5 Quick Fixes to Improve Your Credit Score

• Credit•Credit Cards
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Over the past ten years, the average credit score in America has hovered in the high 600’s. This is considered a fair credit score, but definitely not excellent.

If you’re among those who have a fair credit score and are looking to improve it, you’ll have to focus on a few different financial principles. Fortunately, there are easy fixes to improve your credit score. But first, let’s take a look at how your credit score is calculated:

How Your Credit Score Is Calculated

There are a number of factors that go into calculating your credit score (and, depending where you check your score, there are even different formulas!). For ease’s sake, though, let’s go with the golden standard: the FICO. Here’s how your score formula breaks down:

  • Payment history (35%) — Payment history is whether, and how often, you pay your credit accounts on time.
  • Amounts owed (30%) — Amounts owed is how much credit you’re using at a given time, compared with your total available credit.
  • Length of credit history (15%) — Length of credit history is the average age of your credit accounts.
  • Credit mix (10%) — Credit mix is the variety of accounts you have including credit cards, retail credit cards, mortgage loans, auto loans, and most other kinds of debt.
  • New credit (10%) — New credit is how many recently opened credit accounts you have, and also how many recent credit inquiries you have.

Now that you have an idea of where you stand and why, let’s look at how you can improve upon your credit score.

Fix 1: Get Current With Your Bills

Paying for bills on time is the most important fix you can make to improve your credit. Since payment history makes up the majority of your credit score, this will have a significant impact. Potential lenders look at your payment history to determine how likely you are to pay their loan/revolving credit back on time.

One way to make sure you pay your bills on time is to set calendar reminders. I set calendar notifications one week before my credit card due date, as well as one day before. My bank’s mobile app also sends a reminder to my phone the day before payment is due.

If you miss one payment, it’s not the end of the world. As long as you have plenty of on-time payments, one missed payment shouldn’t plummet your credit score. Just make sure you continue to make on-time payments after that.

Fix 2: Reduce And Eliminate Debt

Amounts owed is the next most important factor that contributes to your credit score. Your credit utilization ratio is the current balance on your debts divided by your available credit. You want to keep your credit utilization ratio as low as possible.

Reducing and eliminating debt will decrease your credit utilization ratio. To reduce your debt, simply continue making on-time payments to your bills. It’s great if you can pay more than the minimum balance. This will help you eliminate the debt faster. If you can pay your entire credit balance off in full each month, that’s even better!

There is no magic number for your credit utilization ratio (though some financial gurus recommend staying below 35%). Just keep in mind that lower is better.

Fix 3: Ask For A Credit Limit Increase

Another easy fix to improve your credit score is to ask for a credit limit increase. If your debts remain the same, having a higher credit limit will decrease your credit utilization ratio. Having a lower credit utilization ratio, in turn, improves your credit score.

The point of increasing your credit limit should be to decrease how much available credit you’re using. It shouldn’t be used to further fund your lifestyle or pay for additional expenses.

When you request the credit limit increase, ask if it’s possible for the credit card company to do so without doing a hard pull. A hard pull is an inquiry on your credit report that can have a temporary negative impact on your credit score. Instead, ask if the credit card company can do a soft pull.

Fix 4: Avoid New Credit Cards

Getting a new credit card affects two parts of your credit score: length of credit history and new credit. When you get a new credit card, your average length of credit history decreases.

For example, let’s say you have two credit accounts — one is six years old and the other is three years old. Your length of credit history will be 4.5 years (the average of your accounts’ ages). If you open a new credit account, the average age of your accounts will plummet because the newest account will be zero years old.

Another tip is to make sure you keep your oldest credit card open. This will keep your length of credit history long and help improve your credit score.

Although they have a small impact, recent inquiries play a role in your credit score as well. As previously mentioned, a hard pull creates a small dip in your credit score. This is another reason to possibly avoid getting a new credit card.

Fix 5: Check Your Credit Report

Checking your credit report can only help you. It may not have a direct impact on improving your credit score, but it can help you avoid some very costly mistakes.

You should check your credit report to make sure there aren’t any unauthorized accounts under your name and that all of your payment history is correct. Sometimes data furnishers make mistakes. Catching those mistakes early and removing them immediately will prevent any negative impacts to your credit score.

You can check your credit report for free at annualcreditreport.com. All three bureaus are required to offer your credit report for free each year. I usually check my report from one of the three credit bureaus every four months, so that I have an opportunity to check for errors multiple times throughout the year. Sites like myFICO, Credit Karma, and Credit Sesame also offer free credit reporting tools.

The Takeaway

These easy fixes to improve your credit score are based on the five factors that contribute to your credit score, as determined by FICO. It’s important to be patient when it comes to improving your credit score.

There’s no magic formula to increase your score by 200 points. But with persistence and following through on these tasks, you can improve your credit score over time.

5 Ways to Save Big On Things You’re Already Buying

• Consumer•Frugality
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5 Ways to Save Big on Things You Already Planned to Buy

I’ve never been the type of person to clip coupons at the grocery store. If you are like me, you may have found that proactively browsing for 10 cent deals is not a cost-effective use of time.

However, I still love a good value. Nowadays, I can leverage technology to help me save on items that I am planning to buy. Here are five ways that you can whittle an extra 1-60% off things that are already on your list.

  1.   Shop through your credit card rewards program

I’m part of Chase’s Ultimate Reward Network. I automatically earn 1% on purchases and 5% on quarterly incentives, just by swiping my card. I also add rewards multipliers by routing my purchase through Chase.

When shopping online, I keep in mind the stores that are affiliated with my bank’s credit card reward program. This list includes retail stores ranging from Walgreens to Nordstrom. All I have to do is use the Chase portal to access those online stores, and make my purchase as usual. Then, watch the points add up.

The rewards can be huge, actually. You can earn double, triple, and even 20x the points per dollar, depending on the store you choose. The extra rewards are immediately added to my account and can be converted into cash using at 100 points to the dollar.

An added benefit of this approach is that there is no penalty if you return the item. The additional rewards points received are simply removed automatically when the transaction is reversed.

I personally use Chase, but other companies like Ebates, FatWallet, and MyPoints have similar programs.

  1.  Buy a discounted gift card

It seems like there is a secondary market for everything these days. Gift cards are no exception.

It makes sense that if you have a gift card for a store you don’t frequent, you could sell it to recoup some of the funds. Conversely, if you know you’ll be shopping at a particular store, you could buy a discounted card that someone else is looking to sell.

There is plethora of sites to buy discounted cards, but the easiest way is to use an aggregator like Gift Card Granny and find all of the deals in one place.

Deals can vary based on supply and demand, as well as store popularity. Discounts on Amazon gift cards, which are versatile and very popular, tend to hover around 1%. Retail stores such as The Limited and Coach, however, can skyrocket to over 50% savings.

You can either purchase digital cards are instantly sent to your email, ready to use in seconds. Plastic cards are also an option, and arrive within a week or so via snail mail.

The biggest risk with this approach is purchasing a card that doesn’t work. Each company has a unique protection policy, so make sure to read the details before you buy. Look for companies that offer a 100% cash back guarantee.

  1.  Buy a gift cards through reward programs

New startups, like the app Benefit, allow customers to buy gift cards while seeking cash back rewards. Before you make a purchase at CVS, Old Navy, Amazon, the Olive Garden and many others, quickly buy a digital gift card through the app and save up to 10%.

Have you been in the situation where you wanted something that was $12, but had a $25 gift card? Say goodbye to fixed price cards that encourage you to purchase more in order to to “use it up” (or even worse, let it go unused). A great thing about this app is that many retailers allow you to purchase a gift card for the specific amount you need… down to the penny.

Benefit also gives customers the option of linking a credit card or bank account to their application. Since transaction costs are higher when credit cards are used for purchase, the rewards incentives are too. Rebates are an average of 3% higher for cash purchases.

Note that you should only buy gift cards for purchases you intend to keep, though. If you return the item, you are given the money back on a gift card instead of cash.

  1.   Search for Promotional Codes

If you see a field for “Promotional Code” during an online checkout process, it may mean that the site offers additional buying incentives. It is easy to find out, just search for the company site and the word coupon and see what pops up (Here an example: Search for “Target Coupon”). Try it for retailers, restaurants, ticket purchases—anything you can buy online.

RetailMeNot, Coupons.com, and Coupon Cabin are popular sites that aggregate promotional codes. You may find codes that open up free shipping, an extra 15% percent off, or a $10 discount on your purchase. Just copy the promotional code from your search results and paste it in the promotional code field. Not bad for 30 seconds of work!

  1.   Use retail price monitoring apps

For a long time credit cards have offered the benefit of honoring price adjustments for items that go on sale within weeks after the point of purchase. Most consumers forget about this benefit or feel that it is not worth their time to report the price change. Recently, apps and tools have been flooding the market to automate both the identification of price changes and the refund process.

Paribus is a site that taps into your email and Amazon account to monitor online purchases. When it finds that the exact item you purchased has a price drop, they work with your credit card to honor the price adjustment. In return, they take a small cut, but it’s money you likely wouldn’t have sought out anyway.

Similarly, many credit card companies offer their own opt-in monitoring programs. I suspect we will see more of these companies come to market.

Stack rewards programs, discounts, promotional offers, and monitoring services for ultimate savings!

Finding the best combination of discounts can be a fun and profitable game. Advanced savers can use these strategies in tandem to increase the rewards.

Example 1

  • Use a cash-back credit card that incentivizes department stores at 5%.
  • Add a promotional code for 20%.
  • Then, let a monitoring service find additional 1% saving two weeks after you made the purchase.

That is a 26% discount!

Example 2

  • Use a 2% cash back credit card to purchase a gift card discounted at 19%.
  • Layer on a %10 coupon code.

That is a 31% discount!

There are many ways to save a little extra cash on what you’re already planning to buy. All you have to do is utilize the many resources available to you, plan ahead when you can, and take advantage of all of the discounts and promotions just waiting to be found. Happy saving!

Now, let’s hear from you. Have you tried any of these techniques? Tell us about your best combinations for saving online!

Top Credit Card Fees to Watch Out For (and How to Avoid Them)

• Credit Cards
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Editor’s Note: Thank you for your interest, any offer(s) below might be expired and no longer available.

At the end of day, banks and credit card issuers are businesses. As such, one of their primary aims is to make a profit. Part of the way these companies make money, of course, is through fees.

Many people think that credit cards are bad because they get you into debt and can cost you money. Although both can be true if you use credit cards unwisely, credit cards can also serve as a powerful tool for increasing your purchasing power and providing you an extra layer of protection.

Your goal should be to reap the benefits of credit cards without paying more than you need. To do so, it’s important to know the terms that come with your credit card, especially the fees associated with it.

Here are six types of credit card fees to watch out for, and how to avoid them:

Annual Fee

With so many credit cards on the market that have no annual fee, you may wonder why anyone would intentionally sign up for a card that carries one. One reason is because those cards tend to offer more generous rewards.

Take, for example, the Chase Sapphire Reserve Card, which has an annual fee of $550. But it comes with an annual travel credit of $300 and many other travel perks. These include trip cancellation insurance and complimentary airport lounge access.

If you decide that a credit card is worth its annual fee, all you have to do is plan for that expense each year. You can either save for it on a monthly basis or set the money aside in a separate account when you run into extra cash.

Foreign Transaction Fees

Foreign transaction fees are applied by your credit card issuer when you make a purchase outside of the United States. On my Wells Fargo Cash Back Card, the foreign transaction fee is 3%. This is pretty standard.

One way to avoid foreign transaction fees is to use cash. You can convert U.S. dollars into foreign currency before you leave the country. You can also use an ATM once you get to your travel destination.That way, you’ll pay a one-time flat fee rather than an ongoing percentage of your purchases.

If you’d feel more comfortable using a credit card abroad, there are plenty of credit cards that have no foreign transaction fees. To name a few: the Chase Sapphire Preferred Card, Capital One Venture Rewards Card, and BankAmericard Travel Rewards Card.

Paper Statement Fees

Banks like PenFed have started issuing a revolving fee for customers receiving paper statements. For banks and credit card issuers, it’s a way cut costs.

Although small, this fee is simple to avoid. Simply opt for electronic statements instead. If you ever find the need to print a copy of one of your statements, you can do so from your home or office.

Balance Transfer Fee

A balance transfer moves your account balance from one credit card to another. This is often done to reduce or eliminate the interest on a debt. By transferring your balance on a high-interest credit card to a card with a lower interest rate (or promotional interest rate of 0%), you can save a lot of money. It can also allow you to pay off your debt faster. That’s one reason we track the latest 0% balance transfer offers.

The only downside is that balance transfers come with a fee — often 3% to 4%. You’ll have to do the math to figure out if the fee is worth the transfer. Depending on your interest rates, it probably will be.

Cash Advance Fee

A cash advance fee is charged when you borrow cash against your credit card. Typically, a cash advance fee is between 2% and 5% of the amount you withdraw.

An advance comes with additional costs as well. The amount you withdraw will start to accrue interest from the date of withdrawal. Also, the interest rate for cash advances is often higher than that of normal credit card purchases.

It’s best to avoid taking out a cash advance if at all possible. Consider pulling the money out of your savings instead. If the amount you need is really high, withdrawing from your checking account and getting hit with an overdraft fee may even be cheaper than a cash advance fee.

Late Payment Fee

A late payment fee is assessed when you fail to make a payment on your credit card bill by the due date. According to the CARD Act, late payment fees must not exceed the minimum payment due. Typically the fee is $25 or $35.

The best way to avoid paying a late payment fee is to always pay your credit card bill on time. I have automatic payments set up, so I don’t even have to think about it. On the due date, my last statement’s balance is automatically transferred from my checking account to pay my credit card bill. In addition, I also have a monthly reminder on my calendar to check that the bill’s been paid on time.

If you don’t pay your entire balance in full each month (although that’s highly recommended), at least pay the minimum payment due. That way, you can avoid the late payment fee.

Final Thoughts

The good news is that most of the credit card fees out there can be avoided. Others, such as the annual fee and balance transfer fee, can often be worth paying for.

By law, you are entitled to know all fees associated with your credit card, as well as how those fees are calculated. You can find most of this information directly on your monthly statement. If anything is unclear to you, don’t hesitate to call up your credit card issuer and ask questions. It’s your right as a consumer.

Why borrowing for a wedding is a bad idea

• Credit Cards•Family & Life•Mortgages•Planning
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I enjoy weddings. I’m just not sure how much I’d pay for one.

That thought was prompted by reading recently that the typical wedding in the United States costs around $30, 000 these days. Now, I’m a little skeptical about that number. After all, there is whole cross-section of businesses dedicated to promoting the idea of big weddings. I think of it as the wedding industrial complex. It is in their interest to promulgate figures that suggest it’s perfectly normal to spend a small fortune on a wedding.

Still, whether or not $30, 000 is an accurate figure, the fact remains that many people spend far too much on their wedding. It could be seen as a welcome sign of prosperity, except that these are not prosperous times. No, we are living with an epidemic of people struggling to pay their student loans and failing to save for retirement. So really, it is worrisome to see couples start their lives together by taking on a heaping helping of debt.

There is even an entire category of personal loans called wedding loans. It is worth looking at how those stack up relative to other options for financing a wedding; but also, I can’t resist the urge to follow that up with reasons not to borrow money for a wedding in the first place.

Compare wedding financing options

Here are some of the ways you can borrow to pay for your wedding:

  1. Credit card. Wedding expenses tend to come up over a period of time, as deposits have to be made, dresses and tuxedos bought, etc. These periodic expenditures make it all too easy to fall back on a credit card as a handy way to pay. But don’t forget that credit card debt is extremely expensive and interest rates are likely to be especially high for young couples with limited credit histories.
  2. Personal loan. At around 10 percent, personal loan rates aren’t exactly cheap, but they are lower than most credit card rates. Also, debt repayment is structured, which makes it easier for borrowers to stay on track toward timely repayment.
  3. Home equity loan. If you are lucky enough to already own a home by the time you get married, a home equity loan is a cheaper way to borrow than either credit cards or personal loans. Just be sure you feel confident in your long-term job security, because using your house as collateral really raises the stakes of borrowing for your wedding.
  4. Line of credit. Another option is a line of credit, which may be either unsecured or secured by equity in your home or some other asset. (Again, secured loans are generally cheaper, but they put your collateral at risk.)
    There are pros and cons to using a line of credit to finance a wedding, though. Since you don’t pay interest until you actually use the line of credit, this approach can be well suited for the way wedding expenses don’t all come up at once. On the other hand, having access to a line of credit can make it too easy to make spur-of-the-moment upgrades or additions to your wedding plans, which can send your costs soaring.

Why going into debt for your wedding is a bad idea

So now I get to be the wet blanket and tell you why you should not borrow to pay for your wedding:

  1. Long-term debt is bad for short-term expenditures. Borrowing for assets like cars and houses makes sense because the useful life of the asset outlasts the repayment period. However, borrowing for short-term events like vacations or a wedding means taking on debt without an offsetting asset.
  2. Don’t feel you have to prove anything. Make the wedding entirely about your commitment to each other, and not about showing off for friends and family.
  3. It’s really easy to overpay. Most people don’t have a lot of experience with weddings, so they are essentially sitting ducks for the professionals who make their living in that industry.
  4. Saving could tell you something about each other. Being disciplined about money will help your marriage work, so why not find out how well you can manage this kind of thing together by waiting and saving up to pay for the wedding?
  5. Multiple debt layers could become a strain. When you think about it, it often takes 15 years to pay off student loan debt. After you are married, you may want to buy a house, for which you will possibly need a mortgage. Do you really want to create a third layer of debt by taking on a wedding loan?

I don’t have any formal data on this; but given the way celebrity marriages often turn out, I get the impression that there might even be an inverse relationship between the cost of a wedding and the length of the subsequent marriage. Then again, that impression might be skewed by the fact that my own low-budget wedding has led to 29 wonderful years of marriage, and counting.

How to decide whether to pay off debt now or later

• Debt Reduction
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A very wealthy and successful guy I used to work for once mentioned something about his mortgage to me. I was a little taken aback, and asked why someone with his money would still have a mortgage. His thinking demonstrated that there are several dimensions involved in the decision of when to maintain debt rather than tap into savings.

Cash or charge?

This comes down to the question we’ve all been asked by sales clerks over the years: cash or charge? That choice is available not just when initially making a purchase, but also any time when you are paying off a loan. If you have some savings at your disposal, you could opt to use some of those savings to pay off your loan ahead of schedule.

On the other hand, in the case of my former boss, his thinking was that between the mortgage tax deduction and investment opportunities, he could earn more on his money than the mortgage was costing him. In any case, the choice comes down to a trade-off between borrowing costs and liquidity — the ready access to your money.

Pay now or pay later? Here’s what to consider

So how do you decide on the trade-off between borrowing costs and liquidity? Here are nine key considerations:

  1. Tax implications. When interest is deductible, as with most home loans, it can lower your effective cost of borrowing and thus make debt more palatable. Keep in mind, though, that not everybody is in a position to take advantage of these deductions. You should be in a position to itemize deductions, and you must have sufficient income from which to take your deductions.
  2. Cheaper alternatives. Sometimes, the reason to pay off a loan is not to retire debt altogether but to refinance it. For example,  credit card rates are very expensive relative to mortgage debt and even personal loans. So, you might pay off a credit card balance by tapping into a cheaper source of debt. Also, if interest rates have fallen since you took out the loan, you have an incentive to refinance.
  3. Rate spread. The bigger the differential between the interest you have to pay on debt and the interest you could earn from savings, the less cost-effective it is to borrow. So, a wider rate spread argues for paying down debt early. For example, 30-year mortgage rates may seem very low at 3.6 percent, but that is still a lot more than the 0.06 percent the average savings account is earning. This means that you probably would lose by having savings offset by debt, and the worse your credit rating, the more this spread is likely to work against you.
  4. Investment opportunities. Of course, savings account interest isn’t the only thing you could earn by investing cash rather than using it to pay off debt. The more attractive you feel opportunities like the stock market are, the more likely you will be to use debt so you can invest your cash.
  5. Early repayment penalties. One factor which can argue against repaying debt early is if there is a penalty for doing so. For example, many mortgages have this kind of penalty, so always check before repaying a loan early or refinancing.
  6. Liquidity. Your wealth might far exceed your debt, but depending on how you are invested you may not have money readily accessible to use to pay off debt. For example, if you are in relatively illiquid investments like real estate, it might not be worthwhile for you to sell off assets to pay down debt.
  7. Upcoming cash needs. If you have large expenses on the horizon, you might want to avoid using up your cash to pay down debt early if you would just have to borrow again in six months for your upcoming needs. In that situation, you can’t be sure whether credit will be available to you when the time comes, or on what terms.
  8. Budget discipline. If you are disciplined about following your budget, you can count on using your savings constructively if you don’t use it to pay down debt. On the other hand, if you are a compulsive spender, you might want to use any extra cash to pay down debt before you are tempted to spend it more frivolously.
  9. Job security. If you have good job security, you can pay down debt with confidence knowing that your earnings will provide you with the cash flow to build savings back up again. However, if you have concerns for your job, you may want to keep some cash in reserve.

Finally, besides the logical considerations to this decision, it also comes down to personal style. Some people, like myself, are just more comfortable when they are debt-free. In my case, that feeling of being free and clear from financial obligations is worth giving up a little liquidity by using savings rather than debt to pay for things.

Money worries and woodpeckers

• Debt Reduction•House & Home•Retirement
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I suppose it is bound to happen if you live in a wooden house in a semi-rural area. Our house has become besieged by woodpeckers.

The insistent, get-you-up-out-of-bed nagging of their rapping on the walls reminds me of the inescapable angst of having money worries. The problem is, I know what to do about financial doubts. Woodpeckers are another matter.

Whose house is this anyway?

I can assure you that my wife and I have a clear legal title to this house. The woodpeckers don’t have a hint of a claim on the property, yet here they are. They drill perfectly round holes in the siding for their homes, and then start building additions by clearing out the insulation and whatever else is in the interior walls. After all, what self-respecting woodpecker can live without a man cave and a gourmet kitchen?

The funny thing is, we’ve been in this house for 18 years, and the woodpeckers didn’t show up for the first several years. Maybe it is because the previous owners had a gun, and we don’t. The woodpeckers have caught on. You can’t underestimate the intelligence of these pests. I started caulking their holes, so they started putting their holes just high enough for me not to be able to reach on the ladder. For now, the woodpeckers have the better of me.

Why this reminds me of money worries

What we are finding with the woodpeckers is that you no sooner shoo one off than another one appears. It’s the same with money worries — you face a series of them over the course of a lifetime and, if you are fortunate enough to put one to rest, another one is bound to pop up. Like the woodpeckers, these money worries seem to start tapping away at the quiet every time you try to relax. I’ve found that what makes me happy is to address the problem directly rather than trying to ignore it, because these things just don’t go away. Some examples:

  1. Job security. This was always the big one for me because, as long as I’m earning a half-way decent income, I’m confident that I can make it work by living within my means. Graduating in the early 1980s when unemployment was 10 percent made me realize very quickly that a good job is not a sure thing, even if you earn good grades and are willing to work hard.
    I suspect a younger generation has also acquired a chronic insecurity about employment, since a net total of over 8.6 million jobs were lost in 2008 and 2009 as a result of the Great Recession. My advice is to make sure you are adding value where you work now, but keep half an eye on the job market. Specifically, know what kinds of jobs are in demand, and try to keep your skills in line with what the job market wants.
  2. Loan repayment. I have a habit of paying off loans early, just because I find it hard to rest with the obligation of owing money to someone else hanging over my head. It’s a real financial woodpecker for me, tap-tap-tapping at my conscience. I even paid my student loan off early, even though that was near the start of my career when there wasn’t much money to spare. I decided that, instead of taking a step up in lifestyle with each raise, it was a higher priority for me to get rid of the debt. That’s not going to be everyone’s choice, but the lesson is to decide what matters to you most and put your resources toward achieving it.
  3. Too much mortgage. Home buyers get so caught up in trying to qualify for a mortgage that they don’t adequately question whether they need such a big loan. Look, lenders and real estate agents have a financial interest in trying to push you to the upper limit of what you can afford, so you need to be the one that reins things in. It’s no use owning a home if you can’t relax in it, and having ongoing worries about meeting your mortgage payments is going to be another financial woodpecker disturbing your rest.
  4. Lack of retirement saving. I get that this is tough in part because people don’t want to sacrifice today’s lifestyle for tomorrow’s practicalities. However, ask yourself whether you are really comfortable with this in the here and now. It might be that you will rest easier if you start to take care of the future by adding to your savings, making you happier both today and tomorrow.

Those are some thoughts on how to keep money worries from pecking away at your peace, interrupting your sleep. They are simple and practical approaches, but that rather than tricks is what works when it comes to gaining control of household finances.

Unfortunately, I am less practical and resourceful when it comes to driving away woodpeckers. So, if anyone has any suggestions, I’m listening.

Depending on stock returns to fund your retirement? Think again

• Economy•Retirement•Saving & Investing
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How worried should I be?

That’s a question financial people get a lot when the market is as unstable as it has been over the past several weeks. Actually, it’s a question we ask ourselves in those environments.

Having both asked and answered that question several times recently, let me share some of the answers I’ve come up with.

Down 500 points? No big deal.

The stock market has hit some major downdrafts lately, including days when the Dow Jones Industrial Average lost over 500 points.

Inevitably when this happens, the media post pictures of Wall Street traders tearing their hair out. That’s okay. Baldness is an occupational hazard, and they are compensated well enough to afford Rogaine.

An important thing to remember about those traders is that they have large amounts of money at stake on very short-term market positions. Outside of the financial sector, though, most investors are trying to save for the long term, for retirement. This means accumulating wealth over 20, 30, or 40 years. Have you ever seen what a 3 percent loss (roughly the equivalent of a 500-point drop at today’s level of the Dow) looks like on a 40-year chart of stock market returns? It is barely a ripple, something you wouldn’t even describe as a speed bump.

Bigger problems than market downturns

For long-term investors, then, most day-to-day or even month-to-month fluctuations can be shrugged off. What is more disturbing is that, for all its ups and downs, the stock market has made very little progress over a long period of time.

Since the beginning of this century, the S&P 500 has gained just over 34 percent, or a compound average of 1.90 percent a year. Throw in a couple percent a year for dividends and you would roughly double that on a total return basis. But returns in the neighborhood of 4 percent a year are far below the growth assumptions people make when they are doing retirement planning. This has been going on for more than 15 years now, which is a significant chunk of anyone’s retirement time horizon.

Add to that the low yields on bonds over the past several years and the even lower rates on savings accounts and other bank deposits, and you are looking at long periods of sub-standard returns for most U.S. investors. This is a bigger problem than any short-term market downturn.

Economic reality vs. perception

Markets are one thing; the economy is another. While the U.S. market was going through all the angst of late August, one very positive piece of economic news went almost unnoticed. The official estimate of U.S. gross domestic product was revised upward to 3.7 percent, a substantial improvement over the original estimate of 2.3 percent, and significantly better than the first quarter’s rate of 0.6 percent.

The contrast between the stock market and the underlying economy is even greater in China. For all the attention the dramatic plunge in Chinese stocks has gotten, what is less reported is that their economy is continuing to grow, albeit at a slower rate than in recent years. Squeezing some of the speculation out of the Chinese stock market should be good for investment there in the long run.

Protecting your number one asset

When the investment environment gets worrisome, your attention should turn to your number one asset. This probably is not your portfolio or even your house. It is your job.

Keeping that stream of income coming — and growing it through career advancement if possible — can help pick up the slack when investments are doing little to build your wealth. Keep your skills sharp, and look to add value at your job to a degree that would make it difficult for your employer to do without you.

Control what you can control

Besides attending to your career, the other thing you can control when investment results disappoint is your spending. Lower returns may mean you have to lower your spending expectations, both now and in retirement. Doing this on your own terms is much less painful than having austerity forced on you when you can’t pay your debts. Just ask the Greeks.

One way to think of all this is that you should be concerned rather than worried. Concern means that the situation is serious enough to merit some attention, particularly with regard to safeguarding your career, tightening up your spending habits, and being alert for investment opportunities. Acting out of concern is distinct from merely worrying, which usually involves unproductive activities like checking the market every five minutes or lying awake at night worrying about decisions that are already behind you.

This notion of acting constructively toward things you can control is perhaps the best cure for a worrisome environment. Once you’ve done all you can do, it is easier to stop worrying and turn your attention to other aspects of your life while the stock market’s drama plays itself out.

The hidden costs of bad credit

• Credit Cards•Debt Reduction•Frugality•Insurance•Self Employment
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The worst thing about bad credit isn’t being turned down for a loan or a new credit card. After all, there are worse things than not being able to borrow. The bigger problem with bad credit is that it can cost you money in a number of ways, and that added cost makes it easy for small money problems to become big money problems.

The more you understand about the hidden costs of bad credit, the more motivated you will be to keep your credit clean.

6 ways bad credit can cost you

Here are 6 ways having bad credit can cost you money:

  1. Higher credit card rates. Credit cards often have different rate tiers for different customers. People with good credit pay lower rates than people with bad credit — and if your credit rating slips after you sign up for a card, the credit card company can charge you a higher rate on future purchases. The irony is that the people who get the best credit card rates rarely actually pay those rates, because they don’t carry balances on their cards over from month to month. In all, the average rate for credit card accounts that have to pay interest is over a full percentage point higher than the average for all credit card accounts.
  2. Higher loan rates. Credit cards are not the only form of borrowing that gets more expensive as your credit deteriorates. Everything from car loans to mortgages are likely to cost more if you have bad credit. Lenders view part of the interest rate they charge as a cushion against the risk of the borrower defaulting, and the bigger the risk your credit rating suggests you are, the bigger that interest rate cushion will be.
  3. Larger down payment requirements. In addition to charging a higher interest rate, lenders also hedge their credit risk by making borrowers with bad credit put more money down on their purchases. This can cost you by forcing you to wait longer before making a major purchases, which often results in paying a higher price.
  4. Higher insurance rates. Some insurance companies offer discounts to customers with good credit histories. This is yet another example of how people who are already in good shape financially get the kind of breaks that can make their finances even healthier.
  5. A red flag for prospective employers. Increasingly, employers are reviewing credit histories as part of their background checks on job candidates. Credit problems have several negative implications from an employer’s perspective — they suggest a low level of personal responsibility, they could raise concerns about putting that person in a position of financial trust or lead them to believe that the candidate may let dealing with money problems become an ongoing distraction on the job. So, credit problems can make it tough to get ahead because you might miss out on the best job opportunities.
  6. Limited financial flexibility. Even if you are able to get a mortgage or a credit card initially, poor credit can limit your flexibility to manage your debt in the future. Poor credit could prevent you from reaping the financial rewards of refinancing or taking advantage of cheaper credit card offers.

4 habits that will keep your credit clean

Naturally, living within your means is the key to avoiding credit problems, but you also have to develop good habits for taking care of your financial responsibilities. Here are four habits that will help keep your credit clean.

  1. Organize your payments. Don’t treat bill paying like a chore that you will get to when it is convenient; you need to have a process to make sure it gets taken care of consistently. Setting aside a specific time of the week for bill-paying and automating some of your payments can help.
  2. Don’t use automatic bill-paying for everything. Automatic bill payments are a useful tool, but they are best suited to bills that are for a predictable amount of money month after month. For more variable bills, you may want to handle them yourself to make sure an unusually large amount does not cause an overdraft, and so you can spot any overcharges or other problems.
  3. Make the timing work. Coordinate the timing of your payments so they will arrive by the due date and so they are in sync with your pay schedule to ensure you will have sufficient funds in your account.
  4. Never borrow without a repayment plan. This is especially important for credit cards, because it is all too easy to use them impulsively. Figuring out how you will repay the money makes you stop and think before you borrow.

You’ve probably heard the phrase “the rich get richer and the poor get poorer.” One way to think about that is that financial conditions have a way of feeding on themselves. Credit problems usually make life more expensive, and thus those problems become harder to overcome. Keeping your credit clean can stop a downward spiral from ever starting.

7 bad things about low interest rates

• Banking•Saving & Investing
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If you have been able to buy a house or refinance a mortgage in recent years, then congratulations. You have been a beneficiary of the Fed’s extraordinary effort to keep interest rates low. For many others though, monetary policy hasn’t been so favorable — in fact, it has cost them dearly.

Ostensibly, low interest rates are a monetary device to stimulate the economy, but more subtly they also serve to bail out banks and borrowers. Who suffers from that? Primarily savers. Whether you have a short-term savings account or a long-term retirement portfolio, low interest rates have made earning any money on your savings an uphill climb.

Recognizing the various ways low interest rates may have hurt you is not important simply so you can mutter rude things about Janet Yellen when she comes on the television. It can help you make adjustments to adapt to the low interest rate environment and the subsequent fallout that will result when rates return to more normal levels.

Here are seven bad things about low interest rates:

  1. Low interest rates on savings accounts. Deposit rates are closely linked to short-term Fed funds rates, so the low interest rate policy has been very clearly evident in driving savings account rates down to near zero. This is especially hard on retired folks, who typically invest their money conservatively and had grown accustomed to being able to earn some retirement income on their savings. Virtually wiping out that income for people who often don’t have another means to earn a living is a pretty harsh blow. There is no way to fully make up for the destruction of savings account income that has taken place, but it does underscore the importance of shopping around for higher-yielding savings accounts, and perhaps committing your deposits to longer-term CDs to earn a higher rate of interest.
  2. Low yields on bonds. Long-term Treasury bonds have been a staple of retirement plan investments, but low interest rates have helped drive their yields to below 3 percent. You might argue that the drop in interest rates created a windfall for bond investors because prices rise as yields fall, but this would be reversed with a return to more normal yield levels. In the meantime, low yields on a significant portion of retirement investment portfolios is going to make it hard to reach the return assumptions on which retirement funding is based.
  3. Fanning the flames of inflation. The Fed has persistently said it wants to keep interest rates low to encourage higher inflation. I can’t help thinking that encouraging higher inflation is like saying “Beetlejuice” three times — you might live to regret the help that you called for.
  4. A stock market on PEDs. Performance-enhancing drugs, or PEDs, inflated the statistics of professional baseball a few years back, just as it artificially inflated the physiques of the cheaters who used them. Similarly, low interest rates artificially pump up stock prices — in the long run though, all you have are companies that are more expensive, but not actually more valuable in terms of having boosted their revenue-generating power in line with the rise in stock prices.
  5. High checking account fees. Checking account fees have risen steadily in recent years, and free checking has become a rarity. Back when interest rates were higher, banks were happy to offer free checking just to attract deposits. With interest rates low, having those deposits on hand is not worth as much to banks, so one recourse is to raise fees. In fairness, it is worth noting that another government policy is also partly to blame for the rise in checking account fees. The Durbin amendment to the Dodd-Frank Act arbitrarily cut the fees banks could charge retailers for debit card transactions. Banks raised fees to make up for this, but don’t hold your breath waiting for retailers to pass their savings along to consumers.
  6. Low mortgage approval rates. The frustrating thing about the low mortgage rates of recent years is that relatively few people have been able to qualify for them due to tough lending standards. When mortgage rates are no higher than the long-term rate of inflation, it leaves little margin for defaults, so lenders are particularly wary about making loans in that situation.
  7. A subsidy for banks. Yes, mortgage rates came down quite a lot, and credit card rates came down a little, but neither fell as far as deposit rates. So, the rates banks pay consumers fell by more than the rates consumers pay banks. That means banks win and you lose.

Of course, low interest rates have not been entirely bad, and I can even accept the argument that they were a necessary evil in the depths of the financial crisis. However, the longer the Fed prolongs the era of low interest rates, the more it seems that savers are getting a raw deal.

8 questions to ask before lending money to friends

• Charity•Family & Life
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It’s one of the most awkward questions a friend can ask you: “Will you lend me some money?” Awkward for your friend to have to ask, and awkward for you to have to answer. Saying “no” could adversely affect your friendship. However, saying “yes” could also put a strain on your friendship, and your finances.

If you get asked that awkward question, you should follow up with eight questions of your own before you decide whether or not to lend a friend money.

1. Why does your friend need the money?

Sometimes, there is a clear, one-time need for which a timely loan can get your friend through a particular situation — for example, Bob has found the perfect house but is a couple thousand short on the down payment, or Jane’s son needs dental surgery. Situations which are out of the ordinary and are not likely to recur at least suggest that a loan might be a one-time thing.

Unfortunately, more often when people turn to their friends for financial help, it is because of long-standing money problems. In that case, your loan is likely to be nothing more than a temporary stop-gap, leaving your friend with the same set of problems in a few months, and you with little chance of being repaid.

2. What other debts does your friend have?

If a friend comes to you for money, it may well be because he or she has exhausted all other sources of borrowing — meaning that the credit cards are maxed out, and possibly mortgage, car, or student loan payments are coming due.

If your friend owes money to credit card companies or lenders, you are probably going to have to stand in line behind them before any money you lend gets repaid — which significantly reduces your chances of seeing that money any time soon.

3. Is this an amount you can afford to lose?

Institutional lenders use a variety of techniques to assess loan risks, and they make thousands of loans. So the cost of the occasional bad loan can be absorbed by the money they make from interest on good loans.

You have neither those underwriting tools at your disposal, nor the opportunity to broadly diversify your lending risk. This makes a one-off type of loan especially risky, and you should not lend more in that situation than you could afford to lose.

4. How formal should the arrangement be?

This loan may be an understanding between friends, but that doesn’t mean you shouldn’t formalize it with a signed, written agreement. Aside from protecting your financial interests, it can be important to the friendship to document your understanding in a way that ensures you both remember things the same way after some time has passed.

5. Should you charge interest?

Remember, there is an inflation cost and possibly an opportunity cost to tying up your money. Charging interest need not mean profiting at your friend’s expense. It can simply be a way of recouping the cost of having the money unavailable for a while.

One argument in favor of formalizing the arrangement and charging interest is that, if you don’t, the IRS may deem it a gift rather than a loan. If there is a large amount of money involved (the exemption limit is $14, 000 for the 2015 tax year), this may mean having to pay gift tax — and the giver rather than the recipient is on the hook for gift taxes, so this could come out of your pocket.

6. What is the repayment schedule?

Part of the formal arrangement should be a repayment schedule. That way you both know what to expect about repayment terms.

7. Has your friend budgeted for repayment?

Another benefit of a repayment schedule is that it can serve as a reality check. Once you have a repayment schedule worked out, it is fair to ask your friend how he or she intends to find the money for those payments — especially if that friend has been having financial problems already.

8. Which will affect your friendship more: saying no or saying yes?

It might seem to be the path of least resistance to say yes, but saying no means you can both quickly put the incident behind you. On the other hand, a burdensome loan could prove to be an ongoing strain on the relationship for years to come.

Consider the alternatives

If the analytical approach described above seems too hard-headed, consider an alternative besides saying yes or no to a loan: simply giving your friend the money. If your friendship is close enough that you really want to help, giving rather than lending money allows you both to move forward with no strings attached.

On the other hand, if simply giving the money away is not something you can afford, you should think very analytically about lending the money. If things go wrong, a bad loan to a friend could cost you both the money and the friendship.