JoeTaxpayer

I saw the commercials for Bank of America’s “Keep the Change” program, and have to say, “No, thanks.” Every time you spend money on your debit card they round it up, and move that money into a savings account. So in their example, if you spend $3.43 they debit your checking account $4.00 and put 57 cent toward savings. For the first three months, they will match it, so on a $25.01 purchase, they will match you 99 cents. But on a $100.99 purchase you are matched 1 cent. I’d guess the average match will be 50 cents or so, but once that full match ends and they match your round up by 5%, that means the match drops to 2 cents. Why bother? A good credit card will match 1-5% depending on the type of purchase you make. As far as I am concerned, debit cards make no sense. I understand how they work, I just don’t see why one would choose a debit card over a credit card.

Joe

written by JOE \\ tags: bank of america, BOA, Credit, credit card, debit cards, keep the change, money, Savings

Not a major Faux Pas, but one that can cost you if you are playing the float on zero interest credit card loans.

For those of you not familiar with this, let me start with a description of what I am discussing. Despite the state of the economy and credit crunch we are in, a number of credit card issuers are still offering zero interest cash withdrawals for as long as 12 months, and some with no transfer fees. The no-fee deals make it tempting to borrow the money, put it in a CD, and just pay it back when the zero rate comes to an end. Of course, this is not for everyone. You set yourself up for the risk of a missed payment, (in my case I set up monthly automatic payments on line), or the temptation to spend that money instead of putting it into a CD. For others, the credit line offered isn’t high enough to justify the effort.

Now, to my recent mistake. When you have an outstanding zero interest loan, any new charges are typically incurring the standard interest rate. So, with an outstanding zero interest loan, I forgot that I had this same card set up to charge my eBay account seller fees. I recently had a sale that had a fee of $2.47. So this amount will accrue interest until I pay this card off in January. Now, interest on this tiny charge would normally be about three cents per month, but BOA credit cards have a minimum $1.50 per month finance charge. So the account will be subject to $7.50 in finance charges over these five months or about 1450% when annualized. Not enough to cancel out the interest I earned on this deal, but enough to offer this as a warning. If it’s early in the free year, and you accidentally pull out the wrong card to make a large purchase, you may find you’ve just negated the saving for the whole year’s deal.

(To be clear, I have no issue with BOA, their rules are clear, the $1.50 min finance charge is stated on their agreement as well as on the checks I used to draw the loan. This is just one of the ‘got ya’s to watch out for.)

Joe

written by JOE \\ tags: Credit, credit card, credit card loans, credit cards, Finance, finance charges, interest, interest rate, loan, money, saving

A regular reader of my blog kindly pointed me to an article in Smart Money titled “401(k) Debit Cards Can Put Retirement at Risk” in which we are introduced to a debit-card like product which taps your 401(k) instead of your checking account. Although I wrote back in May’s “401(k) Loan bad for your (financial) health?” that loans were not absolutely bad, it depended on many factors, I think that such easy access is the flip side of the coin, almost certainly a bad thing. There are times I walk the fine line between wanting ‘big brother’ to establish just enough regulations to protect people from their own irresponsibility and wanting no such laws at all, caveat emptor still applying. Here, I’ll make the distinction between a one-time 401(k) loan used to help with the purchase of a first home, bridge the gap of income for an unemployed spouse, or a refinance of credit card debt combined with a change in lifestyle. Of course, paying off the cards with the loan, then charging up the cards again is no better than using a 401(k) debit card in the first place.

As the post title suggests, my feeling on this product is that it gives the consumer just enough rope to hang themselves.
Joe

written by JOE \\ tags: 401(k) loan, Credit, credit card, Finance, income, money, Retirement

Last September I wrote a post titled “Zero Interest Redux” in which I discussed the impact to one’s FICO score and how borrowing large sums off a credit card at zero interest can hurt your score in the short run. In May, I posted “Free FICO Score” about my discovery that WAMU (Washington Mutual) offered free access to your FICO score if you are a credit card holder.

The access to the report has been a bit sporadic. I was able to pull a number in April, but then no access till July when I received my warning email that my score “had changed more than 20 points.” Fair enough. The April score was 746. Since then I pulled one more $30,000 zero interest loan, and put it against my mortgage. The zero interest deal was for 24 months, and we’ll be able to pay it in full when it comes due. I also added a credit card which offered higher airline miles, a CitiBank Amex card, in addition the CitiBank Visa we had. So I went to the WAMU site, and much to my surprise, my score was up to 773. Even so, it offered suggestions as to how to raise it further;

1. The proportion of balances to credit limits on your revolving/charge accounts is too high
Analysis of consumer credit behavior repeatedly finds that owing a substantial balance on revolving/charge accounts (Visa, MasterCard, Discover, American Express, Diners Club, department store cards, etc.) relative to the amount of revolving/charge credit available to you represents increased risk.

2. The time since your most recent account opening is very recent
Research shows that consumers who have recently opened new credit accounts are slightly more likely to miss payments than those who have not. This is not an especially strong risk factor, and therefore usually means a difference of no more than a few points in a consumer’s FICO score.

That first one is interesting, they go on to suggest “Bear in mind that even if you pay off your credit cards in full each and every month, your credit bureau report may show the last billing statement balance on those accounts” Which means that giving up the float (the time from when the bill is cut to the time it’s due) or some portion of it, will help your score further. Let’s look at the math on that. If you are earning (or paying) 5% as the cost of capital, $1000 will cost you $2.75 for a 20 day float. If your credit card bill is $3000 each month, that’s about $8.25/mo to improve your FICO score. To be clear, this suggests that you make a payment before the bill is cut, so whatever you spent over the month does not show as a balance due.

The alternative to this would be to contact the issuing bank and request a credit line increase, or to use multiple cards, keeping the maximum balance on any one card below about 30% of its credit line.

Joe

written by JOE \\ tags: Credit, credit card, credit cards, department store cards, fico, free fico score, interest, irs, loan, Mortgage

Consumer Reports recently offered an article titled “Your Debt; 8 Benchmarks For Borrowing“, which, for the most part, I liked and will consider adding to a List of Rules I’m assembling. Among the warning signs;

• 28% - Monthly Mortgage (including property tax and insurance) should not exceed this number. Really? That’s exactly what I suggested in my post Mortgage 101, so I’m in full agreement there.
• 80% - The first mortgage should not exceed this level. A lower debt to equity ratio is better. Interesting, I made the same comment in Mortgage 101, but that was more to benefit the bank, not the borrower. I’ll maintain that if the payments are still within the guidelines, there’s nothing magic about 80%.
• 6 - month’s worth of income as emergency money. I wrote about this as well, a couple weeks back in my controversial Emergency Funds post. This may be a worthy goal, and right for many, but not at the top of my list. I have been aggressive in retirement savings, well above average, managed the mortgage with serial refinancing to capture a low rate and an amortization that will end the mortgage well before retirement, and funded college in full for a child who is only 10, yet I’ve ignored this rule.

The CR article goes on with guidelines that are still worth reading if not following right to the letter.

Joe

written by JOE \\ tags: amortization, debt, emergency fund, Finance, income, Investing, Retirement, saving