Using Credit Cards Overseas Roundup

If you read about the British Airways card free flight offer yesterday and were thinking of using your card on your trip you might be interested in an email I recieved from a reader named JT.

About a month ago after we covered the features of the American Express Expresspay cards, I got an email from JT that suggested I cover a new type of credit card technology.  Here’s what he said:

“I guess the AE Expresspay card is convenient, but what would be much more convenient is adoption in the US of chip and PIN cards, what they now have in Europe.  It is getting harder and harder for travelers to Europe to use American-style magnetic stripe cards, and the AE Expresspay card, with an RFID device, is unheard of there. How about advocating a switch to chip and PIN cards instead?”

Chip and PIN

I haven’t traveled to Europe in a while so I wasn’t aware of this new technology.  I did some research and it looks like Chip and PIN cards are a new smartcard that have been rolled out in England and other European countries.

They don’t rely only on the magnetic strip and the signature of the card owner to process and approve the transaction. Instead, the system uses a chip in your card and a PIN number that you enter to prove that you’re an authorized user of the card.

It sounds like the changes were made in an effort to reduce credit card fraud, which had become a major issue in Europe. Policies were changed to pass the liability of fraudulent transactions onto the bank, so banks made a big push to have consumers begin using the Chip and PIN system.

Credit Cards Overseas

I wrote JT back asking if he could go into a little more detail about the problems he’s experienced with his card in Europe and if he’s ever seen Chip and PIN in the US.  He was actually overseas when he got my email, on the start of another European trip. Here’s what his experience has been:

“It is still possible for Americans and others with magnetic stripe credit cards to use them, but only in attended locations.  That is, when you’re faced with train ticket vending machines, automated highway toll booths, and automated gas station, you better have cash as these machines are almost exclusively chip & PIN, especially in France and Germany. 

 

And in today’s increasing automation, it’s harder and harder to find attended locations — that is, real live agents at service windows.  I haven’t run into any problems yet, having arrived in Europe just yesterday on this trip, but I’m glad I’m aware of this barrier for Americans.
 

I have heard that one credit union open to UN employees in New York offers chip and PIN credit cards, but am not aware of other US institutions.  I hope more banks in the US start to offer them, as I cannot conceive of the lack of universality — once again, the US falls behind in technology.”

Not being able to use your credit card would be a little different than I’m used to. There are some stores that don’t accept credit cards, mostly local businesses, because credit card fees eat into their profits.  Usually I don’t notice they don’t take credit until I get up to the register and then have to dig through my wallet to see if I have any cash.

There have been a few cases like this when I ended up leaving the store without what I was there to buy since I didn’t have any cash.  It’s never been a big deal, just kind of inconvenient.  However, if you were overseas and counting on your credit card to work – but then weren’t able to use it – that could be a big problem.  So, if you are traveling to Europe, make sure to bring some extra cash along in case you encounter a place that only takes Chip and PIN.

Has anyone else experienced issues using their credit cards overseas?  Is so be sure to share what you learned in the comment section.  Finally, here are some personal finance articles from this week that you might want to check out.

Personal Finance

Taxes

Frugality

Thanks to Funny About Money and Money Beagle for including my posts in the Carnival of Personal Finance. Also to Kay Bell for including Online Brokerages Tax Software & Training in the latest Carnival of Taxes!

Posted on April 10th, 2011 in Personal Finance | 3 Comments

Written by Ben Edwards · Filed Under Personal Finance 

Renters Insurance 101

renters insurance

Renters insurance is something you should investigate if you’re living in an apartment, townhouse, or condo as a tenant. A good friend of mine recently had his apartment broken into and in hindsight wished he’d had insurance to cover it. 

The really unfortunate thing was he had renters insurance but cancelled it not long before he was robbed.  I asked him if he’d be willing to share his story here but the break in was only a few weeks ago and he’s still pretty upset so we’ll just go with a renters insurance overview.

What is Renter’s Insurance?
Renter’s insurance is an insurance product that will replace your belongings if the place you are renting and living in is destroyed. It is similar to the part of a homeowners insurance policy that provides coverage for items inside the home. Depending on the policy your renter’s insurance may provide the option for medical coverage if you are injured inside the home.

As with any insurance product you select the level of coverage you need (how much money you need to replace your belongings) and your deductible co-payment to make if you have to file a claim.

Why is Renter’s Insurance Important?
Renter’s insurance is critically important if you are renting as a tenant. Some renters believe that if the home is destroyed the homeowners policy that the landlord has on the property will also cover their belongings. Unfortunately this is not true. A landlord’s policy is to make the landlord whole in regards to the property itself. Your landlord’s policy only covers the physical structure that he owns not any of the renter’s belongings within the structure.

You might think you would never need insurance coverage for your belongings. You never leave grease cooking on a stove and you never leave the iron on unattended. But as a renter you are never really in full control of the situation. If you live in an apartment or condo that is connected to other residences, one of those tenants could start a fire that consumes the entire building. If you are without renter’s insurance coverage when this happen you cannot make a claim to replace your clothes, dishes, and electronics. You’ll be starting over from scratch.

What Events are Covered by Renter’s Insurance?
Each insurance company will have different clauses in their renter’s insurance policies. Before you sign on the dotted line and give the firm your money you’ll need to check to make sure you understand what is and isn’t covered.

Most policies will cover theft from the residence and destruction through fire or other disasters. However, just as with homeowners insurance you need to check on if you have coverage due to flooding and negligent maintenance by the property owner.

How Much Does Renter’s Insurance Cost?
Financially speaking there is no reason you shouldn’t have renter’s insurance. The cost of coverage is so incredibly inexpensive in comparison to the cost of having to replace all of your belongings on your own dime. Most renters insurance coverage amounts begin at $20,000.

Rates depend on:

  • Type of structure you are living in (this helps the insurance company consider the risk of loss)
  • Level of coverage you need (how much money it will take to replace everything you own)
  • Your deductible (how much money you pay out of pocket if you need to file a claim)
  • Insurance claim history (if you have had multiple claims the insurance company sees you as a higher risk)
  • Other policies you hold with the company (you can receive discounts for having multiple policies with the same company; if you have car insurance with the firm you should receive a better rate than if you split your policies across several companies)

You should be able to find renter’s insurance through a reputable insurance company for less than $20 per month. The policy I found when we moved into rental town home was $13 per month. That’s about $155 per year. That cost is insignificant in contrast to paying to replace every single thing you own.

Where Can You Get Renter’s Insurance?
Most major insurance companies offer renter’s insurance. You can walk into an agent’s office to request a quote, but getting a quote online is usually best. Rates can vary based on how you request a quote – whether on the phone, in person with an agent, or online.

Online is usually the cheapest because the firm’s overheard is the lowest with an online quote. If you call a call center or an agent then they’re paying to employ the person that individual and potentially also paying a commission to them for selling the policy to you.

Posted on April 7th, 2011 in Insurance | 7 Comments

Written by Kevin · Filed Under Insurance 

Travel Insurance 101

travel insurance

Travel insurance may be something you’re offered next time you book a trip. These days, travel can be fraught with uncertainty -from natural disasters to political instability. Since you never know what might happen to jeopardize your trip, and the money you paid for it, many travel companies offer travel insurance when you’re buying through them.

Of course there’s always the possibility that you could get sick injured, or that a family situation could result in the delay — or even cancellation — of a planned (and possibly paid for) trip. In order to protect against losing their money in such situations, some people decide to purchase travel insurance.

What is Travel Insurance?
Travel insurance is designed to protect you in the event that things do not go as planned with your trip. Most “regular” insurance policies won’t reimburse you if a hurricane makes it impossible for you to travel, or if you end up needing to attend a funeral. Additionally, your medical policy may not cover injury or sickness occurring overseas – which means that you could be on the hook for some of your medical costs while traveling. Travel insurance is a policy you can buy to help protect you while you are away from home.

Travel Insurance Coverage
Travel insurance policies come in a variety of shapes and sizes. You can choose different options, depending on what you think you’ll need. Check with your agent to find out what your specific policy covers. Some of the items that you can expect to get coverage for include:

Trip cancellation: In the event that a company (such as a cruise company) goes out of business, if the weather results in a cancellation, or if you have an illness or injury, or a close family member is sick or dies, you can be reimbursed for the cost of your trip. Understand that most standard trip cancellation portions of travel insurance do not apply if you simply decide to change things. That sort of coverage costs extra.

Trip delays: If you get stuck at your location for some reason, including the weather, you can be compensated with a daily stipend to cover the costs of lodging, food and transportation.

Baggage problems: If your luggage is lost or delayed, you can get reimbursed for the personal items and the baggage, allowing you to replace what you need.

Medical and dental: Covers the cost of doctor visits, hospital stays, dental procedures, lab work, surgery and other issues that might arise while you are on vacation. Realize, though, that routine physical exams, eye care, mental health and replacement of lost health items (hearing aids, contact lenses, etc.) are not usually covered.

Emergency evacuation: For the most part, this is insurance that covers the costs of being rescued from your situation. Many adventure travelers get this to pay the costs of being evacuated from a mountain or other inaccessible area. Emergency evacuation can also apply for emergency flights back home should you become sick or injured.

Rental car: Many travel insurance policies will cover rental car damage and liability.

Flight death: If you die in a plane crash, your beneficiaries can receive a payment. (Although your life insurance policy should cover this anyway.)

Repatriation of a body: You can get help with the costs associated with returning a body (a travel companion or even yourself) to your home country.

Costs for travel insurance vary, depending on the policy and how much coverage you get. I often get trip cancellation insurance (and only that) when I travel, since it is fairly inexpensive — only a few bucks per person — and it helps me feel peace of mind when my family visits my husband’s relatives on the other side of the country. Costs can run from 5% of the cost of your trip to much more than that, it’s definitely worth it to shop around and see where you can get the best deals.

Cheap Travel Insurance

Many times, you can get trip cancellation insurance when you book your trip but be aware that travel agencies and travel companies sometimes add a markup to the coverage.  Usually this mean you might be able to save money on travel insurance by using a third party like InsureMyTrip that lets you search and compare insurance rates from multiple providers.  Just remember, if the rate seems to good to be true, you typically get what you pay for. Make sure you understand what a policy covers and what it doesn’t before buying travel insurance.

Posted on April 4th, 2011 in Insurance | 6 Comments

Written by Miranda · Filed Under Insurance 

How to Improve Your Credit Score

Improving your credit score is key to borrowing money at lower interest rates. As I covered in my last post about how to lower your credit card interest rates, a low credit score can cost you a lot of money. That post shared strategies from David Bach that you could use right away to pay less in interest on your credit card without even raising your credit score.

The following chapter of “Debt Free for Life” goes into detail about things you can do over time to improve your credit score – and as a result, pay less interest.  He starts off by covering your credit report and how it determines your credit score.

Credit Report to Credit Score

Credit report

Your credit report contains identifying information about who you are, a list of all your credit accounts,  credit inquiries made on your SSN, and any collection activity like foreclosures, liens, or bankruptcies.  The role of the credit scoring agencies (Equifax, Experian, TransUnion) is to analyze all this data and use it to determine how big of a credit risk you are.

They sift through all your data with mathmatical formulas that compare the specifics of your situation to all the information, history, and assumptions they have about borrowers. The end result is a number that’s supposed to take into account everything on your credit report and define how safe, or risky, it would be to lend you money – that number is your credit score.

So basically your credit report is all the data about you and your credit score is a summary of that information that lenders use to decide whether to lend to you and at what terms.  Since all the data on your credit report helps make up your credit score, Bach’s book points out how an error on your credit report can potentially hurt your credit score.

Bad Credit Report Data

Bach cites studies that have shown a surprsingly high number of people who have errors on their report, so he suggests the first thing you should do when trying to improve your credit score is check your credit report for any errors.

The Fair Credit Reporting Act (FCRA) can help you out in two different ways.  One thing it does it require the credit bureaus to give you one free copy of your credit report each year, which you can find at annualcreditreport.com.  

Credit Report Letter

Example Credit Letter

Another thing the FCRA does is require that inaccurate information on your report be corrected if you can prove that it’s wrong.

After you send in a request to a credit bureau to correct your information they have 30 days to respond back.  Another important point that Bach mentions is that you have to fix any errors separately with each different credit bureau.

His book gives you a form you can use to ask a bureau to fix your credit report and also provides the addresses where you can send your request for Equifax, Experian, and TransUnion.

Why a Good Credit Score Matters

As I mentioned the intent behind your credit score is supposed to be a standard gauge to help lenders decide whether to lend you money, how much, and at what interest rate.

What Bach brings up is that your credit score is now being used for more than just lending decisions.  I don’t have any exeperience with this but there are cases where credit scores are used when making hiring decisions and evaluating you for insurance coverage.

One example he gives in his book is that in the military, soldiers with poor credit scores could be passed up for promotion because the bad score might represent a security risk.  I don’t have any data on how widely credit scores are being used for things other than lending decisions but if it becomes more widespread then your credit score could influence more than just you borrowing money.

Should You Care About Your Credit Score?

I’ve had people complain on this site that the whole credit scoring system is out of control.  For example, they think it’s ridiculous that college students or young professionals should borrow money just to build a credit history.  The obvious fear is that you create debt, or a habit of borrowing, just so you can prove to the system you’re not a risky borrower.

Credit Score

I agree it does seem silly to borrow money when you don’t need to, promoting borrowing, instead of saving.  However, I don’t think it’s something that you can ignore simply because you don’t agree with the system. Everyone who wants to borrow money will be compared to millions of other people by the credit scoring models.  Good or bad, right or wrong, the credit scoring system is how lending decisions are made in the US.

The longer you don’t acknowledge it’s importance and avoid taking steps to build a credit history, the more difficult it might be to borrow money when you need it someday.  It takes time to build up a credit history so it’s better to start when you don’t actually need the money and do it gradually over the years, rather than wait until you really need the money and time isn’t on your side.

Bad Credit Scores

Halfway through the chapter on your credit score, Bach highlights the fact that last year FICO announced about 25% of US adults had credit scores below 600.

This is a big deal because a score below 600 makes it difficult for you to get approved for a credit card, car loan, or home loan.  I imagine many of the people that fell below 600 had some sort of financial complication caused by the “Great Recession” of the last few years.

Bad credit score

The reasons he highlights the big drop in credit scores in the book is to demonstrate how your credit score can change over time.  The median credit score in the US is estimated at 720 and it could be that some of the people who dipped below 600 at one point had a score of 720 or better.

The scary thing about your credit score is that the time you most desparately need to borrow money could be when your credit score is at it’s lowest. So if you have a good credit score but then lose your job and your house and can’t pay your bills, your lenders will inform the credit bureaus and your credit score will fall.

I think the important lesson here is to think twice before depending on something like a home equity line of credit for your emergency fund.  If your financial life has a melt-down it can take that emergency fund with it, as well as your credit score.  At that point, you’ll be really glad if you saved up an emergency fund to help you get back on your feet.

Good Credit Scores

Credit report

Now that we’ve covered why you have to watch out for a bad credit score, let’s look at what you need in order to have a good credit score.  FICO lists the different credit score factors on it’s website, Bach discusses each of those compenents in his book and gives example of what to consider for each.

Each factor has a different weight and the ones that make the most sense are the ones that make up the biggest portion of your score.  The top three are your payment history (35%), amounts you owe (30%), and your length of credit history (15%).  These make sense, lenders want to know what you’ve done with your loans in the past, how much you owe right now, and how much experience you’ve had with borrowing and repaying loans.

The other two factors are how much new credit you’ve opened recently (10%) and the different types of credit (10%) that you currently have.  New credit applications make sense because they want to know if you’re scrambling to borrow a bunch of money. Of course, another scenario could be that you got a much higher paying job and can afford to borrow more – something your credit score won’t tell them.

In terms of the different types of credit you use, apparently a bigger variety of credit can benefit this portion of the score.  Not only that, having only one type of credit can actually hurt your credit score.  I don’t really understand the logic behind this part of the criteria so I can’t explain why it works that way.

Negative Credit Score Factors

Bach points out some helpful research done by Liz Weston that gives insight into what actions can really hurt your FICO score. She talked FICO into giving her an estimate of how the following things impact your credit score:

  • Maxing out your credit card
  • Skipping a payment
  • Debt settlements (ex: short sale)
  • Foreclosure
  • Bankruptcy

He goes into more detail about each of them and the potential number of points each could drop your credit score.

The Cost of a Bad Credit Score

Bach ends the chapter with a 12 step action plan to improve your credit but right before he digs into the action plan there’s a section on how much money your credit score can save you, or cost you, when applying for a loan.

I’ve talked before about what a good credit score is worth and how your credit score affects interest rates when applying for a home loan. The book has a table that shows an estimate of what your interest rate and monthly payment would be based on your credit score range.  According to the table a drop of 130 points in your credit score could mean an extra $300 a month in mortgage payments.

If nothing else, that kind of savings should be a good motivator to do what you can to improve your credit score.  If this article left you with any questions about your credit score, please ask them in the comments below. Next time I’ll go over Bach’s action plan for fixing your credit.

Posted on April 3rd, 2011 in Credit, credit report, credit score | 14 Comments

Written by Ben Edwards · Filed Under Credit, credit report, credit score 

How to Compare Cash Back Credit Cards

Choosing a cash back credit card can be a little more involved than simply going with the lowest interest rate. 

Of course if you carry a balance on your credit card, don’t bother with cash back cards. You should instead try to lower your interest rates and pay off your debt, as I covered yesterday in my review of David Bach’s new book. 

He outlines a process you can use for getting those lower rates but when all you’re comparing is the interest rates it does make it simpler to choose a card. For example he writes in one of his case studies about going with a 0% interest offer that has the lowest balance transfer fees.

However, if you don’t carry a balance and you’re not concerned with low interest cards then choosing the right card is a little more involved.  As I mentioned yesterday, I’ve thankfully never had to deal with carrying a balance so I look at criteria other than just the APR.  I recently did some comparisons of several cash back cards and thought I’d go over those as an example.

I’m not necessarily going over them in order of importance – I’ll list what criteria I look at and you can choose which are the most important to you.

  • Earning Rewards
  • Redeeming Rewards
  • Card Fees
  • Interest Rates
  • Reward Limits
  • Promotions
  • Payment Policies 
  • Card Programs
  • Customer Service
  • Other Features

Earning Rewards

The key here is to choose a card that best suits your spending patterns.  For example, I look at things like your amount of annual spending and specific types of things you buy when comparing the Blue Cash vs Discover cards.  Look at the types of spending behavior that various cash back cards reward and narrow it down to the one or two that best match how you spend money.

This is easier to do if you already use a credit card and are looking for a replacement because you can look at the previous year’s data online.  If you’ve never used a credit card before then you’ll have to look back through your check register and old bank statements to see your spending patterns.

Redeeming Rewards

The least amount of hassle to get your money back the fastest is what I look for in this category – I like to use my cash back earnings to help offset my expenses.  However, if you’re more interested in using your cash rebates to get deals on purchases of new stuff then your criteria will be a little different.

Going back to the Blue Cash vs More comparison again, one card lets you get your money back sooner but the other can earn you additional discounts on purchases in addition to your cash back.  So how you plan on using your rewards makes a difference in which card you might want.

Card Fees & Interest Rates

Obviously paying no fee is better than having the cost of an annual fee.  When you’re looking at travel rewards cards there are cases where the benefits of the card can outweigh the fee but cash back cards are usually a different story.  I can’t think of a cash back card with an annual fee that’s worth paying, if you know of one be sure to speak up in the comments.

I already touched on this at the beginning of the post so I won’t spend a lot of your time on it but if you’re carrying a balance then I don’t think a cash back card is right for you.  You should research low interest cards and focus on paying down your debt, no cash rebate will make up for your interest payments.

There are a few cards like the Citi Platinum Select that feature lower interest rates plus a form of cash back but in general you should just stick with a card that gets you the lowest interest rate possible.

Reward Limits

Since you’re chasing the highest cash back rates available, you want to make sure that as much of your spending earns at the top rebate rate as possible.  The trouble with reward caps is that they can get in the way of this, often times without you realizing it.  You’re usually not notified once you’ve hit an earnings limit, the cash back structure typically just reverts back to the minimum payout for the remainder of the period the cap applies to.

For example, when I looked at Discover vs Chase Freedom they both let you earn 5% cash back but also had some earnings caps on that higher rate to take into account.  The limits on earnings don’t mean they’re not good cash rewards cards, you just have to compare their bonus rebate caps and the timeframes they cover and see how they fit into how you spend.

Card Promotions

If you’re opening card after card simply to earn the account opening bonus then you’re probably going to negatively impact your credit score – I wouldn’t recommend that.  However, if you’re comparing cards and have two that are similar in most criteria and one pays a significantly higher bonus than the other, I don’t think it’s a bad thing to let the bonus help you decide.  For example, as I shared in my look at the American Express Gold card, I got a free plane ticket when I signed up for the card a few years back.

One thing to be aware of is that the really good credit card promotions are usually reserved for new customers.  So if you do have two similar cards to choose between that are both are offering bonuses – if you’ve previously used one of the cards you might not qualify and that might help make your decision a little easier.

Payment Policies

These are things like the number of days you have to pay off your card, late fees that are charged, how interest is calculated on a balance, and how late or missed payments impact any rewards you might have earned.

Even if you typically pay off your balance each month it’s smart to read up on these because there might be a month where you get busy or something happens and you forget to pay or are late.  It’s good to know what it will cost you in the event something like that happens.

Customer Service

I don’t know what your experience has been but I’ve never had bad customer service when dealing with a credit card company.  Unlike every other company I deal with that has you navigating phone menus and waiting on hold for minutes, the credit card companies always seem to have you talking to a person in under a minute.

One night before leaving on a trip I called American Express at 2:30 in the morning to ask about rental car insurance on my card and the lady was probably the most polite and helpful phone rep I’d talked to in a year.

Of course courtesy and response time aren’t as important as whether the company is willing to work with you. Going back to my discussion of payment policies and late payments, it’s something that happened to me before.  I’d had my Blue Cash card for years and always paid in full and on time but one month I was a few days late.  When I called in to see what I could do about the late fee and interest charges I’d incurred they were willing to work with me since I was a long time customer with a good track record. 

If you have a history of good customer service with a particular company then that’s something to consider.  You can’t always rely on past experience – for example if you’re thinking about getting a card from Capital One but have always had a Discover card it’s tough to compare since you’ve never had any dealings with Capital One.  The best approach in a situation like that is to ask a few people you know who have used the company.

Card Programs

One thing I looked at when comparing Blue Cash vs Chase Freedom is that both cards were eligible for a program specific to that card.  All the “Blue” AmEx cards were part of the “Blue Savings” program that gives you discounts on your purchases with certain partner merchants.  The Freedom card, along with a few others from Chase, can participate in the Chase Blueprint program. 

What Chase Blueprint does for you is let you arrange your payments to help you pay off your balance and lower what you pay in interest.  So Blue Savings is a way to save more on top of your cash back and Blueprint helps you pay off your debt.  They’re different types of programs, which one is more attractive obviously depends on your personal situation but the main point is to investigate what they offer when comparing cards.

Other Features

Some cards have unique feature that make them stand out a little and those can be tough to compare.  If only one company or card offers a feature, how do you figure that into your comparison?  The best way I know how is to try and determine what that feature could be worth in dollars and cents.

For example, with my Blue Cash card I get one free credit score a year through Experian.  The value of that is pretty easy to evaluate since I know what a credit score costs on average.  They also offer periodic discounts & deals, like a recent 35% off TurboTax software – again easy to figure out the dollar value.

Choosing a Card

Obviously choosing a cash back card isn’t the most important financial decision you’ll make in your life.  Since they say most people spend more time planning their vacations then they do their retirement, I’m not too worried that anyone will over analyze this decision.  I’ve gone over a number of points to consider when comparing cards; don’t feel like you have to study each one of these.  Use the ones you want and ignore the rest, good luck choosing the right card!

Posted on March 30th, 2011 in Credit Cards | 2 Comments

Written by Ben Edwards · Filed Under Credit Cards 

How to Lower Your Credit Card Interest Rates

Lowering the interest rate on your credit card is one of the top concerns for people who are stumbling under the weight of credit card debt.  So it’s no surprise that David Bach’s chapter seven in his new book “Debt Free for Life”, has the title of “How to Lower the Interest Rate on Your Credit Card”.

I’ve never personally dealt with carrying around debt on my credit card but said I’d be willing to check out his advice when Bach’s team asked me to review that part of his book.  The previous chapters talked about organizing and prioritizing your debt  – at this point in the book, the emphasis is on reducing the amount of interest you’re paying on your card or cards.

Finding the Best Interest Rates

The approach he suggests is one of negotiation, and in any negotiation it always helps to enter into it with as much information as possible.  The main idea is that you’re likely paying more interest than you could be so you should compare yourself against people around the country to see how much room there is to negotiate.

The book gives you a worksheet to track the balance and rates on each card and the progress of your negotiations.  Bach suggests finding out right away what rate new customers are paying on the same card that you have.   Then he breaks down the different interest rate categories based on your FICO score :

  1. Super-Prime
  2. Prime
  3. Sub-Prime
  4. Punitive
  5. Promotional

His chart shows you which category you’d fall under and what interest rate you should expect to pay – based on your credit score.  Obviously if there’s a big gap that can be a talking point when you call up the credit card company.

Your Credit Score

If you don’t know your credit score, Bach recommends trying out a program from Equifax called DebtWise.  In an earlier chapter he explains how he came across the tool and worked with Equifax to add features that basically took the system he’s been teaching for paying off credit card debt and automates all the steps. 

Anyone who buys his “Debt Free for Life” book gets a DebtWise free trial for one month – I’ve never used the service but I agree that free is good.  Similar to other free credit score options available, if you remain a customer after the trial the service has a monthly fee.

Negotiating Your Debt

Once you know your credit score, what interest rate your score should qualify you for, and the interest rate being given to new customers you have enough information to begin negotiating.  Bach gives you several strategies for overcoming common obstacles when negotiating your interest rates.

There’s not a lot that Bach writes about that you couldn’t eventually figure out on your own but his tips can definitely save you time – and when you’re paying high interest rates time is money.   Bach’s big advantage is that he’s worked with thousands of people to get out of debt in his career so he’s seen what tends to work and what doesn’t.

In my opinion, the best feature of the book are all the examples he gives of former clients and what did, or didn’t work for them. Since I tend to learn better through examples and stories, I think these are the most useful parts of his book. I remember reading about Bach’s Latte Factor concept in his book “Smart Couples Finish Rich” right after my wife and I were married.  Some of the tales he shared of his former clients still stick with me to this day – so pay attention to those sections and learn from the experiences of others so you don’t make the same mistakes yourself.

One of his stories in this book explains how a client went through all his steps and was able to lower their interest rate.  However, it wasn’t as low as they’d like so she ended up signing up for a balance transfer card that gave her 0% interest on her balance for 6 months while she worked on paying it off.  I think this is a good example of how there’s no one right way to accomplish your finance goals – and sometimes you have to try several different things to find the best one for you.

Forbearance & Debt Management Plans

If negotiation doesn’t get your rate lowered and you’re really struggling because you lost your job, were injured, or are just earning less – then you can talk to your credit card company about restructuring your debt.  These are cases where companies are willing to work with you because your ability to pay back the money you owe has been dealt a major blow. 

Since this sometimes involves drastically lowering your interest rates and minimum payments, the credit card company does their homework to make sure you really have suffered a hardship and aren’t just trying to get out of money you agreed to pay.

The book explains how Forbearance and Debt Management Plans work and things you should be aware of before deciding to take that approach (such as frozen credit and damage to your credit score).  He also discusses alternatives to these strategies, such as credit counseling, and devotes a chapter later in the book to the topic.

Improving Your Credit

When it comes to your credit score, the saying “the rich get richer” seems to apply to the whole system.  People who have high debt to income ratios and a long history of good credit can borrow money at the lowest interest rates.  Of course, these are the people who probably have the least need to borrow money – in contrast to consumers with bad credit and high debt levels who are more likely to run into desparate times and need access to credit.

Once you’re in debt it can be tough to improve your credit score in order to borrow at lower rates. Next week I’ll cover another chapter in Bach’s book that explains how your credit score works and different ways you can raise it.

Posted on March 28th, 2011 in Credit Cards, credit score, Debt | 3 Comments

Written by Ben Edwards · Filed Under Credit Cards, credit score, Debt 

Debugging Your Finances Roundup

One of the best tools of our modern technological world is something you probably didn’t even know existed.  You and I depend heavily on properly functioning technology in our daily lives – cars, phones,  computers, airplanes, banking systems, traffic lights, etc – the list is quite long. You probably don’t give much thought to how complex some of these things are because from your perspective they just work.

Taking a Sneak Peek

As someone who earns a living writing software, I’m all too familiar with the different ways things can fail with technology solutions and sometimes have to fix them when they break.  Getting back to what I mentioned in the beginning, there is a tool that helps us create software in a way that’s more durable and less error prone.   The tool is called a debugger, and what it does is peek inside a running program and tell you what is going on at a given point in time.

When you can visualize the different potential scenarios as they occur it gives you insight into what’s causing an issue, or what could cause an issue at some point in the future.  So what does this mean for your money?

Tracking Your Money

Well in the software world there’s a term called “black box” which basically means you don’t know exactly what a program does – all you know is what you put into it and what you get out the other side.  If your finances are kind of like a black box, you might know how much you earn each month and about what you have left over at the end of the month, but you don’t have a clear understanding of where all the money is going, how it’s being used, and what could potentially go wrong to cause your black box to give you a negative balance.

If that describes you then you have two options for “debugging your finances” to help you more clearly see what’s going on with your money.

Historical Debugging

The first is to do a historical audit of your finances, where you pull together old bank statements, checkbook stubs, and credit card receipts to see where your money was spent in the past few months.  This is probably the simplest form of debugging because almost everyone has old bills, statements, and receipts in a drawer that they could dig through and create a picture of that money coming in and going out.

Real Time Debugging

The second form of debugging is to signup for services like Mint that can aggregate and organize your expenses in a form of real time.  Going back to the software world, when you’re debugging you might see things you didn’t realize were happening – you can even do “what-if” type analysis on how things might turn out if you tweak the way they’re currently running.

So if you use services to track your daily spending and alert you to changes in your overall finances then you’ll get a view of yourself earning and spending as its happening.  This can give you insight into some of the challenges you’re facing and can allow you to do forecasting and make adjustments as you see the results come in.

A good debugger can save you hours of pain and frustration and help you avoid nasty bugs when you’re writing software.  The same is true of the tools you use to track and analyze your money, a good system can help you fix what’s not working and anticipate future problems.

Good luck in finding the system that works best for you!  Here are some personal finance posts from last week, maybe some of them can help.

Personal Finance

Insurance

Career

Taxes

Investing

 

Posted on March 27th, 2011 in Personal Finance | 1 Comment

Written by Ben Edwards · Filed Under Personal Finance 

Do You Need Insurance Roundup

How much of your income do you spend on insurance?  If you think about all the different things you could potentially buy insurance for, it’s amazing we have any money left in our paycheck to buy groceries or pay the rent.

Types of Insurance

I made a quick list of some things that you can insure – your trip, pet, wedding, home, car, life, mortgage, appliances, phone, apartment, jewelry, health, TV, computer, and identity.  I’m sure if you thought about it for a few minutes you could come up with even more ways to spend money on insurance.

What exactly are we insuring against?  You name it, you can probably buy some form of insurance for it.  Here are some of the things we worry about and the kinds of insurance we buy to protect us financially from them occurring:

  • Car Accidents (Auto)
  • Home Damage (Flood & Fire)
  • Sickness (Health)
  • Major Injury (Disability)
  • Getting Older (Long Term Care)
  • Faulty Electronics (Extended Warranties)
  • Dying (Life)
  • Inability to Pay Bills (Mortgage Protection)
  • Aging Appliances (Home Warranties)
  • Identity Theft (Credit Monitoring)
  • Losing an Engagement Ring (Policy Riders)
  • Canceled Flights (Travel)

Once again, the list could go on for a while.  I wonder if there are some people that actually buy every type of insurance possible and if they have any money left over at the end of the month?

Do You Need Insurance?

So do you really need all those different kinds of insurance?  What exactly do they all cover, how much do they cost, and how important is each one? 

Of course, the thing about insurance is that we’re not really crazy about paying for it, at least until the time comes up when we actually need it.   At that point we want to make sure we get our money’s worth, since we’ve been paying for it all along. 

Insurance Insecurity

Deciding whether to buy insurance, which type to get, what deductible to choose, etc is never very much fun for me.  Often times I don’t feel 100% happy with whichever decision I make about getting insurance for our family.  I’ve had cases in life where I didn’t buy any or enough insurance and then regretted it later.  I’ve also experienced buying insurance then looking back on my decision and thinking I’d made a mistake and feeling like I’d wasted money. On the flip side, there have been occasions I was supremely thankful that I had insurance.

So given this feeling of uncertainty, and sometimes unease, with buying insurance – this week we’ll start taking a look at various types of insurance.  We’ll cover the basics behind the purpose they serve and offer some food for thought about why you might, or might not, be a good candidate.

Don’t worry, you don’t have to start thinking about insurance today. For now, just check out these personal finance articles from around the web.

 

Personal Finance

Investing

Real Estate

Career

Taxes

Also thanks to Fiscal Fizzle for including my post Why You’ll Never Start an Emergency Fund in the latest carnival of personal finance.

Posted on March 22nd, 2011 in Personal Finance | 4 Comments

Written by Ben Edwards · Filed Under Personal Finance 

Can You Make Money Off of March Madness?

My first March madness tournament pool entry was seven years ago.  I’d never participated in pools at work but thought it might help me get to know some new people in the group better so I put in my $5 and got my entry form.

Running the Numbers

Since I’d put $5 of my money on the line I decided I needed to make some semi-educated decisions about who to pick.  I sat down in front of the computer the night before our brackets were due and started doing some research on the teams.

Four hours later I had downloaded the season stats for all the teams into a database and was running reports for each matchup that I had to choose.  I never intended to spend so much time on the whole process but after investing that much time I decided to just stay up the rest of the night and do as much analysis as I could on the teams.

My wife’s a big Kanas Jayhawk fan so she’d recorded a bunch of Selection Sunday commentary, which turned out to be great for me. Every time I wasn’t sure which team to choose after looking at the numbers I’d watch the picks of the announcers (Digger Phelps, Jay Bilas, Dick Vitale, etc) and use their perspective to help guide my choice.

Big Mistake or Big Score?

I felt horrible the entire next day at work, not having slept at all, and remember thinking to myself what a big waste of time the whole exercise had been.  My thinking began to change after the Sweet 16 had been decided and I was still in the hunt.  All my Final Four teams were still in the tournament and I had a legitimate chance of winning.

Georgia Tech making it to the final game (and then losing) was what won it for me that year.  Only one other person in my pool had chosen them in the final and they had the YellowJackets winning the whole thing. It was a pretty big work pool so I walked away with several hundred dollars of winnings, and was convinced I had figured out the system and would win many more to come. 

Chasing the Money

The following two years I followed the same analysis steps, without staying up all night, and didn’t even come close to winning. I tried even harder those subsequent years, paying for multiple bracket entries, soaking up all the commentary about the teams, and writing software to help me analyze the teams.

It was fun but the reality was I was in it, to win it.  I was after that big fat prize but after a few years pursuing it I discovered that I had been more lucky than anything else that first time. Although I’m sure crunching those numbers did something to help out my luck, I wasn’t able to repeat the process and finally just switched back to watching the games for fun rather than with hopes of making money.

Making Money in March

So, to answer the question of whether you can make money off March Madness, I guess the answer is, it depends.  Financially I came out way ahead after a few years of buying $5 bracket entries and winning the big pot just once.  If you know basketball really well, you’re really lucky, or a combination of the two then you might be able to semi-consistently win some money. But chances are you probably won’t win a ton of money so you’re probably better off just watching for fun.

Entering a bracket is still a good way to watch because it gives you a vested interest in the games and can make the whole tournament more exciting.  Just don’t do it expecting to get your money back.

March Madness Fans

There was something fun, for me at least, about sifting through all the data and writing programs to help make sense of it.  The same bug caught me this year but this time I decided to take a different approach.  I’ve been working with GIS (geographic information systems) lately at work so I wrote a tool to show which teams my newsletter subscribers were likely to support based on what part of the country they came from.

Here’s a screen shot of the teams and their fans – if you’re into basketball or just sports in general, check out the whole map and vote for your team:

 

 

Posted on March 20th, 2011 in Make Money | 1 Comment

Written by Ben Edwards · Filed Under Make Money 

Clariity Family Gift Cards & Financial Plans

Clariity is a new financial planning company with a gifting option that reminds me of my grandfather giving me Wal-Mart stock as a present when I was a kid.

Clariity doesn’t give you stock but it does let you contribute money to help your friends or family towards their financial goals.  A concept kind of like Upromise, where you’re contributing to their college savings – except Clariity isn’t limited to just college and the money is a gift from you.

I chatted over email with the man with the vision, Scott Amyx, who’s the driving force behind Clariity.  It turns out that his team has built some pretty powerful financial planning tools for Clariity members – financial modeling and “what if” features that allow you to set your goals and then test out various ways you can reach them.

The site has a big focus on family finances so I sent him 6 questions about Clariity in regards to financial questions or challenges we’ve run into in our family.  My questions and his answers are below:

1) If I provide all the investment options in my 401k and my wife’s 403b, can Clariity make a recommendation on what mix of investments to choose?

Yes, our Investing and Retirement Accumulation modules will be available later in the year. As you probably know, there are a number of model portfolios, strategic model portfolio for household assets, model portfolio for retirement, model portfolio for college and so forth.

First, a few disclaimers, since we are more than a comprehensive financial planning platform, we are subject to compliance under SEC, FINRA & USA (Uniform Securities Act).

Here are the compliance issues you should be aware of in regards to your question:

1) You’d need Durable Power of Attorney between spouses to derive at a household accounts for the purpose of dispensing advice.

2) Limitations on issuing advice on only assets managed (unless we are the qualified plan administrator or the client has authorized us to dispense advice for which we are compensated through an asset-based fee).

Getting back to your question, the best way to do it is to setup a model portfolio for a retirement account.  Here are the steps for setting up a Clariity retirement account model.

 
2) We bought a house 6 months ago and were running the numbers on a 15 year mortgage vs a 30 year mortgage and what made the most sense for us. Does Clariity offer any tools for mortgage comparison or analysis?

This is built into the Clariity Home Purchase module. The system automatically calculates affordable mortgage and estimated monthly payments.

3) Fortunately, we don’t have any credit card debt but many families struggle to keep their balances paid off on their credit cards. Can Clariity help families plan their spending to prevent accumulating consumer debt?

Later this year with the rollout of account aggregation, we will have basic budgeting capabilities. They will allow users to set targets by spending categories. When it exceeds the target, an alert will be triggered and messaging sent to the user.

For those in debt, we’re planning on having our Debt Reduction module ready later this year. The capabilities include ability to project debt-free in months using a myriad of strategies, including debt consolidation through HELOC or credit card transfer or if that option is not available then the roll down strategy to pay off highest interest card first.

In addition to tool capability, we will have helpful tips and content that encourages those in debt to negotiate their debt terms. We’re also working on an accountability group feature to get friends and family involved in staying vigilante about spending and following through with their debt reduction goal.

4) Many people were up in the air about how to handle the Roth IRA conversion last year. Does Clariity help people compare the Roth IRA and traditional IRA options?

This is a fairly standard Roth IRA conversion calculator put out by most institutions. It’s not in our short term plans but could become part of our Retirement Accumulation and Distribution modules.

5) If my wife and I don’t agree on a big spending or investment decision, are there features in Clariity that will let us do “what-if” analysis to look at the implications of both decisions?

The latest version of Clariity has a catch-all Major Purchase module. It very simply shows you based on your goal amount and what you an afford to save, how many months or years it will take to reach your goal. In other words, it helps rationalize the decision-making process through the notion of immediate vs. deferred consumption.

As for investments and other goal decisions, what if is inherently built into the major goal modules. In the case of Retirement Accumulation, what if and modeling can show the affect of inflation, market volatility, disability, and premature death on your retirement plan.

For the Retirement Distribution/ Income module that’s in development we model the affect of longevity risk, inflation risk, LTC, death of spouse, and market volatility on their retirement income needs.

6) Almost four years ago I wrote an apology letter to our few month old son.  Basically I told him college tuition costs have gone wild and that we probably wouldn’t be able to pay for all his schooling.  We want to help him and his siblings as much as we can, can Clariity help in that college planning process?

At Clariity we believe that there is an inherent difference between head knowledge vs. actionable advice. Most people are not in a position to save some $10,000 a year towards a $300,000 college tuition goal, especially if they have more than one child. Rather, it’s about doing something vs. nothing.

In our College Savings module, we ask users what is a realistic & achievable amount that they can commit to on a monthly basis? Even $100/ month can accumulate to some $15-20K in the future which helps offset a portion of the tuition cost.

How To Setup a College Savings Module in Clariity

1) College savings video primer and transcription are available for those needing an introduction.

2) Assess what the user can realistically save each month. Immediate feedback on projection of those dollars on the same page.

3) Based on their zip code, we then immediately display 529 plans for their state.

4) Using sort, filter & selection features, users can quickly search our database of Savings Plans & PrePaid Plans.

5) Users can also compare side-by-side plans to evaluate performance, tax benefits, costs and read user reviews.

6) After they selected a 529 plan, the user is directed to complete an online application. By completing our application, you in effect can apply to any of the 100 plus 529 plans in the country.

7) If you opt to allow us to help you with your application, we mail you the completed application with stamped & self-addressed envelope with instructions to the user. The user completes any other necessary documentation such as payroll deduction, attachment of voided check and include a check or ACH order and sends the package in to the 529 plan institution.

8 ) Using account aggregation, the user can then track the performance of the 529 plan on our dashboard.

9) Additionally, with the group gifting feature available soon, users can invite friends and family to gift towards their child’s education fund. The next time they have a birthday party for Johnny, in eVite, email invitation or Facebook, the user can request gifting towards Johnny’s college fund in lieu of novel, short-term presents.

Thanks to Scott for taking the time to go into detail on some of these questions!  If Clariity sounds like something you or your family could use, be sure to check it out.

Posted on March 17th, 2011 in Family, Financial Tools | 2 Comments

Written by Ben Edwards · Filed Under Family, Financial Tools 


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