms the same. Obviously a new 30 year mortgage would have much lower payments, but at what cost? No one wants to be paying a mortgage after retirement

Most people have heard of 15 and 30 year mortgages, but you can actually refinance mortgages in 30, 25, 20, 15 and 10 year terms. Do what’s right for your budget.

Refinancing is a long-term numbers game. Many people think that a low mortgage payment means money saved. That’s not necessarily true – it may simply mean you have more spending money this month, but you will have much less money for yourself over the next 20-30 years.

How can you tell? To find out, let’s do some math! Get out your pencil and get ready to write down some numbers.

Step 1. Take the estimated refinance principle and interest payment and subtract it from your current principle and interest payment. This will be your savings per month.

Step 2. Assume that the closing costs of the refinance will be about 4% to 6% of the mortgage amount. Example: Closing costs would be $10,000 on a $250,000 house if they charge 4%. Figure out your closing costs and write that down.

Step 3. Take the number from step 1 (your monthly savings) and divide that into step 2 (your closing costs). This is the number of months it will take you to recoup your closing costs. Example: If your refinanced payments will be $200 less your current payment, and your refinance closing cost will be $10,000, it would take you 50 months (over 4 years) to make up the difference.

Now that you know how long it will take you to recoup your costs, you should decide whether you’re going live in the house that long. If you plan to move before you can make up the difference, don’t refinance.

A New Sheriff’s in Town – the Consumer Financial Protection Bureau

If you haven’t heard, we now have a Consumer Financial Protection Bureau.

You may wonder why? What does it do? How can you use it? Good questions!

Why?

This has been needed for a long time. The CFPB describes itself as a neighborhood cop on the beat, supervising banks, credit unions, and other financial companies. Although we have consumer protection laws in place, there was no central policing agency for consumers to turn to when they faced unfair practices, or even illegal actions, from lenders.

There are many David and Goliath stories out there. Too often, when you have a financial problem, you’re the little guy against a big immovable corporation. You may have seen the news story about the foreclosure on a house with no mortgage. How can a bank seize your house if you don’t owe any money on it? A good question. This man literally had no one on his side until he turned to a local news station.

Hopefully, the days of fighting unwinnable battles are over. Thanks to the Dodd-Frank Wall Street Reform and the Consumer Protection Act of 2010, the CFPB is here to help. Hurray!

What does it do?

Its mission is to educate consumers (you), enforce the current Federal consumer financial laws, and study the actions of consumers, financial service providers, and the markets.

Education. If you know what you’re getting, you’ll make better choices. The CFPB believes “An informed consumer is the first line of defense against abusive practices.” You may say, “I don’t want an education, I just want the terms of my loan to be easy to understand.” They’re working on that, too. Most of us didn’t major in finance and we shouldn’t need a financial degree to understand the terms of our mortgage.

Enforce current laws. As mentioned above, we need a powerful advocate on our side. Unfortunately, it’s not enough that the laws are in place. We need someone to enforce them because the banks and credit card companies haven’t been willing to follow rules meant to protect their customers.

Study. The CFPB will study consumers, banks and the markets, so they can learn what the current problems are, how best to address them, and keep us informed on new risks.

How can you use it?

The CFPB actually wants you to use it, and they’ve made it easy with their interactive website. You can voice your opinions, submit complaints and learn more about finances.

Tell your story. They want your stories, good or bad, whether you’re an employee or a consumer. They want to know what people are up against. They want to know what doesn’t work and what does.

Vote on new practices. Right now they are looking for consumer opinions about simplifying mortgage paperwork. This is so needed. Having been in the mortgage field for many years, and having dealt with the numerous disclosures, I know how confusing it can be. The website is asking you to cast your vote for a disclosure with all the costs listed. Take a look and vote.

There is also a section for you to submit a complaint on a problem you have with your credit card company. They will forward your issue, give you confirmation, and keep you updated. So the next time you feel you are not getting your issue resolved, you might want to have the Consumer Financial Protection Bureau assist you.

They’re still a new agency, so we won’t expect miracles anytime soon. The best way to protect yourself is to do your research ahead of time so you can make informed choices. You can do that by following Quick Tips and passing it on to your friends. And don’t forget to bookmark www.consumerfinance.gov, the CFPB website.

Pay More than the Minimum

You know that little box on your credit card bill that tells you how long it will take to pay off the balance if you only pay the minimum due? Does it scare you? It should. You may be tired of hearing it, but I can’t tell you this enough. Pay more than the minimum.

Here are a few things you should know:

Let’s say you have a $10,000 balance at 12% interest and the minimum payment is $200 per month. You should know that if you stop using this credit card, and that means no more charging on this account, it will take you 70 months – almost 6 years – to pay off the balance and will cost you over $9,000 in interest.

Now think about this: Was whatever you purchased worth that additional cost?

Enough about that. You have debt. What are your options?

You could pay it off with your savings (I am not talking about retirement savings). But, chances are if you had the money in savings, you wouldn’t have made the charges.
You could figure out a way to get more income. Get a part-time job, turn a hobby into some extra cash, or sell items that you don’t need.
You could reduce your expenses. Mow your own lawn, cancel cable TV, stop eating out, etc. (Read my upcoming Quick Tips article on July 22nd for more information.)

Paying the balance off as quickly as possible is in your best interest. Let’s use my example above:

If you could increase your payments by $50, you would save 18 months of payments.
Increase it even more to $100 extra per month and you would cut the time to 41 months.
Pay $200 each month (that’s double the minimum) and you could have the balance paid in 29 months and only pay about $1,600 in interest versus the original $9,000.

Paying your credit card balances off as quickly as possible is a great thing. Make your new budget plan and get started.

What is the difference between a secured credit card and a pre-paid credit card?

Secured versus pre-paid credit – do you know what you’re getting? When I am giving a talk, I can see that many people don’t know the difference between them. Let me tell you the facts:

Secured Credit

With Secured Credit, the bank has placed a set amount of your own money in a special savings account that it controls. If you default on your debt, the bank can use the savings account to recover its losses. Your credit limit is always equal to the amount in the special savings account. Just like a traditional credit card, you will pay interest and receive a monthly bill.

A secured credit card is for someone who can’t get a traditional credit card. If you have bad credit or no credit at all, secured cards are a great way to establish your history. If you still don’t understand what a secured card is, think of it as a security deposit on a rental. The landlord holds that deposit and can keep it if you don’t pay.

As with any financial transaction, read the fine print before moving forward and make sure that the lender reports your information to the credit reporting agencies. Watch out for fees and make sure you understand them fully.

Pre-Paid Cards

With pre-paid credit cards, you simply load the card with money and use the card to make purchases. There are no bills or interest rates on purchases. The spending limit is always the current deposit balance on the card. In that sense, it works like a debit card, yet it has all the consumer protections of a credit card.

Pre-paid cards are often used as gifts and by people who want to avoid spending beyond their budget. You might use one on your next vacation or as a gift for your favorite college student. The consumer protections and the built-in spending limit make this card ideal for those two scenarios.

The fees can be expensive! Credit card companies make their money with the fees – activation fees, monthly fees, reload fees, etc. You might want to consider other alternatives for every day use.

Now you know the difference between them. Make sure you understand them and pick the right choice for you.

Put Your Identity on Ice with a Credit Freeze

I am diligent about protecting my identity. I monitor my accounts, pay bills from my account online, shred paperwork, opt-out of mailings, and so much more. But even that may not be enough.

As a customer, I have been receiving notices that my personal information may have been compromised. I thought my identity was safe because I mostly purchase from, and use, well-known companies. But, they have not protected the databases they use to store everything they know about me. You know the companies I am talking about – Epsilon and Sony to name a few. You’ve probably been getting these warning notices yourself via email and postal mail, and you’ve probably heard more than enough from the media.

What can you do to protect yourself? You can follow my list of things to do to protect you from identity theft. If you need a refresher, visit www.jillrussofoster.com and look at past newsletter articles.

Put Your ID on Ice

If you are not planning on applying for new credit anytime soon, then the best advice is to put a credit freeze on each of your three credit reports. This will stop everyone (including you) from accessing your credit report for the purpose of obtaining new credit. Yes, there is a fee for this service, but it can be well worth it.

What if you need to apply for a loan or a new credit card within the next month? I assume you have a specific need, like a new car, home, or school loans. In that case, you should not use a credit freeze until your loan is complete. When you apply for credit, the creditor should be able to access your credit without you unfreezing your credit because you will have to pay a fee for that. However, do use a credit freeze if you’re just planning on shopping early summer sales. The freeze will not only protect your identity, it will prevent you from opening unnecessary store credit accounts at the mall.

Credit freezes are great and can prevent identity theft. They can prevent identity theft even if someone steals your wallet right out of your hands. But think before you leap, freezing and unfreezing your credit can be costly.