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

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

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

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

Last September I wrote about a zero interest credit card offer I took advantage of. I took the money and bought a CD, pocketing $1000 interest in 6 months time. I received a few comments and questions, centering around how this would impact my credit score. I offered a chart showing how the score is impacted, in general, but couldn’t say for sure the precise impact of any one action on the score. That would take regular access to the score itself, which through MyFICO, would cost nearly $50/yr. Now, I discovered a free way to have regular access. It seems that WAMU (Washington Mutual) offers such access to their credit card holders. The card has no annual fee, and you just click through a link to see your score. They offer an option to get email notification if your score moves by more than 20 points. Combine this with a regular request for your full credit report, and you have a good plan to monitor your credit health

Joe

written by JOE \\ tags: annualcreditreport.com, Credit, credit cards, credit report, Equifax, equity line, Experian, Finance, lend, loan, Suze Orman, TransUnion

The debate continues about how the subprime mess occurred. Let me tell you how it would not have occurred:

• Maximum Loan to value: 80% any higher requires PMI (Private Mortgage Insurance)
• Debt ratio permitted: 28/36 - This means that one’s mortgage payment and property tax cannot exceed 28% of one’s gross monthly income and all one’s monthly debt burden cannot exceed 36%.
• Income must be verified, i.e. ‘no doc’ loans not allowed.
• ARMs must be qualified at the maximum adjusted payment 3 years hence. This would insure that a year or two of rising rates would not be an economic time bomb.
• All documentation must follow the loan, no matter how it’s sold or repackaged

Would these rules eliminate foreclosures? Hardly. People still lose their jobs, and if unable to find work soon may be unable to make payments. People get sick and are unable to return to work, their disability pay not adequate enough to pay the mortgage. The rules above were broken, and the subprime mess resulted. Follow the rules above and it would take a 20% decline in prices for the lender’s capital to be at risk. With the permitted debt ratio above, a family earning $60,000 can pay $1400/mo toward mortgage and property tax. A $1200 payment can support a $200,000 loan at 6%, 30yr fixed. 20% down, and this results in a $250,000 home. Now, the median price of a home is $206,200 per the latest CNNMoney report, down from $219,300 in the prior quarter. Seems reasonable to me.

Joe

written by JOE \\ tags: Business, Financial Services, Home, loan, Money Management, Mortgage, Personal Finance, United States

Recently I posted about the potential for the Roth IRA to serve double duty, as a retirement account, but also as an emergency account if needed. I received a number of emails regarding this strategy, and also questions regarding the use of a HELOC (Home Equity Line of Credit) as a source of emergency funds.
I think that there are risks to this strategy, yet it can work for some. For those with steady, high, income, a HELOC can pay for the new transmission, or unexpected home repair. There’s risk for those who find that easy source of money too tempting, and will look at the $10,000 home theater system as ‘only’ $50 per month, and dig themselves into a hole.
It’s also come to my attention through a blog called Blueprint for Financial Prosperity that some lenders are calling in their HELOCs with little or no notice. So read this as a warning, if you have any lines of credit in place, to check the fine print, and if you are applying for new credit, ask in advance so you are absolutely sure of your rights and the bank’s right to reduce or cancel your line.

JOE

written by JOE \\ tags: equity line, Finance, HELOC, loan

I wrote about a zero interest credit card offer I accepted, and received some feedback and a couple questions from a reader:

Besides possibly affecting your credit score (by having too much available credit), presumably you’ll want to cancel the account(s) at some point… right?

I’ve read canceling too many accounts in too short a time period also negatively impacts your credit score.

Then there’s the impact on your score from new repeated credit inquiries, etc.

Indeed the answer to the above is yes, mostly. Let’s look at what impacts your FICO score;

By the way, the above is from a PBS special, “Secret History of the Credit Card.” Mrs. Taxpayer is still kidding me how a show with such a title can get my interest.

FICO formulas are still a bit of a secret, but the above is a good start. As I’ve read more about each of these criteria, I understand that ‘amounts owed’ are a ‘percent available credit used’ more than total dollars. So accepting a new card and instantly using the entire line may have a bit of an impact, but this is where unused credit on other cards actually helps bring down the total percent used. Of course, applying for too many cards in a short timespan also will impact your score. Canceling cards can hurt you in two ways, raising the ‘percent credit used’, and reducing average age of accounts, so you are correct, these are concerns.

Now assuming all that doesn’t scare one away from accepting free money, what about the tax impact on the earnings you’ll receive? Once you subtract the income tax, the $50 transfer fee, and the temporary possible credit score damage, do you think it’s still worth it?

As I posted, I will gross $450 in profit. With median (household) income at $48K or just over $24 an hour, I do think it’s worth it. I dropped off the cash advance check along with other business I had, so no wasted time there. I set up 5 payments of $200 on my automatic bill pay through my bank, and marked my calendar to make that last payment in full. Maybe 15 minutes effort. I’m not planning to spend time scouting out these deals, but I won’t turn them away. I am 45 years old and remember when $450 was the pay for 150 hours of work. Would I do this to gain $50? No. $250? Sure.

To wrap up, I’ll say that if you are in the market for a mortgage, you’ll want to check your credit report and be very careful not to do anything that might hurt your chance of getting the best rate you can. I wouldn’t want to trash my credit rating, but I can afford a small hit. My fixed mortgage was closed at the bottom of the last cycle and so I doubt a refinance is in my near future. Thank-you JAL for reading my blog, and being the first to comment on one of my posts. I hope I answered the questions you raised.

Edit - I recently found an article “Five Mistakes That Hurt Your Credit Score” by Jeffrey Strain of TheStreet.com which adds to the thoughts I presented here.
JOE

written by JOE \\ tags: Credit, fico, interest, loan, money, wealth

You can go to annualcreditreport.com and request to view your credit report from each of the three nationwide consumer credit reporting companies: Equifax, Experian and TransUnion. Since each one permits you you view your report annually, you are able to view a different one every four months. I’ve not seen the value in paying for ‘credit protection’ since your credit cards’ liability limits you to $50 so long as you repost a card stolen soon after you are aware it’s missing. Even those protection services cannot save you the time it will take to get your life in order if you are the victim of true identity theft.
JOE

written by JOE \\ tags: annualcreditreport.com, Credit, Equifax, Experian, fico, identity theft, lend, loan, TransUnion