Personal Finance Resources

Credit cards can be disastrous, and the credit card companies are becoming even more sneaky when it comes to interest and fees. Here are some quick tips to watch out for when dealing with these financial monsters:

1. “Fixed” Interest isn’t always fixed.
   Often, credit cards have clauses in the terms and conditions that will allow them to jack up your rate in the event of default, or even based on continual credit reviews they perform on you. That means if you have a 30 or 60 day late payment on a different line of credit, your credit card may jack the interest rate on you, even if you have been perfect in your payments with them.
2. Don’t go over your credit limit.
   An over-limit fee of $20, $25, or more is assessed for going over your credit card’s limit. This may not be a one time fee either. They may charge this fee each and every month you remain over your credit limit. Most credit card companies have a way for you to review your account online, use this service, and keep a close eye on what you are spending.
3. Make timely payments.
   I can’t stress this point enough. You cannot be late with your credit card company. You must make your payments, and establish good credit. All it takes is a couple of late payments to really put a bite in your credit, and then when you want to go buy that house, you can’t.

I have said it before and will say it again, credit cards are a good way to build up credit when you have none. However, they are very dangerous, because you get the euphoric feeling that you can get whatever you want because you have a piece of plastic to buy it with. Be smart, use your card as a credit building tool, not a license to shop.

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I love to interact with my readers/subscribers. So don’t hesitate to send in a question and ask me to post about it. Personal Finance Resources is all about helping you with your home finance situations. In this post, we are going to address a few questions posed by one of you, on the topic of Retirement Savings vs Paying Down Your Debt. Here is the email communication:

“I happened to stumble upon your extremely valuable info while researching methods to pay off my credit cards. Don’t know if you’ll have time to answer my question, but here goes: I’m 28, have $20,000 cc debt (@ ~15%), and approx $50,000 in a Traditional IRA and Roth IRA accounts. Do I take the penalty and pay off the CC? I no longer have any need for CC now that I’m out of school, so I’m not worried about this situation reoccurring. Problem is, that compound interest down the road is just so tasty! I figure the future money to be gained is greater than the cc debt with interest, but I need to repair my 611 credit score so i can at least think about buying a house and getting a business loan within a reasonable period of time. Any suggestions?

I’ve been thinking about this one for some time now and your help is greatly appreciated. I am working and will be in the 25%, possibly 28% tax bracket, and have been paying $400 to $500 a month in credit card payments. I’m not sure what my penalties for early withdrawal would be, but if I can invest those $400/month into my accounts instead of losing it to the credit card companies, I think I will be able to compensate for the loss. As it stands now, I have not been able to, nor will be able to put any new funds towards my investments with these current credit card payments. What would be my total withdrawal (including penalties) if I were to pay off the credit cards completely, or would it be wiser to pay off 75% of the credit card debt and continue to pay smaller credit card payments while adding small amounts to my retirement funds? I figure there is a good cost/benefit ratio, but my extreme desire to purge myself of the credit card parasites has clouded my reasonable judgment. “

Possible Solution

The first, and from what I can deduce as the most important question posed here is whether or not to take a tax penalty and pay off the credit cards. If you read my post on Credit Card Secured by Roth IRA, you will notice that in addition to paying income tax on an IRA withdrawal, you will also likely be penalized with an additional 10% tax. So in this case, the total tax on a withdrawal might be as high as 38%. So, to be able to pay off the $20,000 owed to credit cards, a withdrawal of between $30,000 - $33,000 would have to be made. That would be the better part of the IRA account held.

The positive side of this equation is that the $400-500 a month spent in credit cards could be put into the retirement fund as an investment for the future. But it would take at least 4-5 years to replenish the money withdrawn from the retirement account.

The simple fact of the matter is, we need to put our money where it will earn us the most (or cost us the least). If it were not for the serious tax implication of early retirement withdrawal, it may be better to pay off the credit cards, depending on how great your return is on your investments. If it is less than the 15% being spent on credit card interest, than it would make sense.

The Personal Finance Resources Solution(s)

If possible, I would attempt to work out a secured or unsecured loan with my bank at a lower rate of interest. Try to get it down to 10% or less. If you had a house, this would be an excellent situation to use a Home Equity Line of Credit. If you are unable to obtain a consolidation loan, then use the debt stacking method to maximize your payments over the offending credit cards. Then I would stop any contributions to my retirement account, stop going out to eat, cut the cable TV off for several months, and put the maximum amount of money possible into paying off the debt.

With regard to repairing your credit score (611 should be enough to obtain an FHA loan for a house, by the way), credit card companies are mostly interested in a continuous stream of punctual payments. So paying off the cards now would help your credit score, but long term, you will build your credit better if you make some payments. I am not saying to make minimum payments, but make several months of large (as large as you can) payments to increase your credit score while getting the balance down.

I hope this solution was helpful. Consider signing up for my RSS feed so that you don’t miss out on any of the upcoming personal finance issues and solutions.

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There are quite a few adverse effects of cheap insurance. They might be a temporary debt help, but what is the use of such help that will in turn contribute to more debt piling. This consequently contributes to public debt. Turning to such resort is a common occurrence amongst people who work at home. True, that there are edges to best work at home, but ones oft left ignorant.

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College kids and credit cards are a dangerous mix, especially these days. Children in today’s society are more irresponsible than ever before. I wouldn’t even trust most adults in their early twenties to take $20 down to the store to get milk and bread. Kids just do not have any sense of responsibility or care in the world, and it is mostly due to bad parenting. Families today have both parents working, and typically a solid income that will allow for some extra spending money, and debt in the five digit range - yes I said five digits, as in over $10,000 in debt. What happened to our morals, where is our sense of financial management? These are core issues here at Personal Finance Resources. But let’s discuss some key points that will help your child to be aware of their spending, and have a notion of what the value of a dollar really is.

Teach Them How Debt is Like a Prison

Debt really does enslave the borrower. The Bible says in Proverbs 22:7 “The rich ruleth over the poor, and the borrower is servant to the lender.” What would happen to you if you lost your job? Would your finances crumble? Would you lose your house and car(s)? These are very important points that you can discuss with your children. Let them know how dangerous it is, and how it is like a house of cards that can fall at any moment.

Train Them in Personal Finance Management

Small amounts of debt (like a few hundred dollars on 1 or 2 credit cards) can be very beneficial to a first time borrower, like a college kid. This will help them to establish credit, and later they will be able to get approved for a loan for a house, car if necessary, and other things. Running these small balances allows the credit card company to earn a little interest, while building up the college kid’s credit rating. But be very, very cautious and monitor your credit card account, because all too often we fall into the trap that the credit card companies set, “Go ahead and buy it now, you won’t have to worry about paying for it until much later.”

Set Low Balance Maximums

This will help to curb the bliss notion of using a piece of plastic as a license to go on a shopping spree. If you as a parent are helping your child to build credit, set a balance of maybe $250-500 on your child’s credit card, thus forcing them to come to you for additional funds, and allowing you the opportunity to further teach them about financial responsibility.

Today’s lesson, in a nutshell, is focused around teaching. As a parent, we must teach our children all things, including financial responsibility. The earlier they learn, the better off they will be. Take the time to teach them, setup chores and allowances, make them work for things they want to buy. It will make them place the appropriate value on a dollar, and they will need that training later in life.

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Have you every asked, Can you get a credit card secured by Roth IRA? How about this one: Can I withdraw funds from my IRA to pay off credit card debt? Well in this post, I am going to quickly cover these requests, and the open it up for any comments or questions you may have.

• Credit Card Secured Roth IRA
  • The short answer to this question is no, the government does not allow you, or any family, etc. to borrow against your IRA, or to benefit in any way from your IRA or Roth IRA account, other than the intended use of the account (ie when your retire, using it for retirement). This includes any type of borrowing, whether it be through a credit card, bank, or anything else. Now you can, of course, withdraw money from your IRA accounts at a (typically) 10% tax penalty to pay any debt you wish. In this scenario I would say you should take careful consideration, and use my credit card debt payoff calculator for assistance in calculating a time line for debt freedom, then weigh that option with the tax penalty that you face.
  • However, the government does allow you to roll over retirement accounts, and gives you 60 days to complete the transaction. So, if you need money right away, and you can repay it within 60 days, you could use the money from retirement to meet the immediate need, and make sure to repay it all when you complete the roll over to the account. This is tricky, so I highly recommend seeking professional assistance on this one.
• Withdrawing Funds from an IRA to Pay Off Credit Card Debt
  • As noted above, this is a viable option. But you must consider what you will be giving up in the long term. In my article, Invest in a Traditional IRA or a Roth IRA?, I compare the difference of the two just based on tax implications, and there is a significant difference in the amount of money accumulated at retirement age. So if you further compound that by withdrawing funds from your IRA to pay off debt, you may be setting yourself up for long term problems. There are other options; one option is to try to pay off debt using debt stacking, another is to seek online credit counseling. Debt stacking can help you accelerate your debt freedom date without contributing any additional monies to your credit cards. I do not recommend withdrawing from your IRA for any reason other than retirement, but if you have exhausted all other options, then consider it with reluctance.

In short, there really isn’t a viable option to borrow, or to secure a credit card with any kind of IRA. Even withdrawing the funds temporarily while rolling over to other fund doesn’t help most people very much. And taking the funds out to pay off debt isn’t a very good option either, because of the long term negative effects. If it all possible, utilize other methods, as mentioned above to get debt free. And lastly, make sure to sign up for my RSS feed, to get the latest and greatest on personal finance and how to reach your financial goals. It’s free, and well worth your time. If you have additional questions or comments, please post them below.

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To apply for a credit card, one needs to now about the way the credit card finances work. Preferably a low interest card should be applied for. This is because whether it is a bank of america card , or any other banks, every bank charges a certain amount for credit cashed. Before venturing into bank loan market on your card, it is advisable to consult a home mortgage consultant, who are used to such requests and their outcomes.

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This article is dedicated to giving you a Credit Card Debt Payoff Calculator. My intention is to provide you an easy way to determine which credit card to focus your payments on, and simultaneously predicting the number of months left to pay on all your cards. Now, the spreadsheet shown below is an outlandish situation, but I wanted to show you an extreme circumstance, and how to use the spreadsheet. Ok, enough introduction, let’s get into the details of the spreadsheet.

Here are the quick and dirty directions to inputting the data:

1. Delete all the rows that you don’t need. Trim it down to just the number of cards you are running balances on.
2. Determine how much money you can devote to all of your credit cards per month, and enter that number in the cell labeled Available to Pay.
3. Update the Balance column to reflect your current balance on each credit card.
4. Update the Interest Rate column per your agreement with each credit card.
5. Enter the minimum payment for each card in the Minimum Payment column (the default method uses a calculation based on 2% of the balance, you may update this function per your card agreement, to minimize the maintenance necessary on the spreadsheet; post a comment at the end of this article if you need help).

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The strategies contained in the article are not that advanced, but are very solid. The very first section “Pay your bills on time to maintain a good credit record and qualify for low rates.” DUH! Even if you are only able to pay the minimum payment, or less than the minimum payment, send the credit card something. All it takes is a couple of 30 and 60 day late payments on your credit report to plummet your credit scores. However, if you are just starting out, and have no credit, it would be worthwhile to run small balances on 2-3 credit cards, in order to build your initial credit. Always paying your credit cards off at the end of the month will not get you any substantial credit.

When I first started out, I did exactly that. Ran some small balances and began to build some credit. Beware, though, as this can be extremely dangerous for someone new to credit cards. A euphoric feeling tends to circle around the ability to get nearly anything you want without having the cash. Carefully watch what you spend and track your balances.

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With so much information at your fingertips these days, identity theft has become a huge issue in the United States and credit card companies are looking to help their clients avoid identity theft at every turn. Identity theft credit cards provide protections available to you for no extra cost, and give you that added security to put you at ease when using your credit card. Each credit card company will offer different identity theft credit card protection for you, and it’s best to know whats out there when applying for a new credit card.  The following is a breakdown of four major credit card companies, and how they deal with indentity theft:

Discover’s Identity Theft Credit Card Protections

• Credit File Montitoring - All three credit bureaus are monitored for unusual activity every business day, if anything is found that could indicate fraud, you will be contacted promptly by means of an email, text message or mail.
• $25k Identity Theft Insurance - Provides each client theft insurance up to $25k with no deductible for expeneses associated with identity theft (not for New York residents).
• Expert Identity Theft and Credit Report Advisors are always on call to answer any questions.

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It is important to know how credit card interest is calculated. It is not calculated the same way that a CD or an interest bearing savings account is calculated.  The key problem for the consumer is that the credit card interest rate is calculated daily.  I’ll will explain more in a minute on this.  First let’s go over the typical balance types that credit card companies use:

• Average Daily Balance
  By far the favorite of credit cards.  Every day, your balance is recalculated with any payments, adjustments and/or additional finance charges.  With some credit cards, new purchases are also included in this calculation.  At the end of the month, these daily balances are averaged over the number of days in the billing cycle.
• Two Billing Cycle Balance
  This method is most advantageous for the credit card company.  This method is an extension of the average daily balance method, but utilizes two billing cycles to come up with the average daily balance.  The typical grace period (which is usually 28 days) is non-existent under this method.  Also, all your payments, regardless of size, do not truly reflect in the interest calculation until two fulls months later.  Definitely shy away from this kind of offer.
• Adjusted Balance
  If possible, this is the method you want to be using.  Under this method, all payments and credits are subtracted from the preceding billing period ending balance.  Therefore all interest calculations for the current month are being exacted on a lesser balance.

So when you are shopping credit card offers, take the above information into consideration.  It may not sound like it makes much of a difference, but you will see in a moment just how much of a difference it can make.  Remember above how I said that credit card interest is calculated daily?  This is how virtually all credit cards calculate interest.  This means that every day compounded interest is added to your balance.  But Jeffry, I don’t see it reflected in my balance, what are you talking about?

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