Credit scoring has become big business. There are a number of scoring algorithms that can impact the way financial service providers see you. Your credit score influences decisions about whether or not you should get a loan, as well as whether or not you should have favorable terms when you are approved for a loan.
Not only that, but there are instances when your credit score can impact your insurance premiums and other aspects of your financial life. As a result, it’s important for you to do what you can to keep your score in good shape. Unfortunately, we’re all prone to blunder. Here are some of the mistakes that can drag down your credit score:
1. Missing Non-Credit Bill Payments
Most of us know that missing credit payments, like those for credit cards and mortgages, will result in lower credit scores. However, some consumers don’t realize that even their non-credit accounts can have an impact. If you miss utility payments, or you don’t pay your medical bills, those accounts can be turned over to collections and reported to credit bureaus.
2. Maxing Out Your Credit Cards
It seems as though it wouldn’t matter how much you have on your credit cards, as long as you pay at least the minimum on time, and you don’t go over your credit limit. However, this isn’t the case.
When you carry high balances, you are causing severe damage to your credit score. Many credit scoring models use your credit utilization – the percentage of available credit you are using – as one of the top three factors that influence your score.
You’re better off keeping your credit card balances to below 50 percent of your available credit, and it’s even better if you can keep it to under 30 percent of your available credit. Best of all, though, is if you pay off your card each month to avoid falling into the debt trap.
3. Canceling Credit Cards
Some consumers get excited about canceling credit cards, especially as they pay down debt. Unfortunately, this can affect your credit score in a couple of ways.
First, you are reducing your available credit. If you still have balances on other credit cards, your total credit utilization has just been impacted.
Second, you are reducing the length of your credit history. Many credit scoring models look at how old your accounts are. Canceling an account, especially one you’ve had for awhile, can lower your credit score.
4. Assuming All Loans are Created Equal
A credit card is a credit card, right? Not exactly.
Most credit scoring models take into account the type of credit account you have. A credit card issued by a retailer, and not usable outside that retailer, is considered less positive than a credit card issued by a major bank. Likewise, a payday loan can actually negatively impact your score in some cases, while a car loan (if you make all your payments on time and in full) can be good for your credit score.
Pay attention to the type of account you are getting, and where the debt comes from. You’ll be able to better protect your credit score.
What are some other mistakes that can drag down your credit score? Leave a comment!
One of the most difficult situations to overcome is bankruptcy. When you declare bankruptcy, it can be difficult to recover – and to convince creditors to lend to you again.
While it might be difficult to find lenders after you file for bankruptcy, it is possible to borrow money even in this dire situation. Getting to that point might require some hard work on your part, though.
You Can Borrow as Long as Someone is Willing to Lend
Understand that anyone can borrow any amount, as long as a lender is willing to take a chance. Even if you are bankrupt, you might be able to find lenders willing to work with you. Realize, though, that if you are in an open Chapter 13 bankruptcy, you will need to get permission from the bankruptcy court to borrow.
Consider looking for lenders that specialize in poor credit loans and after-bankruptcy loans. Understand that you will likely have to accept the following conditions if you borrow money following a bankruptcy filing:
- Much higher interest rate
- Willingness to secure the loan with some sort of asset
- Smaller loan amount
Because you have shown yourself a credit risk, lenders want to protect themselves, and this means that you will pay a higher price in order to borrow money. As you make your payments on time and in full, though, your credit should improve, and you will have access to better terms.
Improve Your Credit First
In many cases, it makes sense to improve your credit before you try to borrow after a bankruptcy. The first step is to make all of your payments – from utilities to insurance premiums to credit cards – on time. One tactic many use following bankruptcy is to apply for a secured credit card to help rebuild credit by showing responsible habits. You can use alternative credit scoring, like that offered by eCredable and PRBC to establish a positive payment record with non-credit accounts.
Overcoming a bankruptcy is not something that can be done overnight. You will have to show responsible behaviors for 12 to 24 months if you want to be considered by many more traditional lenders, especially if you want to try to qualify for a mortgage. Work to boost your credit score, and you’ll be more likely to be seen as an acceptable risk moving forward.
Add a Statement to Your Credit Report
It’s also possible for you to add a statement to your credit report. If your bankruptcy was the result of circumstances beyond your control, such as a major medical catastrophe, a messy divorce, or a job loss followed by a long period of unemployment, you can add a statement to your credit report. This statement tells your side of the story, and might help some lenders decide to take a chance on you after all.
In some cases, a lender might require you to create a statement for submission with your loan application. Your statement should concisely describe the conditions that led to your bankruptcy, as well as outline what you have done to improve your situation, and your plans for improving your financial management in the future. There are lenders that understand extenuating circumstances, and a well-written statement can go a long way toward helping you qualify for a loan.
You can borrow money if you are bankrupt. However, you need to be willing to pay a higher price, and take extra steps to show that you are capable of meeting your obligations this time around.
Have you gone through bankruptcy? Tell us your story and if you can still borrow money. Leave a comment!
This article was originally published January 23, 2013.
When you are trying to do something big and life-changing, you often need support. It’s difficult to make the big changes in your life if you feel that you are on your own. One of the biggest changes you are likely to make is the decision to get out of debt. Without support, though, you can quickly fail in your efforts.
Creating a ‘get out of debt’ support group can really help you improve your financial situation and keep you on track with your goals. As you put together your plan for getting out of debt, don’t forget about your debt support group.
Family and Friends
The first people you should turn to are your family and friends. Your immediate family is especially important.
If you are trying to get out of debt, you need the help of your life partner as well as your children. If you have a life partner, your first task is make sure that you are on the same page. You both need to be on board with getting out of debt if you want to live a debt-free life. Once your immediate family is on board, you can let your parents, siblings, and other family members know about your debt reduction efforts.
You should also let your friends know what you are doing, and what you are trying to accomplish.
True friends will want to help and encourage you. When you let your friends know that you are trying to get out of debt, they will understand if you want to enjoy frugal alternatives, like having a game night at someone’s home, rather than going out and spending a lot of money. They will also understand if you are not interested in big gift exchanges and other expensive activities.
Online Support Groups
If you are having trouble finding support from those that are closest to you, it can make sense to look for support groups online. There are a number of websites with forums designed to help you get out of debt. ReadyForZero and CareOne are communities that can help you find like-minded people who can give you the encouragement you need to stay on the right track.
Finding those who understand your efforts and interests can be integral to your success in getting out of debt.
Accountability and Encouragement
One of the reasons that it’s important to have a get out of debt support group is that it provides you with accountability. When you tell others about your plans, you are putting yourself out there – asking others to help keep you accountable for your actions. When you know that you will have to face your family, friends, and online support group, you are more likely to stick with your plan and try to make it work. You will work harder to succeed when you know that you will have to face those you respect and love.
Your get out of debt support group can also help you find encouragement. They can provide you with helpful tips and hints, as well as encourage you to keep with your efforts. When you are discouraged, and thinking of giving up, a kind and helpful word from someone in your support group can renew your resolve. Additionally, your support group gives you people who can work with you. If you are all doing something together, and working toward the same goal, you feel less alone, and you know that you have help when you need it.
Few of us can succeed at something as big as paying down debt on our own. Finding a support group can keep you focused. They’ll help encourage you to build the characteristics you need to get out of debt.
Do you have a get out of debt support group? How have they helped you? Leave a comment and tell us where you’re at in your debt reduction plan!
This article was originally published January 7, 2013.
At times, it’s all too easy let financial matters slip through the cracks. However, you need to make sure that you are on top of your finances in order to make the most of your money – you know that!
Here are some of the problems that you can encounter if you don’t take the time to address your finances:
Overdrawing Your Account
This is a problem that comes if you don’t track your spending. Humans are bad at estimating how much they have spent, and how much they have left in their accounts. This is especially true if you use a plastic card (debit or credit) to pay.
If you want to stay on top of your finances, you need to know where your money is going. Make a plan for your spending, and then track where the money goes.
You don’t have to make a draconian spending plan where you plan out where every penny goes, but you should keep track of your spending, and know where you stand in terms of your account. That way, you are less likely to overdraw your account and end up paying hefty fees.
Wrong Asset Allocation
One of the most important things you can do for your investing portfolio is to make sure that you have the right asset allocation. Over time, many portfolios tend to experience drift.
If you are invested in funds, sometimes the natural turnover in the funds means that the asset allocation changes a little bit. If you have your portfolio funded by automatic investments, it’s possible that sometimes you might end up with more of one type of investment.
Whatever the reason, it’s a good idea to check your portfolio once to three times a year to make sure that your asset allocation is what it should be. If your asset allocation has drifted, you can rebalance your portfolio. Don’t ignore your portfolio and end up with an unsuitable asset allocation.
Over time, it’s easy to let something slide, and to end up with money leaks. You might have a subscription to a magazine that you never read, or you might be paying a higher price for certain services. Perhaps you aren’t shopping around. These money leaks can add up over time. Every few months, really look at your expenditures and identify money leaks to plug.
This step includes shopping around for better prices on existing services. Double-check your insurance rates. Many people don’t realize that a little shopping around could save them between $20 and $100 a month on insurance.
Additionally, it doesn’t hurt to shop around for a better-priced cable package (or cut the cable and switch to Hulu and/or Netflix). Take a look at where your money is being wasted and plug those leaks.
Pay Attention to Your Finances
While you don’t need to obsess over every single dollar, you should pay attention to your finances.
Look for inefficiencies in your personal economy, and then find ways optimize them. Know where your money is coming from, and where it is going. Over time, many of us start to become a little bit lax with our finances. Set aside a specific time every quarter to review your finances and make sure that you are getting the best possible results for your situation.
So, are you paying enough attention to your finances? What are some other reasons you might want to? Leave a comment!
This article was originally published January 14, 2013.
When it comes to investing, it’s too easy to just sort of decide on an asset allocation and then stick with it for the next 30 years. While asset allocation is an important part of investing, it’s also important not to take the lazy approach to investing in your future. One way you can change the way you think about investing is to divide your investments into “buckets.”
The idea behind the bucket approach is to recognize that you have different goals for your money. When you need the money, and what you use it for, depends on a couple of factors:
- Risk tolerance: How much can you afford to lose? What do you stand to gain? How much money goes into each investment bucket depends on your risk tolerance, financially and emotionally.
- Timeframe: Another issue is when you want something to happen. The investment bucket that your money goes into depends on when you plan to retire, or whether you want to use investing as a way to reach a short-term goal.
As you build your investment strategy, consider using a bucket list approach, and divide up your money based on what you can afford to lose, and when you are going to need to use the money. Here are some investment options to consider as you create your strategy:
1. Cash Bucket
Into this bucket goes the portion of your portfolio that you want kept as secure as possible. These are FDIC-insured products, like high-yield savings accounts and CDs. You won’t earn a great deal of interest on cash, but it will be safe, and fairly liquid (make sure that you have some of your cash bucket in savings accounts, since the CDs aren’t as liquid without penalties).
Use your cash bucket for things like your emergency fund, or for money that you know you are going to need at a specific time. You can use a CD ladder approach if you want to know that money will be available at regular intervals, but still want to try to maximize returns.
2. Income Bucket
Are you looking to produce regular income? If you want your investments to contribute to your cash flow, the income bucket is the way to go. It takes time to build up a good revenue stream from income investments, so be prepared to take between 10 and 20 years to fill this bucket.
You can use bonds and dividend stocks, as well as P2P loans (if you have the risk tolerance), to put together an income portfolio that makes sense for you.
3. Growth Bucket
This is about building your nest egg. It’s about portfolio growth, often for the really long haul. This is the money that you invest in retirement accounts, and that you don’t plan to touch for 20 to 40 years. This is a bucket where the asset allocation is likely to change as you get older and closer to retirement, and shift from the accumulation stage to the shoring up stage.
4. Medium-Term Bucket
If you are planning a medium-term goal, such as sending your child to college, or saving up to buy a house (goals that take between three and 10 years), you can create a bucket for that. Carefully consider how to balance reasonable growth with some level of security for your money. Using an online discount brokerage can be a good way to build up for your medium-term goals.
5. Short-Term Bucket
Do you have short-term goals you want to reach? Dreams that you want to see become reality in the next one to two years? This is the bucket for you.
You can use an online discount brokerage, or even use tools like the Betterment gift registry to reach your goals. Putting a certain amount toward your short-term goals can help you reach them faster, and you can even use social strategies to get help from your friends and family.
How are you planning to invest your money? Leave a comment!
This article was originally published December 21, 2012.
An important aspect of having well-rounded finances is charity. Giving is generally accepted by many personal finance experts as an essential part of good money management.
Your giving, however, should be like other aspects of your financial management – an effort should be made to ensure that you are getting the best value for your dollar. Maximizing your charity donations can mean more people helped by a cause that you care about. Here are some ways to maximize your charity donations:
1. Research before you give.
In some cases, only 30 or 40 cents of every dollar given to a charity actually goes toward the people it’s supposed to help. Administrative costs, and other costs sometimes eat up the donations. Inefficient charities tend to enrich a few executives at the top without doing a lot of good overall.
Before you give, research the charities you are considering. Websites like Charity Navigator show you how much of your donation actually goes toward the cause (aim for an organization where at least 70% of the money goes to help others). Choose one to three charities that you really agree with and that are well-run, and more of your money will help more people.
2. Set up regular contributions.
Rather than giving unpredictably, you can set up regular contributions. Some charities prefer smaller, but regular, donations to erratic larger donations. You can commit to monthly donations, or even set up a charitable trust to operate in a way that provides regular income for the charity. These regular contributions can give the charity something it can rely on – and take some of the pressure off in other areas. This allows the charity to better serve those populations that need the help.
3. Go local.
One of the things that I particularly enjoy is going local with my charitable donations. You can really see the effect your donation has in your own community when you give locally. Look for local charities that make a difference right where you live. Smaller, community-based organizations often (but not always) use their resources effectively, and they can have a tremendous impact on the local population.
4. Get personally involved.
If you really want to make sure that your charity donations are doing the most good for the dollar, you can become personally involved. Donate your time as well as your money. You can help by volunteering at charitable events, and performing a number of other tasks. Another possibility is that you could be named to a charity’s board, and help make the decisions.
Becoming personally involved is a great way to maximize your charity donations and improve others’ lives. With a little research, as well as the determination to focus some of your resources on making a better world, it’s possible for you to contribute to a large amount of good in the world.
Try to make savvy decisions about your charitable donations. Look for charities that will use a bulk of your gift to help those who need it, and even take a step further and become involved in the actual workings of the charity.
Do you donate to a charity? Leave a comment and let us know your favorite!
This article was originally published December 18, 2012.
So many contingencies can be addressed with solid financial planning – having an emergency fund, creating a college fund to put children through school while minimizing student loan debt, building a retirement plan, and even having life insurance to care for your loved ones upon your death.
But sometimes things happen that come from outside the realm of finance. We can think of them as life events, and they can be game changers.
Often we deal with these events by going deeper into debt, especially if the event is long-term in nature. That compounds the problem because we can end up paying for that reliance on credit for many years after the fact.
What kind of events can take place and how can we avoid the debt they often bring?
A Lengthy Period of Unemployment
A job loss can turn into a life event when you’re unable to find a suitable replacement job within a reasonable period of time. The longer it lasts, the more likely you’ll turn to debt in order to maintain your lifestyle.
Here is how to avoid unemployment-related debt:
- Make a lifetime habit of keeping your most basic living expenses – housing, cars and debt – as low as possible. Cutting variable expenses like groceries and entertainment can be done in a pinch, but big picture expenses aren’t easily reduced.
- Keep a fat emergency fund – three to six months of living expenses is good, but these days a full year’s worth is much better protection.
- Assume your unemployment will be long-term and begin reducing your living standard immediately.
- Find ways to make money immediately, that way you’ll be in circulation and making contacts and have an income source in place when your unemployment benefits run out.
- Most job losses are preceded by smoke signals – don’t ignore them. That’s your cue to update your resume, renew your network contacts and put out some feelers before anything actually happens.
- Be realistic about employment prospects in your field. If the job market is tightening, develop new skills that will keep you ahead of the pack, or start making preparations for a career change if a new job in your current field looks unlikely.
Major Medical Events
Though we hope they won’t ever happen to us, the possibility is real that at some point you may be hit by a medical event that’s more than just a bump in the road. Heart troubles or a bout with cancer can last for many months. One of the problems of avoiding debt during such an event is that there are so many variables relating to the severity, length of time and ability to earn an income while you’re going through it.
Complete avoidance of debt during a major medical event may not be possible, but you can minimize it.
- Have the first two bullet-point recommendations in place at all times – they’re virtually universal in dealing with any life event.
- See if you can create a limited work-from-home arrangement with your employer, even if it requires reduced responsibility. That will give you some sort of income, which will be critical if you don’t have (or don’t qualify for) disability coverage.
- It could help to have some type of work-at-home side business in place, in the event that you can’t effectively work outside your home.
- If you’re falling behind on medical bills early in the process, try to get outside help early. Get help from family, friends and charities for expenses not covered by insurance.
- Negotiate lower fees from healthcare providers wherever you can. Many will work with you.
Legal issues can take so many different forms that it’s impossible to generalize. It could be a civil suit that seeks to seize your assets, a regulatory challenge to your business or a criminal charge. When they hit, you may be tempted to tap your credit lines early in an attempt to defend yourself, but that will only compound your troubles.
Ways to avoid the worst and stay out of debt:
- Keeping expenses low and having a huge emergency fund help here too. Think of it as preparing for the worst.
- Keep prepaid legal services in force, even when it seems as if you’ll never need them. This will keep your own legal counsel from draining you during the fight.
- The saying, ‘an ounce of prevention is worth a pound of cure,’ applies here. In all areas of your life, do your best to be a good citizen and to comply with applicable laws. In addition to minimizing your exposure to trouble, a clean track record can be your best defense before a judge. This is especially true if you face criminal charges.
- Negotiate and settle where you can. Some issues are misunderstandings that can be cured by some heartfelt face-to-face discussions. Swallow your pride and do what you can to minimize the damage.
- Keep insurance in place to cover any identifiable legal exposure.
What goes up, must come down, and that can apply to businesses too. One of the biggest problems with a business failure is that you’ll probably have poured all of your time, resources, and emotions into your business, making it very difficult to walk away. You might do anything to save it, and that includes borrowing money.
Here are some ways to avoid that fate:
- Once again, refer to and implement the first two bullet points.
- Do your best to separate your business from your personal assets using a legal perspective.
- Don’t risk or pledge personal assets for your business. If your business fails you’ll need your home and your retirement plan more than ever.
- Keep or develop some employment skills so that you’ll be able to grab a temporary job, either to carry you through a rough spot in your business or to help with the transition to a new one.
- Know when it’s time to fold up the tent. If the business is in its terminal phase any money you put into it to save it will be a matter of throwing good money after bad. You’ll need all the resources you can muster for your next venture.
It may not be possible to completely avoid going into debt as a result of a major life event. But there are ways to keep it to a minimum and that will give you a better chance at rebuilding your life once the event passes.
Have you been through a life-changing event that impacted your finances? Tell us about it in the comments!
This article was originally published October 23, 2012.
If you’ve been wanting to start earning extra money with some of your unique skills then Kimberly Palmer’s new book “The Economy of You” is a good read. One of the things I like about Kim’s work is that she didn’t write it as an observer, she actually went through the process of starting her own side gig and she shares her personal experiences.
I talked to Kim last week after going through “The Economy of You” and asked her a few questions about her business, Palmer’s Planners, and her book.
1) When I asked Kim why she hadn’t started Palmer’s Planners sooner, she had an interesting two-part answer.
The first part of the answer was that she had never thought of herself as an entrepreneur. She had always thought of herself as a journalist. She had interviewed lots of entrepreneurs and written about business and finance but always from the perspective of someone reporting on the topic, never with a mindset of someone who was creating a business. However, one day she was in the process of doing research on Etsy for an article when the idea for her business came to her.
So why had she started thinking entrepreneurially?
One of the common traits listed in “The Economy of You” for people that have successful side gigs is that they’re often motivated by some major life event – such as adding/losing a family member or a loss of a job. In Kim’s case, becoming a mother and buying a home brought new responsibility that set her mind searching for ways in addition to journalism to bring in money to help support her family.
2) As a follow up to the first question I asked about how others could find their own side-gig ideas.
You may want to create a side income or a business but you don’t know exactly what to offer or what you can provide and you’re out there looking for ideas. I asked Kim for some suggestions for people who might want to create a small business or do freelancing or a side gig but they’re not sure what to do.
One of her tips was to go out and search around sites like Elance, oDesk, or Fiverr and look at the wide variety of things that people are doing and the services they’re offering. There’s also a great appendix at the end of her book that lists out the top 50 side gigs for web-savvy professionals. As the section describes it, the jobs tend to have low barriers to entry and high potential for pay.
3) The next question I asked Kim was how she dealt with setbacks?
Another common trait of successful solopreneurs listed in the book is that of resiliency in the face of setbacks. One of Kim’s setbacks was the lack of sales when she first launched her planners.
The way that Kim pushed mentally through those disappointments was by taking things one day at a time. When she came home at the end of the day she forgot about what went on and any setbacks or failures. She shut off her phone and spent time with her family. That mental break gave her time to reset and start the next day fresh without getting down or discouraged.
Something else that came up as part of our conversation was that between her first book (Generation Earn) and this latest book she invested significant time in another book proposal that wasn’t picked up by a publisher. Although it was discouraging Kim saw it as a setback and not a “failure”. The content and ideas in her proposal went on to be a big part of her first money planner in her new business that continues to sell today. (I didn’t ask Kim this but my guess is she probably makes more off the sale of each planner than she would have made off the sale of each book had a publisher picked it up).
4) How does Kim manage her time between her job, family, and her business?
For Kim family is her number one priority. The way that she’s found success juggling everything and keeping those priorities straight is by having a routine and being pretty strict about sticking to it. There’s time built in every week for work, family, and Palmer’s Planners.
That being said, one of things that she likes about the concept of having a side gig is that it can fit into her life schedule – she can adjust her hours up or down based on everything else that’s going on in life.
5) Looking back, what would Kim do differently when getting started in her side-gig?
Her biggest mistake was spending too much money on startup costs. She spent money printing a batch of planners before she knew whether anyone would buy them. The bad news is she still has many of those original planners sitting unsold in a box. The good news is that sales of the digital version of the planners are going great!
This is a useful lesson for anyone thinking about starting their own business. Avoid spending a lot of money upfront based on assumptions. Try and get actual customer feedback before you go and spend a lot of money right away.
If you want to read more about Kim’s lessons learned, examples from other entrepreneurs, and ways you can develop your own side income I recommend checking out “The Economy of You”.
When someone dies, where does their money go? It’s an important question.
Figuring out where an inheritance goes can be a difficult process, depending on the situation and what kind of instructions the deceased has left relating to their assets. What actually happens depends on the wishes of the person who has passed, tempered by state and local inheritance laws, as well as other rules.
Here are some of the parties that can expect a share of an inheritance when a person passes on:
In many states, if there is a surviving spouse, most of the assets pass to that person, without probate, if the assets are owned jointly. In some cases, though, probate might be necessary even for spouses. Some bank accounts opened in the name of the deceased, but not jointly owned, might not have a beneficiary names. These assets end up going through probate.
Additionally, if someone other than the current spouse is named as a beneficiary, it is the beneficiary that receives the assets. Joint assets pass on without being taxed in most cases.
The government, of course, wants its cut. For estates of certain sizes, there are estate taxes, and in many cases the heirs pay inheritance taxes. Realize that there are federal taxes to pay, and many states also have their own taxes. These taxes can reduce the size of the estate before it is passed on to someone else.
If a person dies owing money, then the estate is responsible for paying those debts. Assets of the estate might be liquidated in order to meet those obligations. If there isn’t enough money in the estate to go around, a judge might decide how much, and in which order, the creditors are paid. The assets that heirs receive are only divided up after the creditors have been satisfied. As a result, a great deal of debt can impact how much you leave to your posterity.
The people named in wills, or listed as beneficiaries on different accounts receive their share of the estate when someone passes on. A will and other estate planning documents can be very useful in helping the executors of the estate assign assets.
In addition to the information listed in estate planning documents, the beneficiaries listed on accounts also receive their share. It’s important to note that the beneficiaries listed on an account trump what’s in the will. So, if you make it clear in your will that your children should receive the benefit of your life insurance policy, but you haven’t removed your ex-spouse as the beneficiary on the policy itself, it doesn’t matter what your will says. Your ex gets the money.
The same thing is true of retirement accounts and Health Savings Accounts and many other types of accounts. This is why it’s so important to review your beneficiaries regularly and make sure all of the information is up to date.
You can choose to leave assets to organizations as well as individuals. It’s possible to leave a portion of your inheritance to a charity, your alma mater, or to some other organization.
Because your inheritance can go to almost anyone, it’s important to think about how you will dispose of your assets when you pass on, including the legal steps you can take to reduce the tax liability of your estate. Get the help of a knowledgeable estate planning attorney and make an effort to use various tools to make sure most of your assets go where you want them to go.
Are you dealing with inheritance issues or questions? Leave a comment!
This article was originally published December 7th, 2012.
Balance transfer cards can be a useful tool for reducing your interest rate and helping you pay off your debt faster. With the right balance transfer offer, more of your monthly payment can go to the principal, and you will pay less over time – in addition to getting out of debt quicker.
Unfortunately, as with so many financial tools, when used improperly a balance transfer card can actually cause more problems. In some cases, a balance transfer can result in a delay to paying off debt – and can even lead to an increase in debt.
Understand Balance Transfer Terms
Before you sign up for a balance transfer, make sure that you understand the terms involved. The terms of the balance transfer can have an impact on how effective it is when it comes to paying down your debt:
First, look at the length of the introductory period. When that period ends, your interest rate might go higher. A six-month intro period may not give you a lot of time to make progress on your debt. You need to be aware of that, and do what you can during the 0% APR period. Your best results will come from a longer period. If you qualify, a period of 18 months can be very helpful indeed.
Balance Transfer Fee
Many balance transfer cards charge fees of between 3% and 5% of the balance transfered. If you have a large balance, and the fee is 4% or 5%, the fee will impact your interest savings – especially if you have a shorter six-month or nine-month intro period. Run the numbers to make sure that you really are coming out ahead.
May Not Get 0%
Sometimes, instead of receiving a 0% balance transfer rate, you might end up with 1.99%, 2.99%, or 3.99%. This can still be a good deal, though, if you have high interest debt. In some cases, you might be better off choosing a 3.99% lifetime balance transfer than going with a 0% transfer that takes effect for only six months. Carefully consider the options and the realities of your situation.
Understanding the terms of the balance transfer can help you make a more informed decision. However, you want to plan it so that you pay off as much as possible during the intro period so that when the interest rate heads higher, you aren’t stuck paying so much in interest that your debt repayment efforts slow to a crawl again.
The Real Issue: “Freeing” Up Room for More Spending
The largest trap associated with balance transfer, though, is the fact that once you move your balances to a new card, it can be tempting to view the “freed up” credit card as “available” money. You could actually end up in worse shape that you were in before.
If you get a new credit card with a 0% balance transfer offer, you might move your high interest balances over. Now that your old debt is on the new card, you have room on your old credit card. If you don’t cancel that card (canceling a card comes with its own credit score implications), you need to be careful about using it. Otherwise, you’ll start racking up the high interest debt again – before your old debt is retired.
Your best defense against this problem is to cancel the credit card. If you are reluctant to take that step, though, you should lock the card away. Put it on ice, or lock it in your fireproof safe. Put it out of the way so that you aren’t tempted to use it.
The reality is that a balance transfer will only really help if you are making true changes in your financial behavior. As long as your money habits remain the same, you will not be able to get out of debt – no matter how many balance transfers you use.
Have you ever transferred your balance to a new credit card? Leave a comment!
This article was originally published November 5, 2012.