interest rates

Credit Karma Warns Shoppers Who Get Store Credit Cards for a Discount

July 7, 2014 By Jeffrey Strain 1 Comment

It wasn’t that long ago when retail stores would offer you a freebie to open up a credit card account. While this still happens, there has been a shift to retail outlets offering an immediate percentage discount off of a purchase to sign up for a credit card. With the second half of the year now upon us, chances are you’ll begin to hear the question more from cashiers about whether you would like to save a certain amount off your purchase (usually 10% – 30%) simply for applying for a store credit card.

It’s an effective strategy for the stores. In a survey commissioned earlier this year through Harris Interactive by Credit Karma, of the over 2,000 adults questioned, one out of every five people (21%) ended up opening at least one store credit card to get the discount offered. Nearly half of them (45%) didn’t consider the impact opening the store credit card might have on their credit score.

As Credit Karma founder Ken Lin noted, “Opening a store credit card can be beneficial if you regularly shop at that store. However, it can also negatively impact your future credit worthiness and your finances, which many Americans don’t think about. That’s when people get into trouble.”

Are these store credit card offers worth it? They can be, but only in specific circumstances. Here are a few things it’s important to remember if you’re offered a discount to apply for a store credit card:

Pay in Full: If you can’t pay off the store credit card in full each month, it’s not a deal no matter how much of a discount the retailer offers. Store credit card interest rates are some of the highest out there, and any savings you received will quickly disappear to interest charges. There is a reason the store is offering you the discount to sign up for the card. They know that in the long run, they will make money off of people who apply for them, not lose money.
It Will Affect Your Credit Score: Applying for a store credit card will affect your credit score. It can help long-term if you pay it off in full each month, but can hurt if you don’t. It might hurt your score short-term if you have recently applied for other credit as well.
It Shouldn’t Be an Impulse Sign-Up: Just as impulse purchases can hurt your finances, impulse store card sign-ups can hurt them in the same way. Signing up for a new form of credit shouldn’t be done on the spur of the moment. It should be something that you spend some time considering and analyzing to make sure it’s the best financial move for you to make. If you haven’t though it through, it’s best to pass until you have a chance to think it through. The same offer will likely still be available the next time you shop if it turns out it’s something which might benefit your finances.

Money Topics They Don’t Teach in High School, but Should

June 3, 2014 By Danielle Warchol 5 Comments

students sitting at high school graduation in graduation gowns

One of the biggest disgraces of the school system is that it often fails to teach basics that we all need for everyday life once we graduate. A prime example of this is basic personal finance. If we could get more students to graduate from high school with a basic understanding of how personal finances work so they could make good financial decisions with their money, there would be a lot less money problems in the United States. It’s a wonder the subject isn’t emphasized more in the classroom. Here are some financial topics that they don’t teach in high school, but they definitely should:

Budgeting

In high school, most teenagers don’t have to worry about saving their money or budgeting for rent, groceries, or bills. If they work, they usually only work so they can spend money at the movies or the mall. However, learning how to budget is an important financial topic that should be taught, as it’s probably one of the most important life lessons. Knowing how to allocate your finances each month will save you a lot of frustration. It will also help you figure out how much money you have to spend.

Loans

As a high school or college student, the idea of taking out a loan seems easy. Moreover, loans seem like free money. Of course, they quickly learn that you need to pay loans back and that loan collectors will relentlessly hound you for payments. If high school students don’t learn about loans in high school, then they definitely don’t learn about interest rates and repossession, two negative consequences that result when a loan is not paid off in full.

Insurance

Insurance is a topic that briefly comes up in high school, but is rarely expanded on. High school students know that they should buy car insurance if they drive, but they’re never given a more detailed explanation about what insurance covers. It’s important to teach them about all types of insurance, from renter’s insurance to car insurance to life insurance. It’s also important to teach them how to choose a good insurance based on their specific needs and financial situation.

Debt

Debt is a scary word, especially to a high school student. However, it’s necessary to teach them about it so they can avoid falling into debt later in life. With college tuition at an all time high, it’s easy for a teenager to fall into debt. This financial topic should be taught in school in order to prepare students for the future and to teach them about managing money.

Credit Cards

Getting a credit card can seem exciting. You suddenly have access to an easy way to buy items now and pay for them later. It’s so easy to swipe a card and not worry about paying for it until the bill arrives in the mail. This is a trap that many high school or college students fall into, and it’s a trap that they desperately need to avoid. Teaching courses around credit card management would help teach high school students about credit card debt and managing their purchases.

Credit Scores

Credit scores rarely make the cut when finance topics come up in high school. They should, as your credit score is one of the most important aspects of your financial profile. It determines what credit cards or loans you can apply for and how insurance companies or rental agencies view you. It can even impact you getting a job. Gaining credit and keeping a high credit score is something that needs to be taught early on. It’s very easy for someone to make their credit score plummet, but it’s incredibly hard to raise a low credit score.

Interest Rates

Interest is often discussed in math class at some point over the high school curriculum, but it’s rarely discussed in terms of real life situations. In financial terms, it’s important to discuss how interest rates work and affect both payments and statement balances. It’s especially important to teach high school students the importance of paying off a balance to avoid high interest rates, which usually occur on loans and credit card payments. Interest rates are one of the biggest wastes of money and one that should be avoided if possible.

Retirement Savings

Naturally, a high school student isn’t going to be thinking of retirement savings. At 18, why would they be thinking of something that’s at least 50 years away? However, they should be taught about the benefits of saving for their retirement. A great way to broach the topic is to tell them how much money they’ll be making by investing in a 401K. For instance, if you put in as little as $50 a week from your paycheck, you’re saving a bit more than $200 a month and $2,600 a year. Over the course of 50 years, you’ll have $130,000. If your employer matches your 401K contribution up to a certain amount, so this means you could have as much as $260,000 not even counting interest. With interest, you would have well over $1 million for a mere $50 a week.

Stocks and Investments

A lot of high schools actually teach students about stocks and investments. Schools that don’t have this in their curriculum should consider it. Stocks and investments are a great way to earn additional money. Of course, it’s an activity that needs to be carefully researched, but it’s a financial topic that students should be aware of.

Taxes

Most high school students know about taxes. They’ve either had to pay income taxes or have heard their relatives complain about paying real estate, income, or federal taxes. But most students don’t realize how taxes affect them. When they get their first job, they tend to forget that their hourly or yearly salary is presented pre-taxes. Learning about taxes is an important step in helping them budget and one that should be taught so they can better manage their money.

(Photo courtesy of Nic’s events)

Death by Debt: 25 Ways You’re Killing Your Credit

August 6, 2013 By Guest Writer 2 Comments

By Jason Bushey

Few sectors of personal finance are as misunderstood as credit. We’ve all been passed on some semblance of how credit score works by our parents, but often those before us are as confused about their scores as we are.

How do you build credit? What affects our scores? How much debt is too much debt is too much debt? And – perhaps most importantly – how can I improve my own scores? (Yes, there are more than one!)

These are all excellent questions, and not all of them have such concrete answers. The fact of the matter is, there’s a lot that goes into your credit – and an equal number of ways to screw your score up completely. Below are 25 things you as an American consumer are doing that are absolutely killing your credit…

Refusing to acknowledge credit

Don’t be misunderstood; “no credit” in no way insinuates that you have “good credit”. Just because you’ve avoided credit cards up to this point doesn’t mean you look like a promising investment in the eyes of creditors. In fact, you’re a mystery, and are thus unlikely to get approved for a loan when you really need it.

Carrying a ton of credit card debt

Some debt is OK, even perhaps beneficial to your score depending on the credit scoring model. FICO, the most widely-used credit scoring model, even infers that carrying a very small balance might actually be better for your credit than carrying no balance at all. But a lot of debt? Spread across one or multiple cards? That rings an alarm sound for lenders to stay away from you.

Because a third of your FICO score (we’ll stick with this model the rest of the way to remain consistent) is determined by how much you owe relative to your total score, it’s important to keep your debt under 30 percent of your total available credit. That said, many experts recommend that the best “credit-utilization-ratio” is 10 percent and under.

Never using your credit card

The flip side of using your credit card too much (and refusing to pay it off) is never using it. Credit card companies reserve the right to close your card due to inactivity. If they close your account, you lose the credit line that goes with, and it stops aging – two things that might not necessarily hurt your score right off, but certainly won’t help it, either.

Use your cards sparingly to keep them open. Credit cards accounts are a lot like George Clooney – the older they are, the better they look.

Owning just one card

Your first credit card gets the ball rolling on building credit, but it can only take you so far. FICO takes into account the number of accounts you have, the kind of accounts you carry in your name and – again – your overall credit line relative to how much debt you carry. Opening up a new account extends your credit line and adds another good-standing account to your profile. That said…

Applying for several cards over a short amount of time

…is a bad idea. Every time you apply for a card, your score takes a small hit. This is to deter consumers from applying for lots of different credit cards or unnecessary loans. (Whether it works or not is hard to say.) This is called a hard inquiry, and they stick like glue to your credit report for two years, though in reality they really only have a negative effect on them for one. Too many of these on your profile make you look desperate and a tad irresponsible, neither of which are going to help build your credit.

Give it six-to-12 months between applying for credit cards to avoid that stench of desperation.

Closing old accounts

Unless you have a serious spending issue, it’s a smart idea to keep your credit card accounts open for as long as you can. Like we mentioned above, aged accounts have a positive impact on your score, and more importantly the credit line that provide allow consumers to carry a small balance without hurting their score.

There’s usually no good reason to close that old account, so keep it open and let it build your score one day (and purchase) at a time.

Making late payments

Late payments are costly to your credit score and your wallet. Though there are exceptions, the average late fee costs a cardholder $35. Plus if that late payment is reported to the credit reporting bureaus, the impact could be even great since it becomes a blemish on your otherwise sterling payments history. What’s the only thing worse than making a payment late?

Skipping payments entirely

You guessed it – skipping a payment can wreak all sorts of havoc on your credit. Your account may be sent to collections (usually after 60 days), your credit card company might begin to call you incessantly, and overall you’re probably going to start feeling really crummy about your personal finance situation.

Don’t let this happen! Never skip a payment and make maintaining an excellent score a priority; few monthly payments can effect as much as your overall credit score as the one required by your credit card. Keep it blemish-free.

Racking up interest

While high interest fees won’t directly hurt your score, they will make it harder to pay off your cards. This could in turn lead to snow-balling debt that increases your minimums and makes the likelihood that you’re late on a payment (or default altogether) more likely. You won’t be doing your bank account any favors, either.

If you’re racking up interest, consider transferring your balance to a new card that charges zero percent in interest during its introductory period. You’ll save money and pay back down your debt quicker at zero percent. It’s called “math” people!

Leaving yourself open to ID theft

Identity theft can be a credit killer, especially when you realize what’s happening after it’s too late. Carrying around unnecessary personal information like your social security number, using your credit card on public computers, using Password123 for ALL of your online passwords; these are all bad ideas that could leave you vulnerable to ID theft.

Take care with your cards, switch up your passwords and remove any unnecessary personal info from your wallet. It could be a credit score savior in the long run…

Using prepaid cards to build your credit

Don’t be fooled – prepaid cards do NOT improve your score in any way, shape or form. They might work as an alternative to a personal checking account, but because they’re not offering a line of credit, there’s no actual “credit” available on prepaid cards. Thus, they’re useless when it comes to building your score.

It’s not necessarily a credit killer, but it could very well be a waste of time.

Applying for the wrong cards

As you might have guessed, not all credit cards are available to all consumers. If your credit score is limited, bad or perhaps non-existent, you’re highly unlikely to get approved for those zero percent cash back cards you see advertised daily on TV.

Like we mentioned above, every hard inquiry of your credit has a small but negative effect on your score, and you want to keep these kinds of credit pulls at a minimum. Don’t waste a hard pull on a credit card you’re unlikely to get approved of. Similarly…

Taking snail mail credit card offers seriously

The word “pre-approved” is used pretty loosely these days, especially when it comes to credit card offers that find your mailbox. Just because you’ve been “pre-approved” for a credit card offer doesn’t mean your guaranteed approval. Not only that, there may be several other card offers available that work a lot better for you and your budget.

Think about it – if you hated flying, you wouldn’t sign up for a frequent flyer credit card, right? Don’t let the flattering pre-approved language rope you into a card you don’t want and will probably never use. The result could be a stale, inactive account on your credit profile.

Co-signing on a card with your irresponsible friend or family member

You may be a generous soul, but never get suckered into co-signing on an account with a friend or family member. Any missteps they have with this account will appear on your credit report. Don’t put your credit future in the hands of someone else. Politely decline any co-signing “opportunities” afforded by a friend or family member.

Taking out a cash advance

They aren’t quite as bad as Payday Loans, but with interest rates that hover around 30 percent and no grace period, your credit card is one of the last places you want to look for quick cash. In the end, the cash goes quick but the interest will surely linger, thus increasing your overall debt and the minimum payments due at the end of each month. That’s an unfortunate 1-2 punch to your wallet and quite possible your score.

Carrying a balance on multiple cards

When you carry a balance on more than one of your credit cards, you could be confusing the credit scoring models that be. The result – and I can speak to this personally – could mean a swift but significant drop in your score. I recently saw my Experian score drop 40 points, and the only thing that changed in the eyes of creditors was that I was once again carrying a balance – of $7, mind you – on my old card.

If you don’t believe me, maybe you should hear it from FICO: “A larger number of accounts with amounts owed can indicate higher risk of over-extension.”

Happy?

Assuming your student loans are enough to build substantial credit

It’s true that student loans can build credit. It’s not true that this is “enough” to build a substantial amount of credit, aka the kind of credit that can get you an auto loan, a mortgage, etc.

Student loans are considered installment loans. With installment loans, the amount owed each month is consistent. Creditors take these types of loans into account, but not as much as loans that are considered “revolving”; these are the loans in which the amount owed each month can vary. You know, like a credit card.

Plus, credit cards represent a line of credit available to you that you don’t necessarily owe. Installment loans on the other hand only represent how much you owe. It’s confusing, but in the end opening a credit card account will give you more of an opportunity to build significant credit.

Give your kids your credit cards

When you give your kids your credit card, you’re putting your credit score in the hands of someone who knows a lot less about credit than even you do. Adding your kid as an authorized user to your account is a good idea to help them build credit. But actually handing over said card is more than likely a bad investment.

If you’re really worried about their financial well-being in case of an emergency, set them up with a prepaid card instead. That way, there’s no danger of them falling into debt, and better yet no danger to you and your credit score.

Ignoring your credit report

By law Americans have the right to one free credit report each year. (You can actually apply to receive yours for free at AnnualCreditReport.com.) Your credit report provides the blueprint for how your score is calculated, and can clue you into little issues you either weren’t aware of or had no idea were affecting your score.

You might find an old overdue library book on your report, or perhaps an inaccurate address. Heck, you might find something on there that’s not yours AT ALL. According to a report out earlier this year by the FTC, five percent of credit reports contained serious errors that could alter a score by as much as 25 percent. One in four credit reports contained minor errors.

Basically, inaccurate information on a credit report is anything but rare. Review yours and research the necessary steps for getting these inaccurate claims removed from your report at once.

Allowing utility bills to pile up

Most utility companies won’t report your regular payments to the credit reporting agencies. But if you fail to make a payment, or decide to let these bills pile up and go late, they could report these bad habits to the major credit bureaus which will in turn make you look like more of a risk in the eyes of lenders.

Paying your utilities are unlikely to improve your credit, but they could certainly hurt it.

Sticking with your secured card for too long

Secured cards are actually a great way to build credit. That said, they have their limitations. Namely, their credit line increases are rare and can require a further deposit from the cardholder. Secured cards are also labeled as such on most credit reports. This is fine and doesn’t have a negative impact on your score, but again it does impose limits to just how much you can do with a secured card.

If you’ve spent a year or more with your secured card and have had no issues, you’re probably ready for an unsecured card. A new, unsecured card will increase your total available credit and add another new account to bolster your overall profile.

Lowering your own limits

Paranoid you’re going to spend too much on your credit card? You may ask your credit card issuer to lower your own limit. But as you’ve read a handful of times by now, your total available credit is only there to help you; lowering it is sort of like shooting yourself in the foot, especially if you’re already carrying a hefty balance.

Sock drawer that credit card if you’re really afraid of over-spending, but don’t willfully ask your credit card company to lower your own line of credit.

Changing your bank frequently

I bet you didn’t know that some (thought not all) banks check your credit score before approving you as a customer. Well, they do, and moving your accounts around frequently means that you’re generating more and more hard inquiries. Keep your money in one place and keep those hard inquiries at bay.

Applying for no-limit credit cards

Credit cards with no limit – such as business charge cards – sound like they should improve your credit exponentially with responsible use. But because they have no limit, the issuer isn’t reporting a line of credit to the issuers. Consequently, these cards aren’t improving your credit line or the all important credit utilization ratio we spoke of earlier.

There’s a limit to how much no-limit cards can really help your score, and the risk perhaps outweighs the reward.

Finally…

Maxing out your cards

We talked about carrying a high balance earlier, but how about maxing out one (or all) of your credit cards?

Yup – that’s a bad idea, too.

This isn’t an arcade; hitting the high limit is not a good thing when it comes to credit cards. It’s not as if your credit card issuer will extend your credit line once you’ve hit your limit. Nor will another credit card company be willing to take on such a high amount of debt via a balance transfer.

Basically, maxing out your cards is a sure sign to credit card companies that something about your finances isn’t right. Thus you start to look like a serious credit risk and, ultimately, your credit score can and will suffer significantly.

This post comes from personal finance blogger Jason Bushey. Jason runs the consumer comparison website Creditnet.com, an online authority on all topics related to credit.

10 Advantages of Using Multiple Financial Institutions

February 13, 2013 By Jennifer Derrick 5 Comments

I have several acquaintances that do all of their banking with one institution. (Typically it’s the bank that holds their mortgage or where they have a large investment account like an IRA or 401K.) They use that one bank for everything from paying the bills to loans to retirement savings. In some cases, they don’t even have multiple accounts or types of accounts at that one bank. They just have all their funds lumped into one big “checking account.”

Certainly it’s convenient, but keeping all of your money at one institution carries many risks. If a single things goes wrong with that one bank or one account, you could face financial hardships while everything is straightened out. Here are some of the advantages you gain when you spread your assets around.

Easier To Recover From Theft

If you have all of your money in one account at one bank, a hacker can wipe you out. While the money will probably be replaced, it takes time. While you’re waiting you won’t be able to pay bills or buy anything unless you use a credit card, and anything you have set up to auto-pay will bounce. You might be able to get the fees reimbursed, but that’s even more hassle. If you have money in a couple of places, you’ll have access to cash while the other problem is straightened out.

You Have More Freedom

If your main bank suddenly raises fees, drops interest rates, or changes its policies, it’s nice to be able to quickly move your business elsewhere. If you already have an account somewhere else, it’s a simple matter to transfer your funds. If you don’t have somewhere else to go, you need to do your research and go through the process of opening and setting up an account. That can mean you’re at the mercy of bad policies or rates for a longer time. Using multiple banks means that one bank cannot hold your money hostage.

Institutional Strengths

You can take advantage of each institutions’ strengths. As with any consumer product, some banks are better at some things than others. Some banks are just not good at handling investments. They don’t have a variety of funds to choose from or experienced advisors to help you. If you have a lot of investments, you may be better off dealing with a dedicated brokerage firm than with your local main street bank. Similarly, some investment firms do not make good checking account or credit card providers. Figure out your needs and then find the institutions that are the best match for those needs. It’s likely that you won’t be able to find a single institution that can meet every need that you have.

FDIC Protection

FDIC protection only covers the first $250,000 per depositor, per institution. (FDIC protection does not extend to investment accounts, only cash deposit accounts like savings or checking.) If you have more than that, you need to open another account at another bank to ensure that your money is protected if the bank goes under.

Protection From Overspending

Some people have difficulty not spending money if it’s in their main account. They think that if it’s there it’s fair game, forgetting (or choosing to ignore) things like emergency funds, retirement, and bills to be paid. If you keep the money you need to save in another account at a less convenient or online-only bank, you may find that you can better resist the urge to spend because the money is harder to access.

To Preserve Credit Union Access

When I first started out, my parents got me into the credit union that they used. Even though I no longer have any affiliation with the group that runs the credit union, I’m grandfathered in. I no longer use the credit union as my primary bank, but I do keep some money in there so that I retain my membership. If I completely closed the account, I would not be able to get back in and they are very useful for certain financial products such as loans and mortgages, if the need arises. If you have access to a credit union but want to switch banks, it may be wise to at least keep your accounts open there so that if you need the credit union in the future, you’re already in.

It Can Make Budgeting Easier

If you have your daily spending money in one account, the money you need for utilities and rent/mortgage in another, and your savings in yet another account, it can make it easier for you to budget. Instead of trying to figure out how much money you need to mentally set aside for each goal or payment, it’s all already separated for you. Some people find this complex, but others find it helpful to keep everything physically separate.

Protection Against Bank Failures

While it’s unlikely your bank will fail, the mess of 2008 taught us that nothing should be taken for granted. Even if the bank shuts down only temporarily, it can leave you stranded if you don’t have another source of cash.

Protection Against Screw-Ups & Accidents

Sometimes things go horribly wrong with banking. Someone enters the wrong account number and your account is erroneously charged. The ATM machine eats your card on Friday night, meaning you can’t get money for the rest of the weekend. If you have another source of cash, you’re not totally adrift while the bank sorts out the mess. If this is your only bank and only account, you’re out of luck until they fix it.

It Can Make Travel Easier

If you travel frequently but you only have your money in a local bank or credit union, you may have trouble getting cash on the road, or you may have to pay a lot of fees to do so. In this case it may make sense to keep at least some of your money with a nationwide/worldwide institution so that you can get money when and where you need it.

One thing to note: If you’re going to open accounts at multiple institutions, make certain that you are not drowning in fees. Search for free checking accounts or use online accounts. Make certain that you can deposit enough with each institution to cover minimum deposit requirements. If splitting up your assets means that you will be paying too much in commissions and fees, it might be better to consolidate with one or two banks. While there are advantages to keeping things in multiple places, it doesn’t make sense to spread yourself so thin that you have to pay fees with every bank. Do the math and figure out what will work for you.

You don’t have to have ten or fifteen accounts, but it can make sense to have at least a checking account, a savings account, and a brokerage account at different institutions. That way, you can move some money in or out of one if it becomes necessary. Putting all of your eggs in the one proverbial basket can lead to problems.

(Photo courtesy of Chase Lindberg Photography)

Pay Attention: Changes Affect Money

February 11, 2013 By Jennifer Derrick Leave a Comment

I wrote a few weeks ago about how many people are upset about the end of the Social Security tax holiday. Now that tax rates have returned to 6.2%, many people are struggling to readjust their budgets because they’d come to count on that money, rather than viewing it as a temporary windfall.

There’s another side to this issue and that is that many people were caught off guard by the end of the holiday. Either they didn’t know it was happening until they got that first reduced paycheck, or they didn’t find out about it until a month or so before it went into effect. Despite the fact that many in the media had been talking about it for six months or more, many people still had no idea that it was coming. Because they were unaware, they missed the chance to proactively adjust their budgets and instead had to scramble to make the bills with a reduced paycheck.

What this mess illustrates is that we, as citizens, have to pay attention to anything and everything that might affect our money. It’s tempting to tune it all out as noise and political wrangling. It’s not exciting and following the governments’ twists and turns can be detrimental to your blood pressure if party politics tend to rile you up. Well, it may be all of that and worse, but it’s essential to pay attention to it if you want to manage your money well.

The government makes many changes that affect our money, and some slip by so quietly that we don’t know they’ve happened until it’s too late. If you pay attention, though, you will be aware of what is going on. So what do you watch for? As a citizen concerned about your money, you have to watch for many things. Here are just a few.

Changes to Taxes

Are taxes going up? Down? Are certain deductions being eliminated or reduced? New ones added in? Are there programs like energy credits that you want to use before they expire? At the local level, are sales taxes changing? Are your property taxes being reassessed? Are the taxes on your retirement withdrawals going up or down? We all have to pay a lot of taxes and getting complacent about the amounts we pay and the deductions we get can hurt us. You have to stay aware of what’s changing and react accordingly.

Changes to Retirement Savings

Unless you’re one of the lucky few who’s going to get a full pension at retirement (and even then, you still need to be somewhat aware because your pension may be in danger) you have to keep abreast of the new laws and products related to funding your own retirement. Are contribution levels being raised? Are new products available like Roth IRA’s? What are the implications for your taxes if you participate in the various programs? Are deductions going up or down? Are the ages for catch up contributions changing? Are minimum withdrawal amounts changing? Every change can affect how much you can save, where you can save it, when you can withdraw it, and how much you’ll pay when you do. It’s important to understand these things.

Changes to Government Programs

Things like Social Security and Medicare will affect all of us someday. Just because you’re young doesn’t mean you don’t need to pay attention. Changes to these programs may impact how much you need to save for retirement and how you’ll have to procure health care. For those closer to or already in retirement, any changes can impact your benefits and the amount you receive. It’s better to know about changes than to be blindsided by a smaller than normal check one day.

Changes in Interest Rates

When the Federal Reserve changes interest rates, it affects everything from your borrowing costs to the interest rate on your savings account. You have to pay attention because any change can affect your debt payments if they are variable and tied to the prime interest rate. Lower rates may signal a good time to go house shopping, while higher rates signal a chance to earn more on your savings accounts and CD’s.

Domestic Money Issues

If you think that the debt ceiling or the passing of a new budget each year doesn’t affect you, you’re wrong. These things impact taxes, employers’ willingness to hire, the stock market, government programs and spending, and the availability of certain services. You have to know what’s going on with the country’s spending if you want to keep your money safe and growing.

Foreign Money Issues

Just because it doesn’t happen here doesn’t mean it doesn’t matter. You only have to look at Europe’s debt crisis to see what happened to our own stock market as a result. Any time there is unrest or trouble in other parts of the world, it trickles into our economy. Because we are all so interconnected and dependent on one another these days, a lengthy strike or a war in another country can impact our economy.

Now, none of this means that you have to become an expert on foreign and domestic policy, economics, and taxes. No one can know everything about every issue that will impact your money. But you do have to be generally informed and aware. Read a newspaper occasionally. Watch Bloomberg TV or CNBC. Read the news online. Listen to news radio while you drive to work. Just pay more attention generally to what’s going on in your local, state and federal governments.

I’ll be the first to admit that reading about this stuff isn’t as interesting as checking the sports scores or seeing which celebrity did something stupid today. It’s not even up there with watching the latest viral YouTube video. But it is something you have to do if you want to make smart money decisions. Only by knowing what’s going on can you prepare for it and change your money strategies. When you know what’s going on, you can also join the movement to lobby for change. Don’t like something the government is about to do? Speak up and get involved. At least know enough to be able to cast an informed vote for the candidate who shares your views.

You have to take an active role in managing your money if you want it to grow and work for you. That means knowing what the government is doing and how it affects you. If you just wait for things to happen, you’ll always be reacting and you’ll always be playing catch up. Those who pay attention have the chance to be proactive and to either take advantage of opportunities or limit the damage.

(Photo courtesy of R/DV/RS)

Using Credit as an Emergency Fund is a Bad Idea

January 16, 2013 By Jennifer Derrick 7 Comments

Not too long ago my neighbor needed a new water heater. After it was installed, we went on one of our daily walks and she moaned about the expense and hassle.

“Well,” I said, “at least you covered it out of your emergency fund, right?” I’ve heard her speak about their emergency fund so I simply assumed that the replacement water heater had been paid for using emergency cash.

“Oh, sure. We put it on the HELOC.”

“Huh? I thought you had an emergency fund,” I said.

“We do. That’s what the HELOC is for.”

Oh, man, I thought, seeing the huge risks and holes in this plan. Turns out the emergency fund I’d heard her speak of before wasn’t made from cash, as I’d assumed (yet again, this proves the wisdom of the old adage about assuming). Her emergency fund is made up of credit.

She’s not the only one. I’ve heard of many people who use credit cards, HELOCS, and other loans as emergency funds rather than saving up cash. Their thinking goes that those lines of credit are just as good as cash and easier to access in an emergency when compared to transferring money out of a savings account or cashing in a CD or stocks. Many of them are certain that they will be able to pay if off before paying much, if any, interest. Some simply can’t be bothered to save up the cash, while others use this method because they want to do other things with their cash like invest, buy real estate, or simply spend on things that are more fun.

Using credit as an emergency fund carries a few big risks, however. First, if you’re using a HELOC you’re essentially putting your house on the line. A home equity line of credit is guaranteed by your home so if you can’t pay back the loan, the bank can take your house. If my neighbor can’t pay for that water heater, she could lose her house.

Second, credit lines require that you pay interest. While a HELOC might be low interest, you’re still paying interest. And credit cards can have interest rates as high as thirty percent or more. If you’re using payday loans for an emergency fund, you could easily be looking at a one-hundred percent interest rate. If you don’t pay these lines of credit off immediately, you’ll end up paying far more in interest than the original emergency would have cost.

Many people have found themselves hopelessly in debt using the credit as emergency fund strategy. They start with the best of intentions. They swear to pay it off right away and not to use it for anything other than an emergency. But things go wrong. An emergency happens around the holidays and that credit card gets tapped for holiday spending in addition to the emergency. Or more than one thing goes wrong at once, meaning that you have to put more on the credit line than you intended. It doesn’t get completely paid off in the first cycle and so the interest starts accruing. Now the payments are higher than you planned. And on it goes until you are deeply in debt, all from one emergency that could have been handled, in cash, with a regular emergency fund.

Using credit for an emergency fund only works for those who are disciplined enough to pay it off immediately, every single time. This usually means once of two things: Either you have a very high income that affords you enough cash to be able to pay it off before the interest begins, or you have other assets such as stocks that you can liquidate to pay off the debt. For most people, though, using credit as an emergency fund is a strategy to avoid. It may be painful and require sacrifice in the short term, but you’re better off stashing some emergency cash in a savings account.

(Photo courtesy of eliazar)