Manage Your Credit & Identity

3 Important Tips for Paying off Credit Card Debt

Last Thursday, I talked about balancing debt repayment with building an emergency savings fund. This is the second part of that post.

For the actual pay debt repayment, there are two ways to do this.

If you are the type of person that needs to see forward movement to keep you motivated, then pay off the smallest credit card balance first, then work your way to the next smallest until you’re done. This will give you a feeling of reward and the financial momentum to keep this going.

If paying interest rates and fees bothers you, you will want to pay off the highest interest rate credit card first and then work your way down to the lowest interest rate. You will have the satisfaction of paying less and less in interest charges each month.

Either way excessive credit card debt is the enemy of your budget.

Live within your means.

Because your credit is so important to your finances, you will have to find a way to live within your means. That means only using your credit cards when you know that you can pay them off in full each and every month.

So many people struggle with credit card debt. Just as they get their debt paid off, something happens and they are in debt again. You can use your cards for the consumer protections and to keep a healthy credit score, but learn to use your credit cards the way you would a check or debit card – keep your purchases within your monthly cash flow.

Balance Debt Repayment with Savings

I get asked all the time for advice on credit card debt. We all know that credit card debt is the enemy of a monthly budget. Your money has better things to do than paying down finance charges and interest. But, if you are currently in debt, then you need to do something about it.

Most of my clients want to know the best way to pay off their credit card debt. Most people ask me if they should put all their resources into debt repayment. My answer to that is “no”. There is one thing that I believe everyone should do while paying off credit card debt – build an emergency savings fund.

You are probably saying that you have no money to save! I’m telling you that you need to find the funds. Your credit card debt may seem like your biggest priority, but if you take all your extra money to pay down debt, then you will find yourself running up credit card debt any time an unbudgeted expense pops up. These unexpected budget breakers are such regular events that we should learn to expect them. Your car breaks will need to be replaced, an appliance will need a new part, the roof will need new shingles. It’s inevitable. I could go on, but you get the idea.

You need to find a balance in your budget with savings on one side and debt repayment on the other.

The easiest way to build an emergency savings account

Each pay period you should have some money automatically transferred from your paycheck to a savings account. Start out with a small amount on a regular basis. That way you won’t feel the pinch and you will be setting aside money to use when something unexpected happens so you won’t have to use your credit cards.

A good way to pay off debt

To pay down your credit card debt:

Make a detailed list of each credit card, the amount owed, the credit limit, the interest rate(s) and minimum payment amounts
Look at your options – can you transfer the highest interest rate debt to a lower interest credit card (maybe you have room on a credit card you already have)?
If you are considering opening up another credit card, please think before doing so. There a number of factors that are involved here . Check my website www.JillRussoFoster.com for the five factors that make up your credit score.

On Monday, I will talk about paying down your debt.

Maybe you CAN refinance

Are you tired of hearing about low mortgage interest rates? You’re not alone. Many of us don’t have enough equity in our homes to refinance – thanks to falling home prices. Homeowners who are underwater need rate reductions more than anyone, but they’re finding it difficult to get them.

If you have a FNMA (Fannie Mae) or FHLMC (Freddie Mac) mortgage, and are current with your payments, there might be a way for you to get a lower rate. The Home Affordable Refinance Program (HARP) has been extended. This program was established in 2009 and is designed to assist people who cannot refinance with traditional mortgages because their property values are too low, and therefore do not meet underwriting qualifications.

There are guidelines that have to be met:

The mortgage must be a Fannie or Freddie mortgage.
The payment history must be current and not have any late payments in the recent past.
You must live in the home. This does not apply to investment property.
You must be able to afford the new payment.
The new payment must be more affordable or more stable.

You may want to look into this program – especially if you have an adjustable mortgage and are planning on staying in your home. This is a great time to get that rate fixed. I don’t think they can go any lower.

You will need to discuss your individual circumstances with your lender to see if you qualify. Talk to your mortgage professional today! You never know when the rates will go up.

It’s January! Time to start the year off right!

It’s time to order your credit report
This month use Experian

Hello everyone! This is your quarterly reminder from me.

Order your free credit report from www.AnnualCreditReport.com.

AnnualCreditReport.com is the ONLY authorized source for a truly FREE annual credit report that’s yours by law. You have the right to know. Exercise your rights! Learn more.

When ordering online:

Select your state, then click Request Report.
Fill out your information, then click Continue.
When it asks you to select a service, select Experian.

Not comfortable ordering online? There are three ways you can order your report:

Order online at www.AnnualCreditReport.com. By ordering online you can have your report back in minutes!
Mail your postal order by downloading the form at www.AnnualCreditReport.com
Call in your order at 1-877-322-8228

It doesn’t matter how you get your report, the most important thing is that you do! Then…

Review it for accuracy!
Follow the instructions with the report to correct any errors.
And, always remember to keep copies for your records.

Do you want to know your credit score? Use CreditKarma.com. Credit Karma will give you a close approximation of your FICO score, and it’s free.

May you have a blessed and successful year!

P.S. You will receive another reminder in May and September, allowing you to stay up-to-date on your credit throughout the year.

When should you use a credit card?

When should you use a credit card? I get asked this all time. There is no simple answer for everyone. Only you know what kind of spender you are.

Here are some general guidelines:

You can charge anything within your monthly budget if you pay your credit card bill in full each and every month.

However, you should think twice before using your card if you are paying down your debt and are currently incurring interest on your credit card bill.

Some people feel that you should never use a credit card. I disagree. Credit cards can actually help you maintain a good credit rating if you stay within your means. And, some credit cards offer benefits like consumer protection. These benefits should come with the card at no cost, or minimal cost, to you. Here are some examples:

American Express offers travel insurance at a minimal cost when you charge an airline ticket.
Some credit cards offer purchase protection on lost or broken merchandise.
Some credit cards offer an extended on purchases.
Some offer insurance coverage on rental cars.

Know all the perks that come with your credit card, that can help you decide whether to make a purchase on credit. If you’re not sure what benefits your card offers, call them for details.

My gift to you for the year 2012

You’ve heard me say how important it is that you check your credit report. You’ve also heard me say that you can check your credit report for free – 3 times per year. That’s because each of the three major credit reporting agencies must give you access to their version of your report.

But, how many of you remember to order your credit report even once, let alone 3 times?

I promise to help you remember. As my blog subscriber, you will receive three reminders this year: one in January, one in May and one in September. Each reminder will tell you exactly how to order your report and which agency to choose. Easy!

Do you want to share this gift with your friends? Simply share this post and allow them to sign up for free credit report reminders, too! There are many ways to subscribe:

Debit or credit?

Which should you use: a debit card or a credit card? You all know the difference between the two – a debit card uses your own money and a credit card means borrowing with interest.

Here is what I recommend:

Use a debit card when…

You make everyday purchases in person. These are items that are part of daily living: groceries, doctor co-pays, restaurant meals, etc.

Use a credit card when…

You are purchasing big ticket items, anything with a warranty, travel reservations, online purchases, etc. Using a credit card will (usually) give you extra consumer protection for little or no additional cost.

More about that added layer of protection:

When you travel, certain credit cards give trip insurance for items such as lost luggage protection. If you are purchasing electronics, some credit cards extend the warranty period. If you purchase something online and it never arrives (or arrives broken), you can dispute the charge with your credit card company after you have attempted to resolve this with the merchant. You should check with your credit card issuer to see what benefits you have with your credit card. Then make your purchases where you will get the most benefits.

Should you pay off your credit card debt with a mortgage refinance?

In our last Quick Tips, we talked about refinancing your mortgage. I hope you did your homework. If you decided that refinancing is right for you, you may be tempted to pay off your other debts by financing them into your mortgage.

Should you do it? Follow these steps to find out.

List all your debts

If debt is a problem for you, take a closer look. Make 5 columns:

Column 1: Write down the name of each creditor (credit card companies, auto dealership, bank, hospital, etc.)

Column 2: Write down why you took a loan or used a credit card. This will help you see how you came to be in debt. Were these essential expenses like a car or a hospital emergency? Or, were these items you could have saved for, like a vacation, clothes, or furniture.

Column 3. Write down the interest rate.

Column 4. Write down the current payment amount.

Column 5. Write down when it will be paid off at the current payment rate.

I know that this can be scary, but you need to know. Congratulate yourself for doing this. This is a huge step forward.

Why is it important to really look at your debt? If your debts just disappear into your mortgage, you could forget where they came from. Most people who consolidate their debt this way have credit card debt again in just a few years. My assistant told me that it happened to her, and she regrets it. Not only was her mortgage increased, but it delayed the real cure: fixing the leaks in her budget.

Refinancing may not be the answer, but knowing how and why you spend will help you stay out of debt in the long run.

Consider the downside of consolidating credit card debt into your mortgage

Credit card debt is unsecured, so you would be taking unsecured debt and betting your house on it (securitizing it).

When you have credit card debt and can’t make payments, that’s a problem – but, your creditors cannot take your home. On the other hand, if you can’t make your mortgage payments, then you could lose your home in foreclosure. If you increased your mortgage loan in order to cover credit card debt, you could end up with a larger house payment – one that you can’t afford! That’s why I don’t recommend refinancing your unsecured debt into a mortgage.

Consider the long term outcome when refinancing secured debts into your mortgage

Secured debt has a physical object that can be repossessed if you don’t pay: it could be a car, or even a home equity loan or line of credit. Here are three questions you should ask before making your decision:

1. If you combine your mortgage with your home equity will this mean you need to pay mortgage insurance? Mortgage insurance is added when the total amount of your mortgage is equal to, or over, 80% of your home’s appraised value. That will increase your monthly mortgage payment.

2. Will you need the home equity line in the future? It will be difficult to get a new line in these economic times.

3. Is it better to pay off your debts yourself, and have a tight budget for the short term? Or combine them with your refinance and have a bigger mortgage in the long term?

Think long and hard about what you put into your new mortgage. Consult with your tax preparer for an objective opinion.

Protecting your child’s credit

If you have been a reader of this column, you know how important it to maintain good credit. Unfortunately, it is not enough to monitor your own credit, you must protect your child’s credit as well.

Good credit is as important to your child’s financial future as GPA and SAT numbers are to career goals. Recently, I was asked by the parents of a newborn what they could do to keep their child’s credit /identity safe.

Unfortunately, the answer is not a thing. You probably don’t like that answer. But it does make sense – let me explain.

To protect your personal credit / identity, I recommend that you place a credit freeze on your credit report so that no one (not even people you authorize) can view your credit without you unfreezing your credit. You have to pay for the service, so you should only do it when you don’t think you will have a need to finance something in the immediate future. Freezing and unfreezing can be costly to your wallet.

Well, you can’t freeze a newborn’s credit, or for that matter, a child’s credit. If you think about it, your child has a social security number shortly after birth, but they do not have credit yet. You cannot freeze credit if there is no credit to freeze.

To protect your child’s credit / identity, you will have to order their credit report at www.AnnualCreditReport.com periodically to make sure that no one has requested credit under your child name and social security number. Don’t wait until they are ready for their first loan or you may find out someone stole their identity years ago.

Is Refinancing Right for You?

“Refinance, refinance, refinance!” That’s what everyone is saying. Yes, rates are low – maybe the lowest they’ll be. You can never tell… until they go up and you’ve missed your chance.

How can you know if refinancing is right for you? You need to ask yourself these questions before deciding:

Question 1. How long do you plan on living in your current home? If the answer is “not long” then it’s probably not worth the cost of refinancing. Do the numbers test below.

Question 2. Are you refinancing to pay off your mortgage faster or to lower your monthly payment? You really should know the answer to this question before you refinance your home. Lower monthly payments are going to look awfully tempting if you’ve got a big wish list or a tight budget. Let’s look at your options.

Let’s say you have a 30 year mortgage, but you’ve been paying on it for 10 years. That means you have 20 years left. You could refinance into a 20 year mortgage to keep the terms the same. Obviously a new 30 year mortgage would have much lower payments, but at what cost? No one wants to be paying a mortgage after retirement

Most people have heard of 15 and 30 year mortgages, but you can actually refinance mortgages in 30, 25, 20, 15 and 10 year terms. Do what’s right for your budget.

Refinancing is a long-term numbers game. Many people think that a low mortgage payment means money saved. That’s not necessarily true – it may simply mean you have more spending money this month, but you will have much less money for yourself over the next 20-30 years.

How can you tell? To find out, let’s do some math! Get out your pencil and get ready to write down some numbers.

Step 1. Take the estimated refinance principle and interest payment and subtract it from your current principle and interest payment. This will be your savings per month.

Step 2. Assume that the closing costs of the refinance will be about 4% to 6% of the mortgage amount. Example: Closing costs would be $10,000 on a $250,000 house if they charge 4%. Figure out your closing costs and write that down.

Step 3. Take the number from step 1 (your monthly savings) and divide that into step 2 (your closing costs). This is the number of months it will take you to recoup your closing costs. Example: If your refinanced payments will be $200 less your current payment, and your refinance closing cost will be $10,000, it would take you 50 months (over 4 years) to make up the difference.

Now that you know how long it will take you to recoup your costs, you should decide whether you’re going live in the house that long. If you plan to move before you can make up the difference, don’t refinance.