JoeTaxpayer

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 while ago, the New York Times offered an interactive graphic,

which allows you to enter all the variables you need to determine whether you come out ahead buying vs renting. You are able to enter the price for the house, rent of a similar house, down payment, interest rate on your mortgage, along with the assumed increase in home value or monthly rent. Note: you may click on the image above to be taken to the Times’ web site.

Joe

written by JOE \\ tags: Home, home value, interest, interest rate, Mortgage, new york times, Renting

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

Well, it’s been a month since my “Suze on Variable Annuities” post which sparked some heated debate. So much so, that I decided to take a look at a newer product, the Fidelity Growth & Guaranteed Income Annuity and analyze it in a feature article titled “Another Look at Variable Annuities” on my main web page.

I must say, I find the process interesting. I’ve been a ’spreadsheet guy’ for some time and enjoy playing with the numbers. Please read the article and comment here, if you wish. The Fidelity link above should download a PDF of a brochure for the product I analyzed. If it doesn’t, please advise of the broken link.

Joe

written by JOE \\ tags: annuity, fidelity, income, interest, spreadsheet, suze, variable annuities

They say that when the shoeshine boy starts talking about stocks it’s a time to get out of the market. Last week, David Letterman offered his Top Ten List,

Top Ten Signs You Have a Bad Bank

1. Manager giggles whenever he says, “early withdrawal”
2. They made $2 million loan to the Hillary Clinton campaign
3. Most banks are backed by the FDIC; your bank is backed by KFC
4. Bank robbers leave with a sack of IOUs — that’s how bad things are, ladies and gentlemen
5. Loan officer will approve your mortgage only if you let him rub you
6. ATM looks suspiciously like a Ms. Pac-Man machine
7. Interest paid not in money, but in Saltines
8. They promise they’ll have your money if you come back after tonight’s Keno drawing
9. Instead of Andrew Jackson, their $20 bills have a picture of Tito Jackson
10. Teller asks, “How may I swindle you?”

Maybe this is the sign that we’ve reached the bottom in this crisis, I hope so.

Joe

written by JOE \\ tags: banks, david letterman, fdic, interest, loan, money, Mortgage, stocks, top ten list

I usually don’t post on Sunday, so this post is going to be a bit off topic, a few general thoughts. First, I’m happy to see readership growing over the past weeks,

as well as steadily over the past 6 months.

I’ve gotten many comments, most of which are positive, all of which are welcome.

Recently, I’ve started posting about the Money Merge Account, and my feelings regarding that product. Lest this blog turn into my soapbox for ranting, I’ve decided to commit to a steady pattern of posts on Mon/Wed/Fri as I’ve been maintaining, and when I have more to say regarding MMA, I will add an extra post on either a Tuesday or Thursday. Other than that, I am trying to vary post topics, so technical, limited interest topics affecting a tiny percent of taxpayers will not appear more than every few weeks. I think there’s a need to bring those topics up as obscure as they may be. As always, your input is welcome and appreciated. Questions, and/or topic suggestion are always welcome.

Joe

written by JOE \\ tags: interest, irs, mma, money, money merge account, soapbox, tax

From Innumeracy.com:
Innumeracy: A term meant to convey a person’s inability to make sense of the numbers that run their lives. Innumeracy was coined by cognitive scientist Douglas R Hofstadter in one of his Metamagical Thema columns for Scientific American in the early nineteen eighties. Later that decade mathematician John Allen Paulos published the book Innumeracy. In it he includes the notion of chance as well to that of numbers.

From “Money Merge Advantage“, an MMA agent’s blog:
“In FACT… The software alone could still beat the 2nd scenario (putting the $300 discretionary to the mortgage each month)… WITHOUT using that discretionary income AT ALL. Yes, SERIOUSLY!”

If you have no idea what Money Merge Accounts are, or what I am talking about, please see my Money Merge Links page for references and then read on. In the blog I reference, the example starts with $250K, 30 yr, 6.5% mortgage. Then we are told a bi-weekly will provide some $75,800 worth of interest savings. No problem there, a bi-weekly is like paying 8% higher than the required monthly payment, usually in the form of a 13th payment snuck in once a year. The examples then offer that $300 more each month will cut the mortgage down to 19 yrs 8 months, which I still follow. But then the blog writer claims that with no extra money, beyond the $300, MMA will cut the mortgage to 14 yrs 4 months! This is beyond the wildest claims I’ve seen so far, and completely beyond reason.

Lastly, came the quote above, suggesting that with no extra funds available, the HELOC shuffle alone can produce savings greater than a $300 monthly principal payment would achieve. This raises new and troubling questions. The couple in the example have a net income of $3800/mo. If their HELOC were 0%, and they borrowed this $3800 at the beginning of each month, and paid it back at month’s end, it would gain them just under $21 per month, nowhere near $300. And no HELOC offers a 0% interest rate. At best, the HELOC is a percent or two under the fixed rate mortgage. This is simple math, folks, and no “sophisticated algorithms” are going to change the fact that 1+1=2 or that the best one might squeeze out of their HELOC shuffle efforts is $20-$30 per month, certainly not $300.

Joe

written by JOE \\ tags: HELOC, income, innumeracy, interest, jferheart, mma, money merge account, Mortgage, saving, sophisticated algorithms, UFF

A couple weeks back in a post titled Money Merge Hyperbole, I discussed the Money Merge product offered by UFF, and focused on the fact that in their published example, it’s clear that the use of a HELOC doesn’t provide any incremental savings. A kind reader points out on his web site, My Debt Elimination Calculator, that HELOC can provide some savings depending on a number of factors. Among them, the time of the month that income comes in, when bills are due, and the relative differences in HELOC interest rate, mortgage rate, and checking account interest. I agree with this. I’m from the “numbers don’t lie” camp and Greg offers numbers to back up his comments on that post. In his examples, the HELOC system saves $2550 more than the prepaying method on a $100K mortgage. (This is for the more realistic example where the borrower doesn’t have the (unrealistic) extra $1000/mo, but a more reasonable amount which will reduce the mortgage to 24 years from 30. In this case, Greg’s software is capturing over $100/yr in extra savings by using the HELOC. I certainly can’t knock a system that beats what I saw on official MMA sites but only costs $30. Take a look through the link above.
One point I must concede is this: It’s easier to make a purchase (waste money) when it’s from cash in the bank than when you are taking that money as a HELOC withdrawal. Maybe that’s what the MMA people are trying to say, but that message is lost to me among all the hyperbole.

I will close with this question and thought. If UFF, with the chance to put their product in the best light, cannot provide an example with real numbers which shows any savings beyond that of the prepaying (which I can illustrate with a free spreadsheet) yet create this illusion of ’sophisticated algorithms’ taking millions of dollars to develop, how do they justify a $3500 price tag? On the flip side, you have been introduced to Greg, (whom I just met via my blog) a Computer Scientist who was able to write code providing a solution that actually impressed me looking at his example. I’m sure this debate isn’t over.

Joe

written by JOE \\ tags: debt elimination calculator, free spreadsheet, HELOC, interest, jferheart, mma, money, Mortgage, Savings, sophisticated algorithms, spreadsheet, UFF

I continue to be amused by the debate over whether the ‘Debt Snowball‘ that Dave Ramsey suggests is the best method for fast debt reduction. I wrote about this some time ago on my Feature Web Site, and got quite a bit of email telling me how I ignored the emotional side. They quoted Dave Ramsey, “personal finance is 20% head knowledge, 80% behavior”.
Today I came across the web site “Consumerism Commentary”, which had a nice spin on paying the highest interest debts first (as I suggest), but calling this method “The Debt Avalanche“. Sounds good to me. Nice article.

Joe

written by JOE \\ tags: dave ramsey, debt, debt snowball, Finance, interest, irs, Personal Finance

In a post titled “Money Merge Account Evolution” we are subject to hyperbole, but no numbers. No proof. The latest version of MMA™ claims that if one has a mortgage along with ten other debts, they somehow need to consider 3 million possibilities before paying a dollar to any of these debts. Wow! Did he say 3 million? Is my rule “pay the highest interest rate credit card first, until it’s paid off” too simple? Should I spend even a millisecond deciding between paying my 18% credit card or prepaying my 5% mortgage? And do I really need software to help make that decision?
To be clear, I don’t suggest that MMA™ is a scam. It certainly is not. It does exactly what it claim it will do. It also lags the math that a simple spreadsheet can offer. A beautiful site called “Discover Money Merge” offers an example, one that spans the just over 10 years that MMA™ will take to retire a 30 year mortgage. Please view their example, I won’t copy their image to avoid any copyright issues. Now look at the year end numbers from my simple spreadsheet (this is for a 30yr, fixed, 6% loan. Their assumption and mine is an extra $1000/mo is available to pay the mortgage.)

Now compare this to the example linked to above. My spreadsheet - total interest paid, $67408.24, their example, $70,428.19. Where is the savings? Why didn’t the use of the HELOC they recommend along with the extra risk of borrowing funds short term at a higher rate provide any savings at all? If you are completely new to this topic please see the link list above for more details. More to come, I’m sure. If you’d like a copy of the full spreadsheet, please submit a comment with your email address and I’ll send it along.

Joe

written by JOE \\ tags: 30 year mortgage, Credit, free spreadsheet, HELOC, interest, jferheart, jubilee project, loan, mma, money, money merge account, money merge account evolution, Mortgage