How Much Debt Can You take?

By: Christina

01/16/2007

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 mortgage 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 mortgage and very little cash and investable 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 positive cash flow? How much dividends are your investable 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 company’s coverage ratio. What is the the cash flow versus interest payments? For triple A bonds, it is not uncommon to find coverage 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.

Are Credit Card Protector Plans Worth Looking at?

By: Mr Credit Card

12/21/2006

Since getting the Chase Flexible Rewards Card earlier this year, Chase has sent me their Chase Protector Plan in the mail every once in a while. Today, I decided to open it and read the terms and conditions carefully. This is what the plan is all about.

The Chase Protector Plan is essentially an insurance policy in which cardholders pay a premium every month in return for protection against various events like unemployment. When these events happen, you are
allowed to suspend your payments with no adverse effects on your credit rating. You will also not incur interest charges.

Let’s take a closer look at the events that can trigger the suspension of payments.

1. Leave of absense or Business Hardship – 6 months

2. Life Events (birth or adoption of child, marriage, domestic partnership, divorce, retirement, change of primary residence, experiencing a natural disaster or death of a covered person) – 4 months

3. If you incur a household, medical, transportation, or education expense of $50 or more for one of the three federally recognized holidays – New Years’ Day, Memorial Day and Labor Day) – 1 month

4. Up to 2 years for other qualifying events like unemployment.

You have to pay a fee of $0.89 for every $100 in monthly ending statement each month.

While many people dismiss insurance type products that credit card issuers try to push to cardholders, I am quite tempted to take this one up because there is hardly any insurance against job losses or any of the other trigger events. Should you lose your job, paying your bills and conserving cash (and obviously looking for your next job or starting your own business) should be your top priority.

I do not use the Chase Flexible Rewards as my main card, so the fees should be just be a couple of dollars at most a month. The only thing that may limit the effectiveness is my relatively low credit limit on this card compared to my main cards – the Blue Cash and the Amex Gold Card.

I would be curious to see if you have signed up for something similar.

How to choose a 0% Card to Reduce your credit card debt

By: Mr Credit Card

12/20/2006

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. These days (post credit crisis), you will need a good credit score to get a 12 months deal. But hey, even 6 months is good enough.

2. Get one with reasonable balance transfer fee

Back a couple of years ago, credit card issuers were falling all over themselves to offer 0% deals with no balance transfer fees. But these days, most have gone back to charging a fee (ranging from 3% to 5%). There are some issuers that charge no balance transfer fee, but the introductory offer is normally not 0%.

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. This used to be an issue but since the CARD Act, no issuer today uses the double billing cycle 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.

Once again, these used to be popular deals, but they have all but disappeared.

Recommended 0% Interest Credit Cards

Please check our balance transfer credit cards list for the best offers today.

Myth of 0% Balance Transfer for Life Deals

By: Mr Credit Card

12/14/2006

I just received another one of those credit card offers in the mail. What was different this time is that fact that they stated I would get a 0% apr for the life of my balance transfer!

So I checked the terms and conditions in greater detail and this is the fine print that I found out. Well, it turns out that you do get a 0% apr on your balance transfer for the life of your balance. However, there is a catch. You would have to charge at least two items to your card at least once a month. And every month, you would have to pay a minimum balance (say 4%). The minimum payment that you pay will first go towards paying the balance with the lowest rate (aka – your balance transfer at 0%). Meanwhile, your two items that get charged to your card the first month accumulates interest payment. After one year, you would have spent twenty four items on your card that are carrying interest.

If you pay the minimum payment of 4%, you will finish paying your balance transfer amount in 25 months (actually, it is slightly less than 25 months because your total balance would increase given that you have to spend 2 items a month on the card).

So what is the big deal you say? Why not just two packets of chewing or Hershies chocolate bars every month and you will be fine. Actually, you may not be fine, you almost have to a few more items just in case the second item does not get registered (computer mistake) and you lose your 0% deal. Secondly, chances are that you will spend more than two items on the card you could end up ing more things that you want simply because you want to maintain the 0% apr deal.

I have always maintained that getting a 0% balance transfer deal makes sense when you have a lot of credit card debt that you would like to reduce or eliminate and you still have good credit. The trick to using this technique is to take the money you have saved from the 0% card and use it to pay the balance on your card with the highest interest rate. Wash, repeat and rinse, and you will be able to figure out how long it takes to reduce your credit card debt.

0% apr for life of balance card complicates the matter because you are forced to use that card, when all you want to do is to pay the minimum and focus on paying off the card with the highest interest rate.

Lastly, there is no such thing as 0% apr for life of the balance. You HAVE TO pay the minimum payment anyway (4%). This works out to 25 months (slightly longer than 2 years). My suggestion is that if you are looking for a 0% apr card and you have a good credit, try to get one with an introductory period of at least one year (with no strings attached). The 0% apr for life of balance deal that I got would complicate matters because I am forced to use the card. Furthermore, it is never for life (only about 2 years!).

Recommended Credit Cards For Balance Transfers

If you have credit card debt and are looking for to reduce your interest payments and apply the debt snowball method, then I suggest you check our list of the best balance transfer credit cards for the latest offers.

Note – – Life of Balance Transfer Deals are no longer offered today.

My attempt at getting the Porsche Cayman Coupe at My Wish List for $5,000

By: Mr Credit Card

12/11/2006

At 3pm EST today, I got into the My Wish List site and tried to get the 2007 Porsche Cayman Coupe, which was going for $5,000. Bear in mind that I use the Verizon FIOS fiber optic internet connection, had my credit cards ready. But it did not seem to help. I actually captured my hilarious attempt in a screencast! You can watch it below.

There will be another Porsche going for $5,000 at 7pm EST later this evening. I’ll be trying again and will report back!

How to get a 2007 Porsche Cayman Coupe for $5,000?

By: Mr Credit Card

12/09/2006

Wouldn’t you like to get a Porsche Cayman Coupe 2007 Model for just $5,000?

If you are an american express cardholder, you may stand a small chance of landing one of these beauty for YES $5,000. At this moment, actually from November 18th till December 14th, American Express can participate in the My Wish List promotion.

This is how the promotion works. Everyday, there will be an item displayed on the My Wish List page. This item will sell for much less than the retail price. There are a limited number of these items and they will appear at certain times during the day.

The Porsche Cayman Coupe will appear on Monday (11th December) at 12pm, 3pm and 7pm EST. There are only 3 cars available. You will have to be in front of your computer, clicking in your details as soon as the items appear and hopefully have a fast enough connection to be the first! It is a long shot, but I will still give it a shot.

Below is a screencast on the My Wish List site.

3 Critical “Personal Finance” Mistakes I have made

By: Mr Credit Card

11/28/2006

As we approach the end of 2006, I want to share some financial mistakes I have made. Three years ago, I sat down and thought long and hard about the financial decisions I have made and thought about what I should be doing going forward. I am glad I did that 3 years ago because I am now better off because of some decisions I made. Here is what I have learnt about the do’s and don’ts of your finance.

Mistake 1 : Procrastinating on taking care of the basics

1. Paying our bills – let’s face it, paying your bills suck. Having said that, you still have to pay them. Many of us have faced a situation where we misplaced a mail, and missed a payment. Paying your bills is a necessary but low value task that we all dread and tend to procastinate. The solution to this is to automate your payments with autopay functions. For example, you can use your credit card to automatically pay for your wireless, utilities and cable bills. If you have a reward credit card, you will earn points from paying these bills with your credit card. To ensure that you pay your credit card bills on time, enroll in automatic payment where payments will be made automatically to your bank. You can set it to pay the minimum balance or the full amount.

2. Regular investing – Yes, I was guilty of this. But paying yourself first is one of the keys to financial success. But how many of us have enrolled in automatic investment plans? If you have not, start right now.

3. Taking care of your insurance needs – another one of those things which we tend to put off. I took care of this one a long time ago and have a peace of mind since then. But many friends of mine have not!

4. Doing your wills and estate planning – Like insurance, this can be considered defence strategy in the big scheme of personal finances. It has to be done. It is easy to put off doing this. Many leave it till it is too late. I did mine 5 years ago, but have yet to have a “review”. This will be the next task.

Mistake 2 : Wasting time on Personal Finance Matters

Personal finance matters are very important, but wasting too much time on time is another mistake that I made. As I look back at myself, I realize that I fall under the “need to do everything yourself” or “who needs to pay fees to financial planners” category. To give you a perspective, I used to work for major Wall Street firms in trading and I thought I knew a lot (not everything but more than most folks) about the markets. Truth is that working on Wall Street or a hedge fund does not equate to being a good money manager especially when it comes to your own money. I was involved very early in the dot com companies, made a lot of money with AOL, Ebay and Yahoo. I gave some gains back and was still ahead.

But when I looked at my actual returns over the last 10 years, I realize that I would have been better off putting my money with a few good managers (not index funds though). I still cannot believe the amount of time I spent on researching companies and doing my own thing only to realize that I could have spent that time more productively.

Are you spending too much time reading about finance matters? or even dare I say spending too much time debating the index funds versus managed funds? Or doing your own stock investments? (yes – I will get flak for this). But the reality is this : If you are truly great at picking stocks or in investments, you should go to an investment bank, speak to someone who can raise funds for you, show your verified track record and raise money to start a hedge fund. You charge 2% management fee and 20% of the upside. Relocate to connecticut and soon your dream red ferrari is yours. Truth is that for 99.999% of the population, it is best that someone elses manages your money. Unless, you can achieve mid teens return with an acceptable diversification and low volalitility, you are better off spending your time on more important matters. Remember, anyone can “for a brief period” outperform massively by taking concentrated bets. But truely great investors make above market returns with a diversified portfolio without too much concentration risk. It is the ability to consistently come up with great investments that is the undoing of many manager and worse still for the individual without a technology and research infrastructure.

Mistake 3: Not spending enough time on self development and money generation activities

I am not talking about investing your own money here. I am refering to investing your time in your career or business. Most of the time, mistake number 2 leads to mistake number 3. As a do-it-yourselfer, I thought I can do it all. I read a lot, thought I knew a lot and spend too much time on my finances. But on hindsight, I could have spent more time on improving myself in certain areas. If you are a salesperson, it is better to invest your time in improving your sales skills. If you are a manager, wouldn’t it be better to spend your time learning to be a better manager? or networking. Increases in bonuses or salary will more often than not outpace any 15% returns you get on your portfolio! If not, then you are set to retire.

Achieving your financial goals require both offense and defense. Defense includes things like making your you have adequate insurance, have done your wills and estate, having a system in place to pay your credit card bills and other stuff on time.

Offence includes optimal portfolio allocation and investments. And it also includes career advancement, or for some building a successful business. You can have all the optimal portfolio allocation, but what good is it if you do not get a raise often? Someone who works on wall street can have no financial planning, but would still be better off because she or he makes so much more money. This is often the missing link in achieving your financial goals. Your financial goals are tied to your career or business goals.

Cures for the 3 ills

After recognizing these mistakes I have made, I made a few changes that have helped me so much.

1. Automate Manual task

I have now automated as much of my financial stuff as I can. I do not waste time with things that do not make you money any more. I have set up automatic bill payments for my credit cards and other accounts. (you will never be late on your payments if you do this). I have set up automatic reinvestment for your mutual funds (pay yourself first). Get Mircrosoft Money or Quicken to automate your budget and spreadsheet. Hire a bookkeeper if you can afford one. I did these things 3 years ago and it has worked wonders.

2. Outsource your financial management

This is going to cause some controversy. But for most people, hiring a reliable and competent financial advisor is best thing to do. Choose someone you are comfortable with, having regular meetings with your advisor (once a month – if not at least once a quarter). Yes, you have to pay them fees, but a good financial advisor will be worth it. A good advisor will be able to take care of your insurance, investments and other financial issues. I really think you should spend time making money, not managing money. Let others manage it for you.

3. Spend more time on “money producing activity”.

For most people, it means not managing your own money. If your networth is $500,000, a 10% return means you will make $50,000. If you have have a networth of $500,000, chances are that you will be making a decent salary and have a good career. Enhancing your career or growing your own business is more productive than spending all your time “managing your own money”. Even if you had to pay a 1% fee to your financial planner ($5,000), spending your time that you would have spent on your “financial matters” will more often than not yield more than $5,000. Surely a promotion or stock option grant is easily worth more than $5,000? Surely a great business idea is worth more than this? Instead of researching the next big idea, I now spend my time on creating and growing my business and career. For me, that meant improving my sales skills, learning direct marketing techniques, learning about building websites/blogs like this one! For you, that may mean learning to manage better, improving your presentation and sales skills, taking time to network, taking time with a mentor. If you are a business owner, that means thinking strategically about your business, hiring people to do task you should not be doing.

Ending Notes

To sum up, I made 3 crucial mistakes in my opinion. I did not automate routine task, spent too much time managing my own money and not enough time in my self development and career development. Make no mistake, you have to spend time on your finances. But once you have a financial plan, you should put it on auto-pilot (and hire a pilot – aka financial planner). To improve your personal finances, get your basics right, have a financial plan and spend your precious time on things that make you money and improve yourself.

I found that as I spend less time on my personal finances have actually improved (because I focused more on my business). Automate as many aspects of your financial life as possible, hire a good advisor and spend time improving your core competency.

P.S. – If you are not good enough to be a hedge fund manager, then forget about managing your own money. Outsource it. If you are good enough, chances are that you will not be reading this blog! You will be working in New York or Connecticut and driving a Red Ferrari!

11 Shopping and Budgeting Tips for the Holiday Season

By: Mr Credit Card

11/24/2006

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 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 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 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 ing 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 , or you really want to give yourself a treat. Make room for that in your budget.

I hope you find these tips helpful.

What is the difference between a charge card and a credit card?

By: Mr Credit Card

11/16/2006

I get lots of this question from readers.

A credit card give you credit. That means that you do not have to pay your bills fully and you can carry a balance. You will be charged an interest on the balance that you carry. The rate that you will be charged is the apr (annual percentage rate), which is stated in the terms and conditions of your card. This is one of the ways that credit card companies make money.

A charge card on the other hand, requires that you pay your bills in full. That means that you cannot carry a balance. The most famous charge card is the American Express Rewards Gold Card, along with the Diners Club Charge Card.

Most charge cards have an annual fee. The reason is that these cards cannot make money from cardholders carrying a balance (they also make money from merchants whenever a transaction takes place).

Should you get a charge card or credit card. Well, if you need credit and carry a balance occasionally, getting a credit card makes sense as most do not have annual fees. Though a charge card has annual fees and does not allow you to carry a balance, they have very good reward programs. For example, the Membership Rewards from American Express and Diners Club Rewards are perhaps the best reward programs around.

How I Got A Free Continental Airlines Flight With Membership Rewards Points?

By: Mr Credit Card

11/10/2006

I just arrived yesterday at Atlanta for a weekend conference. What is interesting is how I got my airline ticket from my reward points.

The situation was that I am in Philadelphia, and was trying to book this trip 2 weeks ago (kind of last minute). I had a lot of Membership Reward points which I had gotten from using my American Express Gold Card.

Through several internet searches and phone calls, I found that Delta Airlines had the best direct flight. So I thought I could use just transfer 25,000 Membership Reward points to Delta Skymiles and get a free ticket. Turns out that seats allocated to frequent flyer miles have been taken up and I would need about 50,000 miles to get that free ticket!

So I checked with American Express to see what they could do. Turns out that they could get a Delta ticket for $430 (or thereabouts – which turned out to be cheaper than what the Delta rep was quoting me). Because my Gold Card was a “Gold Plus Card”, I could use my Membership Reward points for any airline without transferring points into air miles. In this case, I needed 43,000 points (1% reward ratio).

But I was still looking to use only 25,000 points! So a phone call was made to Continental Airlines. After some investigating, the rep told me that it was better to go to Newark and fly direct to Atlanta than to leave from Philadelphia International Airport and take a roundabout trip. Turns out that all I need was 25,000 miles and even the AMTRACK train ride to Neward was included in the package!

So I duly opened a new Continental Airlines OnePass account, transferred 25,000 points into the account and I was set.

At that moment, I did not have enough points in my Chase Flexible Rewards card and program and hence I could check to see if having that 25,000 points in Chase would help out at all. Furthermore, you need to book 21 days in advance!

But it just goes to show that depending on the situation, it may be better to use air miles, while in other cases, it may be better to use points from a regular credit card reward program. One of the key factors is how far in advance do you book your tickets. If you are always booking last minute flights, you may have to use more points than what is stated in the reward program. But I appreciated the flexibility of my American Express Preferred Gold Card as I could either transferred Membership Reward points to a frequent flyer account (if it made sense), or use it to books flights on any airlines. In this case, transferring points to Continental Onepass miles made the most sense for me.