Are balance transfer cards a good idea?

By Sabrina Karl

If you have any credit card debt and have ever received a balance transfer offer in the mail, you might have wondered if these cards are a smart money move. As is often the case, the answer depends.

For one, do you have the resources and discipline to use the balance transfer card to your advantage, and avoid the pitfall that could land you in an even worse situation with your card debt? Second, is the balance transfer offer a good one?

Balance transfers work by allowing you to pay off one card’s balance and transferring it to a new card under its balance transfer terms, which often differ from the terms for new purchases.

The reason to consider this is because card companies often offer promotional balance transfers, such as zero or low interest for a certain number of months. If you’re currently paying double-digit interest on your card debt, reducing or eliminating that interest for several months or a year can rightfully be appealing.

Here’s where the discipline comes in. Once the promotion ends, your interest rate on any remaining balance will spike. So transferring a balance only makes good financial sense if you can pay it all the way down during the intro period.

You’ll also need to balance the costs. In years past, you could find cards that offered both a 0% APR intro period and a free transfer. Nowadays, it’s almost impossible to find a card with both. Typically, you’ll be charged 3% of the balance you’re transferring.

Deciding whether to take one of these offers therefore boils down to two things: calculating what it will cost you vs. what you’ll save, and asking yourself if you’ll have the funds and self-discipline to pay off the balance before getting stung by the post-intro interest rate.

Four major warning signs of identity theft

By Sabrina Karl

The prospect of identity theft can be scary, but the sooner you recognize it might be happening to you, the more quickly you can take action to stop it.

Many people imagine identity thieves raiding bank accounts or charging to credit cards that aren’t theirs. But identity criminals also apply for loans and new credit cards in other people’s names, and even file unauthorized tax returns and medical claims.

Knowing the red flags of this activity can tip you off early in the criminal’s process that something’s wrong, and by catching identity theft happening before it gets too far, you can dramatically limit your exposure.

First, watch for bank withdrawals and credit card purchases you don’t recognize, or invoices coming in the mail for products or services you didn’t order. Receiving a bill for a loan or credit account you don’t recognize is also an obvious warning sign.

Two, watch for small unrecognized charges on your credit card, as thieves will sometimes test out stolen card numbers with easy-to-overlook micro charges before moving on to more expensive transactions.

Three, if you’re no longer receiving a monthly statement you normally receive by mail, it could be a sign that fraudsters have changed the address on your account so you won’t see unauthorized charges on your statement.

Four, if your tax return is rejected as a duplicate, identity thieves likely filed a fraudulent return on your behalf ahead of your legitimate one, aiming to capture a refund in your name.

In all of these instances, immediately contact the associated financial institution or IRS to report the fraud and cooperate with their investigation efforts.

As for minimizing future breaches, two of the best practices you can adopt are strong password management and regular monitoring of your financial accounts.

What is a personal loan, and when is it good to use one?

By Sabrina Karl

Mortgages, auto loans, and credit cards have become familiar financing tools for many Americans. But fewer of us have experience with personal loans.

Personal loans are a cross between a mortgage or car loan and a credit card. Like a credit card, you can use the money for whatever you like. Also like a credit card, personal loans are unsecured, meaning there is no collateral—like a house or vehicle—to backup the lender in case you default. As a result, the interest rates on personal loans are higher than on secured loans.

Personal loans are structured more like home and auto loans, though. Whereas credit cards offer a revolving line of credit you can use and pay off at various amounts over time, personal loans provide a fixed amount of funds that are repaid in uniform monthly payments over a set loan term.

The lowest personal loan rates are currently around 6%, though they range into the double digits. And though term lengths vary, the most common run from 2 to 7 years.

So when is a personal loan a good idea? A top reason is to consolidate other, more expensive debt. If you can score a personal loan rate substantially lower than what you’re paying elsewhere, it can be smart to use one to pay off those high-rate obligations.

Personal loans are also useful for those who can’t get lower-rate credit. Opening a credit card with a 0% or low promotional rate can be a better option financially, but not if you can’t qualify for one of those.

It’s generally advised, however, to refrain from using personal loans for big-ticket items that are discretionary and beyond your budget, like a bigger wedding than you can afford or travel that you’re better off deferring until you can save up enough funds.

When it makes sense to close one HELOC and open a new one

By Sabrina Karl

A home equity line of credit, or HELOC, can be a helpful financial tool when used responsibly. But if you’ve had one for several years, it’s worth exploring whether you’d be better served by closing that HELOC and starting fresh with a new one.

One reason is that your amount of home equity has likely changed. When you apply for a HELOC, the lender calculates your loan-to-value ratio (LTV), or the percentage of your home’s value that is financed. The higher your LTV, the higher the interest rate you’ll be offered.

If you’ve been paying your mortgage for a number of years, you may have dropped into a lower LTV tier, offering the potential for a lower rate. Typically, these tiers fall at 90% LTV, 80% LTV, and 70% LTV.

In addition, the current interest rate environment will possibly be in your favor. One of the financial impacts of the Covid-19 pandemic has been a dramatic drop in interest rates, bringing mortgage rates down to all-time lows. As a result, current HELOC rates may be substantially less than the rate on your current HELOC.

Third, many HELOC lenders offer an introductory rate, so you may also be able to secure an exceptionally low rate over the near term.

Of course, there are times when closing your HELOC isn’t just a choice, but is necessary. Anytime you refinance a first mortgage, for example, an existing HELOC on the property must not only be paid off, but must be closed.

If considering closing a HELOC, it’s important to check with your lender on whether there are any penalties for early closure. And as you shop around for a new HELOC, you’ll want to compare the initial costs from various lenders, as well as any annual fees they may charge.

Why paying off your car loan early isn’t always a good idea

By Sabrina Karl

We’ve all heard it countless times: paying off debt is one of the wisest financial goals you can set. But while paying off your car or truck loan early may indeed be a smart move, it isn’t the best choice 100% of the time.

For one, the shorter your loan term, the less likely it will bring much benefit. If you financed your vehicle for just 3 years, you’ll probably gain little by retiring it early, since you already capitalized on lower interest rates by choosing a shorter term.

You’ll also want to check whether your loan carries a prepayment penalty, or if it involves precomputed interest. In contrast to simple interest, precomputed interest means paying the loan off early won’t reduce your ultimate interest expense.

If you’re clear on these are issues, paying off your loan early will reduce your total cost, which is always a good thing. In addition, it will free up money in your budget for other uses, will make it easier to sell or trade-in your vehicle, and if you’ll soon be applying for a mortgage, will helpfully lower your debt-to-income ratio.

On the other hand, keeping the loan can be great for your credit score, as it adds diversity to your credit profile and provides an opportunity to build your track record of on-time payments.

It’s also sensible to instead pay off any debts with a higher interest rate than your car loan. Credit card debt and personal loans are almost always a better use of your debt reduction dollars than a vehicle loan.

Lasty, if paying off your car or truck early leaves you with less cushion to weather unexpected expenses each month, or prevents you from establishing an adequate emergency fund, it’s smarter to fund that financial security first.

Will closing a credit card help or hurt my credit score?

By Sabrina Karl

Regularly paying attention to your credit score is a smart move for anyone wanting to maximize their finances. Because higher scores will lead to lower interest rate offers on mortgages, loans, and credit cards, as well as potentially cheaper insurance premiums, working to incrementally raise your score is a worthy endeavor.

One of the first ideas many people have when considering how to boost their score is to close a credit card. While it may seem like reducing your existing access to credit will look good to future creditors, they actually look more favorably on those who have credit available that they’ve refrained from using.

That’s why one of the top three factors impacting your score is your credit utilization rate. This calculation indicates how much of your available credit you’re currently using. Someone who is maxed to their credit limit on every card would have a credit utilization rate of 100%, while someone who barely uses their cards would have a rate close to 0%. To earn the highest credit scores, you’ll want to use less than 10% of your total combined credit limits.

When you have a card you aren’t using, its limit counts toward your total credit available, yet with no balance on the card, your utilization rate on that account is 0%. Keeping it open therefore helps bring your overall credit utilization factor down. Conversely, closing the card would drop your total credit limit, which will in turn increase your utilization ratio and lower your score.

If you opt to keep a card open but unused, make sure you aren’t paying an annual fee (and if you are, call the card issuer to negotiate a waiver). You may also need to use it for a transaction once every year or two to keep the account active.

How to earn more from your credit card than it earns from you

The credit card industry generates billions of dollars every year, based on fees and interest paid by many of its cardholders. But unlike most products, you can enjoy the benefits of a credit card for free. Even better, you can come out ahead.

The first step is to avoid incurring interest on your transactions, by paying your full balance every month. When you don’t, the amount you carry over to the next month is charged an interest rate that is almost always in the double digits.

Second, make sure those full payments are always made on time. If you miss the due date by more than a day or two, not only might you trigger an interest fee, but you’re likely to be charged a late fee as well, creating a double cost whammy.

You’ll also want to avoid annual costs. You can do this by only choosing “no annual fee” cards, or if you already have a card with a fee, you can call the issuer to request they waive it or move you to a no-fee card.

Diligently avoiding all of these costs will lead you to a beneficial card relationship, where you have credit access for a month at a time and pay nothing in exchange. But you can do even better by both avoiding all fees and earning rewards on your card activity.

To do this, choose a card that offers cash, points, or travel awards that you find useful. Cash can be the best choice because you can redeem it frequently and apply it to anything in your budget. Additionally, look for sign-up bonuses when shopping for a new card.

When you can earn rewards and simultaneously avoid fees, you’ve succeeded in making your credit card more lucrative for you than for the card issuer.

Beware of taking a longer auto loan term than you need

Three things about buying a car or truck are fairly indisputable: it’s generally an expensive purchase, the smartest financial move would be to save up and pay in cash, and most people can’t manage No.2 so they finance the purchase instead.

When considering an auto loan, one of the most important decisions is how long a term to choose. What the car dealership tries to steer you towards may not be your best option, and following the national trend may not be in your best interests either.

That’s because vehicle buyers are choosing longer and longer loans. Historically, 3- and 5-year auto loans were the most common. But the average existing car loan is now up to almost 6 years, according to Experian’s Automotive Industry Insights report for Q2 2020.

But choosing a longer loan carries risks. For one, interest rates are higher on longer terms. Though your monthly payment will be lower, you’ll pay significantly more interest over the course of the loan. For example, a $25,000 auto loan at 5% for 36 months will cost you $1,964 in interest, while you’ll pay $4,232 in interest on a 72-month loan at 5.25%.

Also, longer loans make it more likely you’ll be repaying the entire time you own your vehicle, since the average ownership duration is 6-7 years. Additionally, as your car ages, you’ll need to start shelling out for repairs and maintenance, which can make it harder to afford your car payment.

Lastly, contemplating a longer loan often leads to choosing a more expensive vehicle. Because the monthly payments are smaller, dealers will point this out to make more expensive models look more affordable. The better choice is to spend only what you can afford, and with the shortest term you can reliably afford.

A single credit card or more than one — What’s the smarter choice?

By Sabrina Karl

Perhaps you’ve heard about “credit card maximizers”, the folks who hold a dozen or more different cards to squeeze out the maximum rewards. At the other end are cardholders who have owned a single card for decades.

Which is the smarter strategy? As with many things, the best choice for most folks lies somewhere in between, with your own money management personality being the biggest determinant of the most beneficial approach for you.

At the extremes, it’s easy to see the pluses and minuses. Holding a single card makes managing payments and tracking expenses exceptionally simple. You also never have to choose which card to use.

But by holding more than one card, you can significantly boost how much you recoup from your spending. For instance, you could open a card that pays an attractive cash back rate on gasoline purchases and use it only for that. Other common categories that can be worth a new card are Amazon or Target purchases, dining out, or groceries.

Of course, going to extremes and continually opening additional cards to score new and better rewards can in theory allow you to earn as much as possible on every penny you spend. But it requires a lot more work to manage a stable of cards, their payments, and your decisions on which card to use.

On top of this, frequently applying for new cards will hurt your credit score, as will any missed payments because you can’t keep track of everything.

For some personalities, a single card is most appealing. Just be sure to occasionally review if you’re getting rewards well-suited to you. But for many spenders, the sweet spot is to hold a few different cards, with certain ones dedicated to specific easy-to-remember purchases, bringing more rewards to your bottom line.

Should I pay off credit card debt before applying for a mortgage?

By Sabrina Karl

If you’re considering applying for a new or refinanced mortgage, thinking through your credit and debt is an important first step. If you’re carrying credit card debt, it’s natural to wonder how paying it down will impact your application.

Card debt affects your mortgage request in two ways. The first is your credit score. Qualifying for a good mortgage rate doesn’t require excellent credit, but it helps. If you can raise your score above 760, or even 780, you’ll likely receive the best rate offers.

Whatever your score, consistently paying your cards on time is the No. 1 way to boost your score. That said, how much card debt you’re carrying compared to your available credit line, called card utilization, is also a factor. An account with a high credit limit but a small balance is rated more favorably than one that’s maxed to the limit.

So paying down a balance can lower your credit utilization and improve your credit score. If your card isn’t maxed out, you can also try requesting a credit limit increase. By not adding more debt after the limit is raised, your credit utilization will improve.

The other way card debt impacts your mortgage application is its impact on your debt-to-income ratio, or the percentage of your monthly income that goes to monthly debt obligations. But the minimum monthly payment is what lenders count here, not the full balance. So unless the total minimum payment on all your cards is very high, this may have little bearing on your mortgage approval.

It’s also critical to consider your available cash on hand. Paying down card balances will reduce your cash for a down payment and reserve. So if cash is tight, paying down card balances may hurt your application more than help it.