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Guru Q&A: Should I Pay My Credit Card Off With My Savings?
FiLife User Question: I have a credit card with a balance of $5,000 and I have enough money in my savings account to pay this off. Should I go ahead and pay this off so I have more money during the month to live on because it is difficult some months to make ends meet.
-unicorn
FiLife Guru Response: Generally speaking, I think this is a good idea. Here are some things people in situations like yours might consider.
-What is the interest rate on your card? If it’s like most cards, the rate is somewhere between 12 and 30 percent. Assuming that’s true, then paying off that card is almost surely the best investment you can make in your financial future. The interest you’re paying won’t be tax deductible, and so if you have a 20% rate, paying it off will be like “earning” 20% on that money, tax free.
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Guru Q&A: How Can I Earn Credit Card Rewards with My Company Card?
FiLife User Question: I travel quite a bit for work. I want to get a continental credit card. Can I pay my company tickets with my continental card then transfer the balance to my company’s credit card? Or perhaps pay my continental card with my company’s credit card?
-rahamdan
FiLife Guru Response: Paying one credit card with another without fees is generally not an option. And the fees required for doing so are often cost prohibitive. One new option that is more reasonable than most is Chargesmart, but at 2-2.5% you will still be paying more than the airline miles would be worth in almost any circumstance.
Balance transfers also come with prohibitively high fees under normal circumstances.
I would suggest you ask your employer about simply paying for the tickets yourself, and then having the company reimburse you. If they’re unwilling, I’d let the idea go for now.
-FiLife Guru Dave Hanson
Got a question for FiLife? Ask it here.
Guru Q&A: Which FICO Score is Used When Applying for a Loan?
FiLife User Question: What is the FICO score that is required to apply for a loan? Are 3 credit bureaus used?
-aishal
FiLife Guru Response from Dave Hanson: For personal loans, FICO score requirements can vary widely. Commonly one FICO score is used, though not always. Note that as with other loans, underwriting requirements have tightened considerably in the last year as credit has grown more scarce.
Your best bet would be to contact the issuers of the loans you are interested and ask them directly. They might not want to give you a cutoff score (and they may not even underwrite with a FICO score cutoff). But they should be able to give at least general answers to questions about their underwriting criteria.
FiLife Guru Response from Mark Kantrowitz: Note that your FICO score can differ considerably from one credit reporting agency to the next. This is why it is important to check your credit reports with each of the three major credit reporting agencies, to make sure there are no errors that could hurt your credit score. For example, if you have a good credit score with Equifax and TransUnion but the lender uses Experian, it’s only the Experian credit score that matters.
Differences in the credit scores can also arise from differences in the credit history data at each credit reporting agency (e.g., some creditors report your data to only one agency, some report it to all three) and differences in the weighting used by each agency.
Lenders often have additional binary (yes/no) criteria in addition to the credit score floors. For example, many will deny your application if you’ve had a recent bankruptcy even if you have a good credit score. Or if your income is volatile or if you are self employed.
Credit score floors vary from lender to lender. The lower your credit score, however, the less likely you are to be approved for a loan. Anything under 650 is considered “subprime.”
-FiLife Gurus Dave Hanson and Mark Kantrowitz
Guru Q&A: Will Debit or Credit Better Protect Me from ID Theft?
FiLife User Question: I have been told by a number of people that they use their credit card over their debt card because it offers better protection against identity theft. Is this true?
-Paul
FiLife Guru Response from Dave Hanson: While debit card issuers generally offer more protection than they did in the past, policies vary substantially. Your issuer should have provided you with a written statement explaining their policies. If you do not have this, you should contact your bank to find out exactly what protection you have and what you are liable for in cases fraud.
By contrast, credit card protection tends to be both stronger and more uniform. This is partly because the law requires that credit card users are generally not liable for more than the first $50 taken through fraud. As a practical matter, virtually all card issuers cover that $50 as well.
The basic functionality difference between debit and credit cards also protects credit card users better than debit card users. Credit cards allow us to borrow money from the credit card issuer. By contrast, debit cards enable us to use our own money in our own bank accounts. Thus credit cards put creditor money at risk from fraud, while debit cards put our own money at risk. When creditor money is fraudulently tapped from our credit cards, we will face some hassle: replacing the card, perhaps getting a charge or two denied, perhaps an overlimit fee that needs reversing. But if out own money is so tapped, it can send checks and auto-debits bouncing right and left, causing a situation that can be far more difficult to remedy.
Bottom line: a debit card is significantly more vulnerable to fraud than a credit card. That’s just one reason why using a credit card is preferable–provided that the user has the financial discipline to pay off the balance in full each month.
FiLife Guru Response from Dean Binder: Debit card usage does NOT appear on your credit reports therefore it has no impact on your credit scores. If you shift all your purchases over to a credit card for the fraud protection then keep in mind that the debt reported to the credit bureaus each month by your credit card issuer can have an adverse effect on your scores. So, it’s a good idea to weigh the added protection versus the score damage, especially if you’re in the market for a new loan.
Guru Q&A Deluxe: Should I Save for Retirement or College?
Our gurus are having a healthy debate on whether you’re better off putting your money in an IRA for retirement or in a 529 for your kids’ college. Check it out and then add your own two cents here.
FiLife User Question: I have no savings and I am 35. I have 2 kids. I can save $500 a month - should I save for retirement or for my kids college?
-nrek123
FiLife Guru Response from Dave Hanson: Our planning guru Michael will give you a thoughtful answer when he gets a moment. In the meantime, I’ll give you my take: save for retirement before college. Here are a few reasons why:
-You Can’t Finance Retirement. College can be funded via loans, scholarships, grants, et cetera. Your retirement cannot be.
-Financial Aid. Retirement account savings generally will not count against financial aid formulas. At least a portion of your college savings will.
-Saver’s Tax Credit. If your adjusted gross income is below $53K (joint, or half that if single), then you qualify for a CREDIT (not deduction) that can be worth close to $1,500 on just $4,000 in retirement savings. An excellent piece on this credit is available here.
-Employer Matching. Many 401(k) plans will match a portion of the money you set aside for retirement. That’s “free money,” and should’t be passed up. College savings doesn’t give you that benefit.
-Better Investment Options. IRAs offer unmatched flexibility and many options for extremely low fees. College savings accounts like Coverdell IRAs and 529 plans have improved, but still don’t match that flexibility.
-More Flexible Withdrawals. Many retirement accounts provide for the penalty-free withdrawal of funds for any number of reasons–including paying for college. College savings accounts generally do not.
-Creditor Protection. IRAs and 401(k)s are generally fully protected if you should need to declare bankruptcy. College savings accounts offer some protection, but it is more limited.
Bottom line: With $500 a month to save, retirement should come first. Ideally, you will be able to increase your savings over time. Sometime after that point. it will start making sense to fund college savings accounts as well.
FiLife Guru Response from Mark Kantrowitz: Your goal, at a fundamental level, is to maximize your money. Money is fungible, meaning that it doesn’t really matter if it is in a 529 plan or a retirement plan. If you have more money in your retirement plan, then you’ll feel more comfortable spending current income on college costs. Likewise, if you have more money in your 529 college savings plans there will be less pressure on your income during and after the college years, so you’ll be able to save more for retirement.
So you should take steps that maximize your total return on investment. As Dave says, if your employer provides a matching contribution, maximize the match. If your state 529 college savings plan provides for a state income tax deduction on contributions to the state 529 college savings plan, take advantage of that too.
I discuss this in more depth in FinAid’s Saving for College section.
I have a few comments on Dave’s response:
Guru Q&A: Should I Consolidate My Credit Card Debt?
FiLife User Question: I have over $30k in credit card debt. What are the pros and cons of consolidation companies and what are the consequences for me?
-rqdasilva
FiLife Guru Answer: There are a few common problems with debt consolidation loans. First, if the underlying issue is overspending, then this kind of borrowing does nothing to solve the problem. that got the borrowing consumer in trouble in the first place: overspending. Second, these loans can be far more expensive than the debt they are designed to pay off. Finally, opening these new loans can harm your credit–which among other problems can make getting out of debt all the more difficult. This last point is especially true if the loan comes not from a bank or credit union, but from a “finance” or “consolidation” company.
If you can find a low-cost loan to help you do so, it can make sense in some circumstances.
Here are some questions to ask yourself before you go that route:
1. Have you cut expenses where you can to pay off your credit card debt?
2. Assuming you have been or now are committed to focusing on paying off this debt, how much can you pay each month towards bringing this debt down?
3. What are the rates and minimum payments that you are being billed on each of these accounts? And are you near or over your credit limits on these accounts?
Guru Q&A: Should I Close My Credit Card Account?
FiLife User Question: I received a letter from Wells Fargo indicating that they are raising my rate on my credit card from 13.8% to 18.9%. I have always paid on time and believe this has to do with the current financial climate. They do state that if I “do not accept these terms, your account will be closed…and you may still pay off any existing balance on your account under the current terms.” My question is will closing the account affect my credit rating and would it be better to not close it, quit using the card and work on paying it down? Thanks.
-sterritt65
FiLife Guru Answer: Excellent question. Many borrowers are facing similar quandaries these days.
Credit ratings are highly dependent on specific circumstances, and these will determine how closing the card will likely affect your rating. Key factors include: how high your “utilization” on that card is (that is, what percentage of your credit line is being used); what your utilization of credit overall looks like; how many other cards you have and how large those credit lines are; and how old your Wells Fargo card is (and how that compares to the age of your other accounts).
Generally speaking, the more cards you have, the less impact closing the Wells Fargo card is likely to have.
Without knowing these specifics, I would advise you to do all you can to pay the balance down, rather than closing the card. If you close it, you may send a signal to Wells Fargo and other issuers that you are struggling to pay your bills. Such a signal is always worth avoiding, but doubly so in a skittish credit environment like this one.
If you follow up with as much of the specific circumstances mentioned above as you can, I will try to offer additional advice.
-Dave Hanson, FiLife Guru-At-Large
Feel free to chime in with your own answer here. Or go here to ask a question.
Guru Q&A: Can I Get a New Car with Bad Credit?
FiLife User Question: I have a 2004 Scion xB I have a Toyota loan with 11 payments left on five years. I have been late in the past with poor credit issues. Would Toyota still finance me if I trade to a new Toyota?
-Rainfun
FiLife Guru Answer: If you have been late on this loan and have had poor credit issues, it is highly unlikely that you’ll be able to obtain a loan from Toyota or any other lender on favorable terms. You can always apply, of course…but the new credit inquiry will give your credit profile yet another ding (albeit a minor one).
I would advise against your trading in your used Toyota for a new one, at least until your credit has “healed” considerably. Your car is just four years old, and will be fully paid off in less than a year. That will free up cash to invest, save, pay bills, etc. Meanwhile, you will avoid both the big depreciation loss you will pay by buying another brand new vehicle, and the high rate that a new vehicle would cost you.
Getting the Credit (Card) You Deserve
Anyone with an active mailing address - and that even includes our furry friends - knows that there are many credit cards out there looking for our business. Here at FiLife, we’re interested in reviewing and discussing these options.
One question that seems to keep popping up on our discussion pages is “how do I get the credit card that suits me best”? The FiLife team asked me (the Credit Card Guru) to say a few more words about this topic on the blog. I’m hoping we all can exchange thoughts in the comment section below.
Credit card applicants should keep these three factors in mind when hunting for a new card:
1.) Acceptance: Will my application be approved or denied? Your credit profile usually determines whether you’ll be accepted or not. And cards with the most desirable terms—rewards, low interest rates, et cetera—inevitably are reserved for those with strong profiles. But how do you know whether your profile is strong enough?