One of traits that we have to look at ourselves is how do we think about money. Some of us do not really think about it, while others compartmentalize. What do we mean by that?
Well, instead of having one checking account, you may have one checking account for paying your utilitise, another for paying your mortgage. You may even have a seperate money market account.
In your investment portfolio, you may have a retirement account, a seperate account for your kids college education savings, another account for save for your home downpayment or your second home.
While such actions show how organized you are, it may also lead to sub optimal financial decisions. How can this be? Let us take a look at a couple of examples. We’ll start with the simple seperation of bank accounts. While you may want to have seperate checking, savings and money market accounts, the danger is that you may be sacrificing yield you can earn simple by having seperate accounts. You may get better rates on some accounts if you have a larger deposit.
The same thing can happen in your investment portfolio. You may have an IRA account, a seperate college savings account for your kids and even a seperate brokerage account. Once again, while having seperate accounts may make you fee better, you have to constantly check your asset allocation with your financial advisor to make sure your “whole portfolio” is managed properly.
The danger with having seperate accounts is that your entire portfolio may be either too risky or too conservative. And the culprit is that by having too many seperate accounts, they are not looked at as a whole.
If you find that you like to have seperate accounts, get some advice and make sure your asset allocation is in line with your financial goals. If you find that it is not, chances are that the mentality of seperating accounts is the reason for this. You can either consolidate many accounts together (this will likely to result in a better allocation and higher yields) or if you keep your accounts seperate, make sure that your entire financial picture and asset allocation is looked at as whole. Otherwise, you may find that your portfolio is either too conservative (which may delay the time frame for you reaching your goals) or too risky.
How big a mortgage can you take? How much credit card debt can you carry?
Much has been made about good debt versus bad debt. Getting a mortage for your home is “good” while an “auto loan” is bad because your auto purchase will depreciate. But how much debt can you afford. Below are some guidelines that in my opinion, you should consider.
Stability of income
How stable is your income? This is a very important factor. The more stable your income, the higher debt load you can sustain. Doctors, for example, can afford to have a bigger mortgage than most of us. It is not just because they have high income, but also because they have higher income potential that is more stable. Most new doctors who graduate have a ton of student loans. Yet banks are slightly more lenient on them simply because they have high and yet stable income growth ahead of them. Many doctors have high student loan debt, a mortage and very little cash and investible assets in the beginning of their careers.
However, if you are an insurance agent or real estate agent, then your income inherently is less stable (though lucrative). Your ideal debt ratio will depend on your income and assets.
Alternative source of income
Do you have alternative sources of income? Do you have a rental property producing postive cash flow? How much dividends are your investible assets giving you? The more sources of cash inflow you have, the better your ability to take on debt.
What is Your Coverage Ratio?
When bond investors invest in bonds, one of the key ratios they look at is the companys’ coverage ratio. What is the the cash flow versus interest payments? For triple A bonds, it is not uncommon to find coverege ratios of 10. For junk bonds, coverage ratios of 1.2 to 1.5 are not uncommon.
What is your coverage ratio? How much income are you bringing in? What is your interest payment every month. To be even more conservative, subtract all necessary household expenses from your income and use that number to calculate your coverage ratio. Ask yourself what your coverage ratio will be if you take on a loan, credit card debt, or a mortgage? If you coverage ratio will barely be one, then you should reconsider whether or not to take than loan or mortgage. If your coverage ratio is above 3 and you have a stable income, then you will be a lot safer.
What is your Debt to Equity or Asset Ratio?
How much debt you can take is also influenced by what is your net worth. If you have a few properties free and clear, taking on another mortgage may not be an issue even if your income source is not stable. Before you take on another debt, be sure to calculate your net worth, both equity and assets, accurately.
How much cash on hand do you have?
Ford and General Motors are in big trouble for their North American Operations. But has kept them going is that they have tons of cash on their balance sheet.
How large is your emergency fund? How long can you last if your present source dries up? Think long and hard about this when before you take on any new debt.
Summary
To sum up, I think you have to look at a variety of factors before you can decide how much debt you can take - whether it is a mortgage, auto loan or home improvement loan. Look through these factors carefully before making any big decision that will impact your financial future.
Though gas prices may be falling, getting a gasoline credit card is still one of the best ways to save money on gasoline. But choosing one can get a little tricky. Here are few guidelines to understanding the choices that are available to you.
Station specific cards
The first type of cards available are station specific cards. With these cards, you can earn rebates when you use the card at specific gasoline stations. The rebates range between 3% to 5%. You will typically earn 1% rebates on other purchases.
These cards either allow you to cash in your rebates or automatically credited to your next statement. Some allow you to earn rebates just from gasoline purchases but others allow you to earn rebates on all purchases made at the gas stations. The best cards pay 5% rebates. An examples of station specific card is Chase BP Visa®
Rewards Card, which pays 5% rebates on purchases made at BP Amaco stations, but also pays 2% rebates on dining and travel purchases.
Any Gas Station Credit Cards
There are a couple of gas credit cards that allow you to earn rebates when you make use your card at any gas station. Example of such cards include the Chase PerfectCard™ MasterCard® and the Discover® Gas Card.
The Chase Perfect Card pays 3% cash rebates on gasoline purchases. The Discover Gas Card goes better, paying 5% rebates, but only for the first $1,200 in annual gasoline spending.
Other Cash Rebate Credit Cards
Most cash back credit cards pay anywhere from 2% to 5% cash rebates on purchases made at supermarkets, gas stations and drugstores. The Citi® Dividend Platinum Select® Card for example, pays 2% rebates on gasoline purchases. The Blue Cash® from American Express pays 5% rebates but only after you spend $6,500 annually.
No Perfect Card
As you can see, there is no perfect card. Both the Blue Cash and the Discover Gas Card pay 5% rebates. But the Blue Cash requires annual spending to exceed a threshold before you earn 5% rebates and the Discover Gas Card limits the 5% rebates to $1,200 in annual gasoline spending.
Write down your monthly expenses (including gasoline spending) and choose a gas credit card that best fit your spending pattern. But certainly consider a gas credit card to save on your gasoline spending.
As the year begins (or just ended), most of us will have a list of goals to fulfill, be it financial goals, fitness goals, relationship goals etc. One of the goals I have and many have, but never get around to it is giving to charities. Whereas people go to the gym (to start their fitness program and goals) for a month of two in the beginning of the year, only to stop in February or March, most of us never get to even think about a charity we want to be associated with even though somewhere back in our minds we say we want to start giving to charities.
As a reviewer of credit cards, I am aware that most credit card reward programs, as well as most frequent flyer and frequent guest programs have the option of allowing you to donate points or miles to charities. However, most cardholders of rewards credit cards use reward points for well, rewards and not to donate them to charities. Some organisations have credit cards that promote their cause, but are rarely marketed aggressively. It is for this reason that I would like to suggest you consider some of these “charity credit cards” if you have been thinking about giving regularly to charities.
The biggest issuer of charity credit cards is Bank of America. Below are just a sample of possible charities and their credit cards that you may want to consider.
The Anne Geddes Credit Card is a credit card that that allows to earn Anne Geddes Reward points. In addition to that, a portion of every $1 you spend on th e card is donated towards the Anne Geddes Philanthrophic Trust, which works in the area of prevention of child abuse. Anne Geddes is a reknowned photographer who takes wonderful pictures of babies and has a product line at their online store, www.annegeddes.com. I have also done a video review of the Anne Geddes credit card which you might want to check out.
Another charity credit card that has caught my eye is the Make-A-Wish Credit Card. The Make A Wish Foundation is the largest wish granting foundation which grants wishes of children with life threatening medical conditions. For every $1 that you spend on the card, $0.65 is donated to the Make A Wish Foundation.
Another card that I would like to mention is the Ducks Unlimited World Points Credit Card. Ducks Unlimited is an organization that is involved in land and nature conservation. I got to know more about this organization from someone I met who is a hunter. This is an interesting card because you earn reward points with this card and yet a portion of every dollar that you spend on the card is donated to Ducks Unlimited.
If you are not attracted to any of these organizations, check out this page from Bank of America for more charity credit cards. If, after doing some research you feel strongly about suporting any one of these organizations, you may want to consider their credit cards because it essentially jump start your charity giving and puts it on auto-pilot.
Qn : Hey Mr Credit Card - I have 5 credit cards with $25,000 debt on all of them. I have been paying my bills on time and my fico score is still good. But my debt is too high for my liking and I would like to get rid of my credit card debt. I’ve heard that getting a debt consolidation loan or a home equity line of credit will reduce my monthly interest payment. What is your opinion on this matter? - Julie.
Ans : Julie - Since you have a good credit score, I would not get a home equity line of credit (HELOC) even though you may “save” a little on your monthly interest cost. The reason is because any HELOC is a secured debt just like your mortgage. If you miss on your payments, you may face foreclosure. In contrast, your credit card debt is unsecured debt. If you default on your credit card payment, the credit card company cannot force you to sell your house. Your credit will take a hit, but your house can never be foreclosed.
Here are the steps I would take to reduce credit card debt.
2. List the credit cards from the highest apr to the lowest (the 0% card will be the lowest). Your goal should be to eliminate the debt from your highest interest rate credit card first, and then moving on to the next highest apr card until you have completely eliminated your credit card debt.
3. Document and write down the minimum payment you will pay for all credit cards. Set that amount now and pay that amount every month for all credit cards. Over time, you will be paying higher than the minimum requirements every month because you will be reducing your principal.
4. Take the savings from you get from the balance that you transferred to the 0% balance transfer card and use that extra savings to pay off the card with the highest apr card.
5. Once, you pay off the card with the highest apr, use the extra money that would have been used for the payment to that card and increase your payment on the next highest apr credit card.
6. Wash, rinse and repeat the process.
Other things to take note of
You also want to consider these other points. Firstly, use your lowest apr credit card to charge your daily expense. Pay off that amount every month. Do not use your 0% balance transfer credit card because you should be transferring a balance up to the maximum credit limit for that card.
Secondly, make sure you pay your bills on time (especially for your new 0% apr credit card) because your apr will increase to the default rate should you miss your payment. With universal default clause, your apr on ALL your credit cards may increase if you miss even one payment on any debt obligations.
Thirdly, you can reduce your credit card debt faster if you set a budget and reduce your monthly expense. Look for ways you can save money. For example, consider getting a VOIP phone provider rather relying on your traditional phone carrier. Consider getting Vonage as they are the largest VOIP provider and is much cheaper than traditional phone plans (I personally use vonage and would recommend it). Consider getting coupons from coupon sites to get discounts on your purchases.
I do not know the rates on all your credit cards so we cannot calculate how fast you can eliminate your credit card debt. But if you stick to this strategy, you will get rid of your credit card debt before you know it.
If you want to reduce your credit card debt and still have good credit, one way to speed things up is to apply for a credit card with a 0% balance transfer deal. You should then transfer any balance from the highest rate card to the new 0% credit card.
You reduce credit card debt by taking the savings from the 0% card and using that to pay the credit card with the highest interest rate. Repeat the process until you have totally eliminated your credit card debt.
However, to get the best 0% apr deal, you need to watch out for these things in the credit card.
1. The longer the 0% deal, the better
Looks pretty obvious, but 12 months is a good 0% introductory period to go for. If you get a deal for longer than 12 months in the mail, go for it.
2. Get one with no balance transfer fee
The usual balance transfer fees for most cards is “3% of balance transfers with a minimum of $5 and a maximum of $75″. Citibank has some cards with a maximum of $250 on balance transfer fees!. Choose a card that waives the balance fee for the introductory offer.
3. Choose a card which does not use the 2-cycle average daily balance method
When you are aggressively paying off your debt (having a lower balance with each month), the 2-cycle method of calculating your monthly balance will result in a slightly higher monthly balance because you are taking the average balance over 2 cycles. Get a card which uses the normal average daily balance method.
4. Avoid 0% Balance Transfer for life Deals
These occasionally come in the mail. The catch to these deals is that you have to use your cards a couple of times a month and any minimum payments goes towards paying the 0% portion. Hence, you will be racking up interest charges to a card which is supposed to be 0%! Furthermore, there is no such thing as 0% for life. If you make the minimum payments of 4%, you will pay off the balance in 25 months. Better to get a 0% 12 month card and rollover to another one in one year’s time.
With the criteria above, it means you should try to avoid Chase and Discover cards because both issuers use the 2-cycle average daily balance method and also charge a balance transfer fee during for the introductory offer. The best cards to get for balance transfers at the moment are Bank of America Credit Cards. Many of their WorldPoints Rewards Card and Outdoor and Sports credit cards offer 0% apr on balance transfers and cash advance checks for 12 months. You also do not pay any BT fees. Bank of America also uses the 2-cycle method to calculate monthly balances.
Much has been written about arbitraging 0% balance transfer deals offered by credit cards. While 0% balance transfer deals have been used to entice consumers to applying for a new card, some savvy consumers have long used these deals to make “free money”. Here is how this exactly works.
First, let’s make a few assumptions.
1. You do a balance transfer of $10,000 (for easy computation purposes).
2. You can take this amount and put it in a bank account that earns 4.5%.
3. The balance transfer deal is for 12 months (or 1 year).
4. Let us further assume that there are no balance transfer fees.
Firstly, if you take $10,000 for the credit card issuer and put it in a bank account (fixed deposit?) for 1 year earning 4.5%, you will receive $450 after one year. Assuming that your tax bracket is 30%, then you get $315.
For the balance transfer, you have to pay 4% of your balance transfer amount to maintain the 0% deal. Hence, during the first month, you pay back the credit card issuer $400 (0.04 X $10,000). After the first month, the remaining balance is $9,600 and you have to pay 4% of $9,600, which is $384. Below is the table illustrating the cash flows.
Total Minimum Payments made over one year is $3,872.90.
At the end of one year, you get $10,450 from the bank (principal plus 4.5% interest). You will then use $10,000 to pay off your remaining balance (actually, your remaining balance is $6,127.10 and $3,872.90 is the amount that you keep and is the amount that you paid on your minimum balance over the year).
Hence, $450 in your pocket, which is essentially risk-free arbitrage. This figure will be less depending on your tax bracket. It will also be less if you are charged a balance transfer fee. Your return on capital is infinite as there is theoretically zero financing cost and zero capital outlays if we look at the picture at the end of one year. But in reality, you need to pay the 4% minimum balance every month and your net cash flow is negative for one year until you withdraw the original principal and interest from the bank account.
However, for this to work, you have to bear a few things in mind.
1. Some credit cards only allow you to do a “proper balance” from another “higher rate credit card”. You need to find a credit card that will write you a balance transfer check or advance check.
2. You will have to pay on time and not miss a single payment. If this happens, your apr will go from 0% to either normal or default rate (very high). If you miss a payment to any other creditor and it is reported in your credit report, the universal default clause can be used by the credit card issuer to cease your 0% deal.
3. You cannot pull this off too often as there is a limit on the number of credit cards you can apply in a short period.
4. Under most terms and conditions, credit cards have the right to raise the apr from 0% to whatever they please without explanation.
Frankly speaking, for just a couple of hundred dollars and the hassle you have to go through, I would not even bother with this. Having said that, for those with quite a bit of credit card debt but still have a good credit score, getting a credit card with a 0% balance transfer deal makes sense as it reduces your interest cost quite a bit. You should then use the savings from the 0% deal and pay off the card with the highest interest rate.
My final thoughts are that 0% balance transfer deals should be used by those who want to reduce their credit card debt and still have good credit. Playing the arbitrage is just too much of a hassle for a couple of hundred bucks.
People tend to accumulate the most credit card debt over the holiday season and it is not difficult to see why. We get caught up in the festive mood. We see things that are “cute”, “cool” and decide to buy them for our family, friends and and for ourselves. We get enticed by blowout “black friday” sales.
Come January, when the credit card bills arrive, reality sinks in and the bills pile up. Your credit card debt reduction plan took a step backwards!
Below are a few tips to help you navigate your finances through the holiday season.
Set a budget
As basic as this may seem, most people do not have a budget for their chrismas and holiday shopping. Make a list of people who you want to buy presents for. Start with your family, close friends and then colleagues and other friends. Set a budget for the amount you will spend on each gift.
This is actually quite an exercise, so take your time and plan carefully.
Put some thoughts into your gifts
While it is easy to buy something “generic” like a gift card, putting some thoughts into your gift will make your receivers happier since they are not getting something that other people have given them.
Think of something that the other person will use and appreciate. Be extra careful when you are buying gifts for your friends’ kids. While the kids may go crazy over a new toy, you will most likely to wasting your money because kids get other toys very quickly. Instead think of something that will last and will be appreciated over time. At least your money will not go to waste.
Ask your loved ones what they want
If you do not know what to get for someone, just ask. Some like surprises, but many are more than happy to tell you. It saves you time, money and effort.
Beware of upsells from stores
Have you ever bought a computer from Best Buy? You will first be told that when you start your new computer, many unnecessary program will load and it takes up a lot of time. These programs are installed by the manufacturer. But Best Buy can remove them for you, for a “low fee of say $30!”. Fact of the matter is that you can call customer support of the manufacturer and ask them to guide you on how to uninstall those programs!. You will also be asked to get a Zone Alarm security suite (which is fine) until they tell you that they will install for you for a fee! (when you can easily do this yourself).
Or have you ever bought a home theatre system? The salesperson will first ask you to get “better cables” and a “dedicated power supply” to enhance your sound and visual experience.
While these add-ons will work, getting sold on them is the easiest way to blow your christmas and holiday budget.
Be disciplined and be aware of these upsells.
Be wary of Extended Warranty
The extended warranty is another upsell technique. Pay $50 more and you will get an extra year of warranty on your new washing machine or computer, plasma tv etc. Rather than paying for these “entended warranty”, check if your credit card offers extended warranty? Many cards these days offer extended warranty for product purchases for up to one additional year after the manufacturers warranty expires. There are some limits to how you can use this feature. For example, for most cards, you have to make a purchase that is within 50 miles of your address. The can only use this feature for up to a certain value and you have to keep the receipts and inform the credit card company after you make your purchase. Read the terms and conditions carefully or call up your credit card company verifty them.
Shop around to get the lowest prices
Doing price comparisons on the internet is so easy these days. Check sites like froogle, pricegrabber etc and try to find good deals. It most definitely pay to spend some time doing online price comparisions.
Check out credit card deals
Chances are that your credit card will be sending you mails and emails with some promotions. Check these out as very often, you can find some great bargains. Many credit card issuers also have their own shopping sites where you can get better deals and earn extra reward points. For example, American Express has shopamex.com, Discover has shopdiscover.com
Send in your rebate forms
I simply dislike having to send back rebate forms. You tend to forget. That is how many businesses make money. A percentage of consumers will always forget to send in their rebate form so companies keep the rebates they were suppose to give. That “great deal” does not look so good if you do not send in the rebate form.
Do it immediately after your shopping trip.
Use any unused gift cards
Another way companies make money is by selling gift cards. Like the rebate forms, a certain percentage of consumers never use gift cards that are given to them. You will probably have some lying around. Use them for you holiday shopping and save some money this way.
Use your credit card reward points if they are to expire
How many reward points do you have in your credit card reward programs? Are they about to expire? If they are, make use of them and exchange them for items on their reward catalog. Some points like the Membership Reward points do not expire, but most other reward points have an expiration date. Check your points and make use of them if they are about to expire. Do not waste them.
Plan for unexpected purchases
Lastly, always plan for the unexpected. Even if you have made the effort to make a realistic shopping budget, chances are that you will always have some unexpected presents you have to buy, or you really want to give yourself a treat. Make room for that in your budget.
