Money Under 30

Credit Card Alternatives

David Weliver — Fri, 20 Nov 2009 16:02:04 +0000

Credit card companies are raising interest rates on just about everybody these days, fueling many people’s passionate disdain for using any credit card for any reason.

Once upon a time, there was only one alternative to spending with credit cards: cold hard cash. But then came debit cards—accepted everywhere just like credit cards, but without annual fees, finance charges, and the looming risk of lifelong indebtedness.

Today, credit card alternatives are growing steadily and are looking even more attractive. That said, some alternatives to mainstream, unsecured credit cards are total rip offs—like many prepaid debit cards and even many secured credit cards.

Good Credit Card Alternatives

There’s nothing wrong with cash and traditional debit cards, but a couple of new products provide some credit card perks (cash rewards or the ability to borrow for a big purchase) without credit card trickery (minimum payments and creeping interest rates).

Rewards Debit Cards

Debit cards are becoming Americans’ plastic of choice. In 2009, debit card transactions surpassed credit card purchases for the first time in history thanks, in part, to debit cards’ popularity among younger spenders.

That’s great, because it shows that more Americans are becoming debt-averse. As I’ve written before, however, some debit cards have a ways to go to match benefits credit cards offer like cash rewards and fraud protection.

But now, there are rewards debit cards.

PerkStreet Financial offers a debit card tied to a free checking account that pays users one percent cash back on all non-pin purchases. So you can get cash back for your spending without giving business to a credit card company!

Peer-to-Peer Lending

I am a huge fan of peer-to-peer lending sites like Prosper and Lending Club; they let individual investors make loans directly to borrowers. With no bank in the middle, investors get higher returns and borrowers enjoy lower rates on personal loans.

Case-in-point, three years ago I took out a Prosper loan to consolidate debts at a savings of about four percent. Now that my loan is paid off, I’m starting to lend money and an earn eight or nine percent annual return; far better than the paltry one or two percent banks are paying these days.

Although I don’t advocate going into debt, if you absolutely need to borrow money for a big expense, consider getting a 36-month peer-to-peer loan at a fixed interest rate instead of borrowing on credit cards.

Learn more about:

Not so Good Credit Card Alternatives

I dig rewards debit cards like PerkStreet and the peer-to-peer lending model. But if I were you, I’d stay away from these products that disguise themselves as alternatives to credit cards but will actually end up costing.

Prepaid Cards

Prepaid cards, sometimes called prepaid or re-loadable debit cards, seem like a good alternative to credit cards: You transfer money onto a the card and use it like a debit card; you can only spend what you have. Problem is, these cards are re-loadable cards are loaded with fees.

Each card has a different fee structure, but these are some of the fees I’ve seen on prepaid cards:

Account opening fee
Per transaction fee ($1 or $2 every time you use the card)
Re-load fee
Monthly fee
Inactivity fee
Customer service fee (every time you call them)

Although these cards are often marketed to individuals without bank accounts, I have seen some marketed to college students and otherwise savvy but credit-averse folks.

If you know of a fair prepaid card, let me know in a comment. Otherwise, do your homework before you sign up for one of these cards!

Secured Credit Cards

Although secured credit cards are, in fact, credit cards; I consider them an alternative to regular, unsecured credit cards because you can’t exactly go into debt with a secured credit card.

On the surface, secured credit cards look like prepaid cards. You deposit money into a savings account and that deposit becomes your credit limit. You can make charges on the secured credit card up to your credit limit, and you pay back the charges monthly (either in-full or over time).

The big difference is that secured credit cards report your payment history to the credit bureaus, so you’re building credit history. You can’t go into debt, because you haven’t actually spend money you don’t have. For these reasons, secured credit cards can be a good tool for anybody having trouble building or reestablishing credit. Just be careful, as the majority of secured credit cards are marketed to people with major credit problems and, as such, contain outrageous fees up to several hundred dollars a year.

You’re much better off calling your existing bank and asking if they offer a secured credit card product. Expect to pay an annual fee for a secured credit card, but if you’re looking at a fee over $100, you’re probably being taken.

What do you think? Do you use a credit card alternative that I didn’t mention here? Let me know in a comment!

Think You Don’t Need Health Insurance? Think Again

Guest Writer — Wed, 18 Nov 2009 13:30:29 +0000

The younger we are the more we tend to think that we are invincible and do not need health insurance. Cancer, broken bones, and weird illnesses with names that we can’t pronounce are all things that happen to other people and never to us—right? Wrong!

Probability of Developing Cancer

According to the American Cancer Society and their studies showcasing the probability of developing invasive cancers over selected age intervals there is a one in 70 chance of developing cancer before the age of 39 for men and a one in 48 chance for women. If we stretch it out even further then over ones entire lifetime there is a one in two chance of developing cancer for a male and a one in three chance for a female.

If the above statistics don’t scare you and shock you to some degree then consider that these are just cancer statistics! There are any other myriad number of different things that can and often do go wrong from a simple broken bone in a sports injury to an illness that you had never even heard of until the doctor sits you down to give you the diagnosis.

I’m not just rattling off these statistics to paint a doom and gloom picture, but to set the stage for three reasons I believe you need adequate health insurance benefits.

My Three Reasons

Very bad medical problems can and do happen to many of us—maybe even you.
Those very bad medical problems can be very expensive and potentially ruin one’s financial future if they do not have adequate health insurance.
It is a smart thing to purchase comprehensive health insurance coverage to protect not only your health but also your financial future.

The Cost of Common Health Procedures

According to ChangeHealthcare.com the cost of these common procedures at Tampa General Hospital close by where I live is somewhere in these ranges (keep in mind that these cost estimates are just for the hospital fees and does not include medications, extra tests, Doctors fees, etc.

I know from personal experience after talking with a friend of mine that after he developed leukemia the cost of his prescriptions alone would have been somewhere in the $3,500/month range without his health insurance. Stories like his are good stories to tell because he actually had health insurance coverage, where as the owner of an agency that sells Florida health insurance I could tell you many other stories from the flip side of people that ran their finances into the ground because they did not have adequate health insurance coverage):

Heart Attack: $37,650 to $41,17
Fracture of Upper Leg (Femur): $22,648 to $24,771
Lung Disease: $49,963 to $51,366

Again, the cost estimates above are just the basic hospital average costs for Tampa General Hospital and do not include many of the associated fees that are involved.

Buy Health Insurance Before You Need It

Many people are of the mistaken belief that they should just wait until they develop a major illness before they buy health insurance. This kind of thinking is akin to someone who totals their car without having any car insurance and then goes to an auto insurance agent and attempts to buy collision coverage for their already totaled vehicle and expects the insurance company to pay for the damages to their car. The most responsible thing that you can do when it comes to caring for you and your family’s health (and securing your financial future) is to make sure that you have adequate health insurance at all times – before you may need it (and hopefully you never even need to use it!)

Compare Health Insurance Providers

If you have financial goals like buying a first home, getting out of debt, or any other number of great things then take the time to do some comparison shopping to find not only a cheap health insurance plan but one that will act as a safety net to protect your financial goals from the financial ruin that a uninsured medical bill could bring. Just like it is common knowledge that you can save money by doing a car insurance comparison every so often it is not as widely known but just as effective to shop around and compare health insurance providers in order to find an affordable plan.

Stick with large and trusted companies like Blue Cross Blue Shield, United Healthcare, Aetna, Humana, etc. and stay away from discount health plans that masquerade as true health insurance but in reality are just hyped up coupon cards that leave you out in the cold with little to no coverage should you ever get hit with a large medical bill.

Do your homework to shop around and then choose a comprehensive major medical health insurance plan from a trusted nationwide company to make sure that your health care and financial future has an adequate safety net should the unfortunate happen.

Joel Ohman is a Certified Financial Planner and President of 360 Quote, LLC. He is a serial entrepreneur and is currently spearheading several successful consumer comparison websites including Credit Card Chaser and Health Insurance Providers.

Photo Credit: The Doctr

Yes, Virginia, There is a Rewards Debit Card

David Weliver — Tue, 17 Nov 2009 22:43:31 +0000

There’s a new rewards debit card in town!

It’s good news for those who absolutely refuse to use use credit cards: A new company, PerkStreet Financial, offers a free online checking account that pays users one percent cash rewards on all non-PIN debit card purchases. You no longer need to use credit to earn cash rewards on your everyday purchases, and you can even get a $50 bonus just for signing up.

What is PerkStreet?

PerkStreet Financial has partnered with the Bancorp Bank to offer a free online FDIC-insured checking account, similar to ING Electric Orange and others. It works just like any other checking account—you can:

Write checks
Use a debit card against the account
Withdraw cash via a nationwide network of free ATMs
Make electronic or mail-in deposits

You just won’t find a branch on your nearest street corner!

What Makes PerkStreet Unique?

Although some other online checking accounts pay interest (usually far less than one percent); PerkStreet offers a one percent cash back rewards debit card; that’s ten times the rewards the average debit card offers*. Just like rewards credit cards, PerkStreet users collect rewards as they spend that can be redeemed as cash back or for free coffee and music. PerkStreet also has no minimum balance requirement and will send you free checks.

Is It Really Free?

As with other checking accounts, PerkStreet may charge you a fee if you bounce a check, overdraw your account, or use a non-network ATM. Also, if you don’t use your account at least once a month, you’ll be charged a $4.95 monthly inactivity fee. But the account remains free as long as you make at least one deposit, debit card purchase, or ATM withdrawal each month.

PerkStreet does not charge any of the fees that many pre-paid debit cards charge (everything from monthly fees to per-transaction fees). And, since its a rewards debit card, not a credit card, you’ll never pay interest or risk going into debt.

But I Already Have a Checking Account and/or Rewards Credit Card

In my opinion, PerkStreet is a perfect compliment to a local checking account. If you already have direct deposit and online bill pay set up with one checking account, you can open a PerkStreet account and transfer money once or twice a month that you designate as spending money. You’ll have an easy way to budget for discretionary expenses, and you’ll earn rewards as you do it.

If you’re already happily using a rewards credit card (and paying the balance in full each month), you might not be interested in PerkStreet. But their rewards debit card is absolutely perfect for anybody who chooses to live credit-free or can’t get approved for a credit card at the moment.

How Do I Sign Up?

Getting started is easy at PerkStreet.com.

It takes $25 and about five minutes.
You’ll receive free checks and your debit card in the mail.
Sign up before Dec. 31 and get a $50 bonus in your account!

Signup for your free PerkStreet account now

*The average debit card offers .04% rewards vs. PerkStreet at 1%. 17% of debit cards offer rewards (Source: BAI/HItachi 2008 Study of Consumer Payment Preferences). Of debit cards that offer rewards, the average value provided is 0.23% of spending (Source: Survey of the top 10 bank holding companies by total domestic deposits, as ranked by the FDIC). The resultant value provided by the average debit card is 0.04% of spending compared to PerkStreet at 1%.

Are You an Image Spender?

David Weliver — Tue, 17 Nov 2009 17:12:55 +0000

I am going to venture a guess that one of the leading reasons many of us twentysomethings wind up buried in debt is because we spend above our means not because we have to, but to look good, fit in, and feel richer than we are.

Are you an “image spender?”

I’m not saying you have to be a superficial diva or high-rolling meterosexual. But from time to time, do you indulge, splurge, and overspend on clothes, jewelry, watches and other accessories; apartments, furniture and even pets; dinner and drinks and lattes; cars, vacations, and a whole lot else?

And do you do it to look good?

I don’t assume there’s anything wrong with image spending, per se—if you can afford it. (I’ll leave that debate for another time). But the trouble starts when you spend to show off but don’t have the savings. If you think you think you’ve ever been guilty of image spending beyond your means, even just a little bit, (I won’t tell), I’m going to suggest some ways to temper your urge to splurge but still look good.

First Of All, Take Stock

It’s natural in our advertising-saturated society to want to look good and keep up with trends. Choosing to tune-out all the consumist messages you hear and see every single day is difficult work, but well worth it. The less you care what other people thing, the more you can build a financial foundation that will let you spend money on the things you want—and actually afford them. And hey, if that still means the latest fashions, no problem.

But if you admit to yourself that you have a budget or debt problem because you overspend on your image; you do need to ask yourself: Why?

Are you trying to keep up with others?
Are you shopping to fill and emotional need?
Do you have a shopping addiction?

If you think you might have one of these problems, you might want to spend time addressing the deeper psychological causes of your spending.

Look Good, Spend Less

The good news is you don’t have to completely abandon your image to curb your spending. Here are some things you can do:

Keep Your Image “Classic”

One of the easiest ways to overspend on your image is to try to keep up with ever-changing trends. But if you create a style that’s classic and sophisticated, you can buy just one or two “hot items” a year instead of dozens.

Take Care of What You Already Have

Make the stuff you own last by caring for it well. After years of treating my clothes like old rags I’m finally learning to hang my nicest shirts on quality hangers and occasionally dry clean them instead of throwing them in the wash after every wear, meaning I only have to buy any new clothes once or twice a year.

Remember: Nobody Knows Where It Came From

My wife frequently gets compliments on how she dresses, yet most of what she owns comes from Target and Old Navy; not Fifth Avenue boutiques. Impress people with your personal style, not the brand name of the things you own.

If You Splurge, Do It Wisely

I once read a piece of advice in Esquire that comes to mind. It went something like this:

Time in your car every day: One hour. Time in your clothes every day: 12 hours. Spend accordingly.

I’d take this a bit further: What stylistic items do you use almost all the time? Your watch, your shoes, your coat? If you’re going to spend a bit more, do it on these items that you’ll get the most use out of, not items that you’ll wear once or twice a year.

What do you think? Have you found ways to maintain a sleek image on a budget? Or do you just say screw what other people think? Share your thoughts in a comment.

A Case for Local Banks and Credit Unions

David Weliver — Mon, 16 Nov 2009 17:38:06 +0000

I have been trying to convince my wife to switch her checking account away from Bank of America; I’m not a fan. Recently, on my post on leading financial iPhone apps, two readers asked why. Although there are pros and cons to banking both with large “megabanks” and local banks and credit unions, I’m a firm believer that most of us are better off banking with small, community banks or credit unions.

Why We Use Megabanks

There are two big reasons most people I know use Bank of America or other megabanks (Citi, Wells Fargo, Chase):

Megabanks’ size provides a sense of convenience (e.g., nationwide ATMs).
Megabanks have bought up smaller banks and converted customers’ accounts. (And customers don’t switch away).

A huge ATM network seems like a plus, and big banks do offer other perks, like iPhone apps and fancy programs that round up your debit card purchases and put the difference into savings. But still, for average individual banking customers, bigger isn’t necessarily better.

ATMs Everywhere

Yes, there are more megabank ATMs worldwide, so you may be more likely to find one when you’re away from home (and thus avoid a fee). But just because they have a huge network doesn’t mean you’ll find an ATM when and where you need one. And megabanks are more likely to charge you a fee for using another banks’ ATM (in addition to the fee the ATM bank charges). Bank of America currently charges customers a $2.00 fee for using a non-B of A ATM ($5.00 outside the US).

The Customer Service Myth

Next comes convenience, like 24/7 telephone customer service. But recall the last time you called a huge company’s 800 number. Was it a pleasant experience? Perhaps you were put on hold or you wound up talking to somebody who just read from a script and tried to sell you something.

Every time my wife calls Bank of America for a routine account change, she waits; and something gets screwed up.

She called up over a month ago to change her name after we were married. They said it would take seven to ten days for her new debit card to arrive. It hasn’t come. Nor has any indication they processed her name change. Looks like they totally “forgot”. Another time she called, the operator pitched a credit card that my wife had no interest in. My wife said “no, no, NO!” Guess what came in the mail a week later? The credit card she made very clear she did not want.

In my humble opinion, no matter how hard big banks try to spin their customer service, you’ll always be dealing with a big corporation in which you’re just a number and a potential profit.

Why Small Banks and Credit Unions are Better

I have held my primary checking account with two institutions: Formerly I banked with a Massachusetts credit union; now I’m with a small Maine community bank. They offer “all the basics” that big banks do: Free checking, online account management, and bill-pay. But the following are some benefits I’ve experienced with these community financial institutions that you won’t find at the megabanks:

ATM Fee Refunds

My current bank refunds any ATM fee charged by any ATM, anywhere in the world. Immediately. No limit, no exceptions. Whether I get charged two dollars, three, or even five, they put the money back in my account the next day. I’ve withdrawn cash in the Caribbean and Eastern Europe. The fees have been reimbursed. My old credit union refunded ATM fees too, but they did it once a month and had a cap on how much they would refund each month. Either way, these perks mean I can use whatever ATM is convenient without worrying about fees.

Real Customer Service

When I call up my bank, I get somebody on the phone immediately who is in-state and who sounds like they value my business. When I walk into a branch, I’m treated like a person, not just a profit opportunity. I can ask to speak with a branch manager who is not just a cog in the wheel of a giant national corporation, but who has real decision-making authority.

Personal Lending

When you apply for a credit card, personal loan, or mortgage with a big bank, you really are just a number. They look at your credit, assets, and debts and make a decision on whether to approve you and for what rate. End of story. At small banks or credit unions, you can sit down with underwriters who will listen to your situation and make personalized recommendations. Of course, I’m not going to sugar-coat this: Small banks and credit unions still want to lend you money (and earn interest from you), and they’re not going to give you a loan if your credit stinks. You do, however, have the opportunity to put a face on your loan application, which can make a huge difference.

As an example, when small banks and credit unions write a mortgage, they don’t sell it to investors. They hold it. That means that they’re not going to make a home loan they know a customer can’t afford. That’s why local financial institutions aren’t nearly as affected by mortgage defaults and foreclosures as the big boys. And that means that small banks’ customers are still able to afford their mortgages—and are staying in their homes.

Better Rates

Banking is a competitive business. Remember when I said that a lot of people I know are with megabanks because those banks bought up smaller banks and migrated their accounts? Changing banks is intimidating, and most of us don’t do it unless we become really fed up with our current bank. To win new customers, small banks and credit unions often offer much better rates on CDs and loans, and even checking accounts, like a 4.01 percent checking account at one credit union.

Read More: How to change your primary financial institution.

My old credit union consistently offered auto loans at a point or more below anybody else. They issued credit cards with eight or nine percent fixed interest rates, compared to 12, 15, or 20 percent rates offered by the big issuers.

Find Top Rates: MoneyAisle searches top bank rates in your area.

The Bottom Line

No single bank or credit union “has it all”. Those that offer unlimited ATM refunds may not have the top savings rates; big banks that have ATMs and branches everywhere charge more fees to pay for all of that infrastructure. But in my experience small banks and credit unions (which, by the way, are non-profit, and reinvest earnings in perks and lower rates for members), consistently deliver personal service and a much better value than the megabanks.

What do you think? Let us know where you bank, and what you like about your institution. Can you defend Bank of America or another big bank? Love your credit union? Have a horror story? Share your story in a comment!

Best Online Savings Account Rates (November 2009)

David Weliver — Thu, 12 Nov 2009 18:00:35 +0000

Online savings accounts are a critical tool—especially for young savers—to set aside savings in an insured account while earning better interest rates than at their local bank. This page examines the best online savings account rates and is updated monthly or when rates change. For a more detailed comparison of our most recommended online savings accounts, read: high yield savings accounts compared.

The following chart displays the best online savings account rates for some of the most popular banks among our readers. These top online savings accounts have been chosen not only for their consistently competitive interest rates, but also their customer satisfaction, ease of use, and overall reputation.

Happy saving!

Best Online Savings Account Rates

Bank	Rate	Minimum	Remarks	Link
EverBank	1.77%	$5,000*	New customers get 2.51% for 3 months	Go »
Ally Bank	1.64%	$1	Rate updated 11/13/2009	Go »
WTDirect	1.51%	$10,000	Top-rated customer service	Go »
FNBO	1.50%	$1		Go »
HSBC	1.35%	$1	Global bank	Go »
ING	1.30%	$1	Divide into up to 30 sub-accounts	Go »

*The minimum to open an EverBank account is $1,500, but balances under $5,000 are assessed an $8.95 monthly fee.

Want more top rates? Use MoneyAisle to find the best deposit rates »

Have you found other online savings accounts that offer competitive rates with low or no minimum opening deposit? Please let us know in a comment, or share your experience saving with any of the above online savings accounts!a

Open Your First IRA

David Weliver — Wed, 11 Nov 2009 16:48:58 +0000

There are a lot of reasons to open an individual retirement account (IRA). If your employer doesn’t offer a retirement plan, offers lousy investment choices, you’ve maxed out your 401(k), or simply want greater control over your retirement savings—an IRA is for you.

Anybody under age 70 ½ who is earning an income can open an IRA. You can choose between a traditional IRA and a Roth IRA. Which one you choose depends on your income and the tax bracket you predict you’ll fall into in retirement.

Roth vs. Traditional

If your adjusted gross income is less than $116,000 and you expect that you’ll be taxed at a higher rate when you retire, you should think about opening a Roth IRA. Money you invest in a Roth IRA is not tax deductible now, but the funds you withdraw in retirement will be tax-free.

If you think you’ll pay less taxes in retirement, then think about a traditional IRA. The contributions you make are tax deducible now, but you’ll pay taxes when you take the money out in retirement.

The maximum you can contribute to either a Roth IRA or traditional IRA is $5,000 this year for everybody 50 and younger.

Where to Open an Account

Don’t delay opening an account just because you’re not sure where to start, or where to invest. You can open an IRA almost anywhere that offers banking or investments, but online brokers are a great place to open an IRA. Many don’t have minimum required account balances or opening depoists on IRA accounts, and you can start buying investments for between $5 and $15 a trade, depending on the broker.

Start now: Compare recommended discount brokers for starting your IRA

For newbie investors, exchange traded funds (ETFS) and no-load mutual funds provide an easy way to start a diversified portfolio at lost cost and with just a few trades. To get started, research funds for free with Morningstar.

Read more: 23 things beginners must know about saving for retirement

My Credit Card Raised My Interest Rate! Here’s What to Do

David Weliver — Tue, 10 Nov 2009 14:47:13 +0000

Stories of credit card companies raising interest rates on just about everybody—even customers with perfect credit, no debt, and no late payments—continue to roll in.

That’s because the CARD Act takes effect this winter and will restrict credit card companies’ ability to raise interest rates on existing customers. If you thought credit card companies were committing usury in the past with APRs of eighteen, or twenty percent; you ain’t seen nothing yet. Cardholders are seeing their rates go as high as 29.9 percent; there’s even a story of man who received a credit card offer at 79.9 percent APR!

How do you know if your card is raising your interest rate? What can you do about it?

How Credit Cards Raise APRs

In general, your credit card company must notify you of any changes to your account, including interest rate increases, by mail (or electronically if you have consented to receive legal disclosures online). Unless you pay late. Most cards’ terms and conditions include a clause that allows them to raise your interest rate if you pay late or go over your credit limit; no notification required.

Manage your cards well? You’re not immune to rate hikes.

My wife just received a notification from Citi that her interest rate will jump to 23.9 percent in December. That’s on a card with a $15,000 credit limit that does not have a balance and has always been paid in full. (We use the card for joint expenses each month and pay it in full).

She received a letter yesterday detailing the change. Unlike other rate increases I have seen, however, this notice had an interesting clause. If my wife were to transfer a balance of $3,000 or more to the card (plus a fee), Citi would actually lower her rate to 9.9 percent on the balance transfer and all future purchases until 2011. Obviously, Citi is just trying to make some money off this account. Since we always pay the balance in full and the card has no annual fee, they never get a dime from us in interest.

Just be sure to watch the mail.

A lot of these credit card rate increase notices look like junk mail. But if you miss them, you may miss your opportunity to opt-out of the rate increases.

How to Opt-Out of Rate Increases

When your credit card company raises your interest rate arbitrarily (i.e., not because you paid late), they must give you the opportunity to opt-out. Usually, you must contact the card’s customer service to opt-out. If you opt-out:

You can pay off the existing card balance at your current (lower) interest rate.
When the debt is paid off, or when the card expires, the credit card will be closed.

If you don’t opt-out by the specified deadline, your rate will go up and you won’t be able to do anything about it after the fact. So if you’re carrying a balance and your credit card company notifies you of an extreme rate increase, you should probably opt-out (unless you can pay off the balance in-full immediately). This is the time to forget about whatever effect closing your credit card has on your credit and just get far, far away from this nasty interest rate.

What to Do Next

If you’re not carrying a balance on the card that raised your interest rate, there’s little point to opting-out. As long as you don’t take on debt on that card, who cares about the APR? You might, however, be so outraged with the card company that you want to stop doing business with them. Or, you might want to preserve a lower APR “just in case” you need to revolve a balance on the card in the future.

Try negotiating.

In the past, customers with excellent payment histories could often be successful just calling up their credit card company and saying “Hey, I can get a 13 percent APR with Card ABC or Card XYZ, why should I stay with your card at 20 percent? What can you do for me?”

This strategy is certainly still worth a shot, although you can expect to have a harder time getting concessions from card companies. For one, they know that it’s harder for customers to switch to a new card (due to tightened credit requirements). Second, the card companies need the money. (Not that I expect you to have a lot of sympathy). But with sky-high default rates and the new laws limiting sneaky fees and interest rates that used to make credit card companies lots of cash, they’re trying to figure out how to make money on a totally new playing field. For now, that means charging even their best customers ridiculous interest rates.

Or, get a new card.

If you have really good credit and little or no credit card debt, you’re in luck, because you can probably apply and get approved for a new credit card at a much lower APR than on existing cards you have. (Most cards are offering new customers APRs ranging from 12 to 18 percent; not great, but better than 24 or 29 percent). Your best bet is to apply with companies that are actively seeking new creditworthy applicants, like Chase and Discover. Chase’s Freedom card has been a perennial favorite of card-critics for its simple rewards program, and the new Chase Slate card provides a lower rate, albeit no rewards, for customers who want the flexibility of paying some purchases over time.

Compare and apply: See my list of recommended credit cards.

What about you? Have your credit card interest rates gone up? How high? What have you done about it? Please share your story in a comment.

Six Things to Know About Your Student Loans

David Weliver — Mon, 09 Nov 2009 19:06:27 +0000

At some point during my freshman year of college, I vaguely remember attending a mandatory 45-minute meeting in the financial aid office and signing some paperwork that had to do with my federal student loans. And I remember receiving notices about nine months after graduating that it was time to start repaying my loans, which I’ve been doing faithfully ever since.

But like most people I know, that’s about the extent of the time and energy I’ve invested in understanding my student loans and student loan debt.

The fact is, we’re borrowing more and more to go to school. The Wall Street Journal reports that the amount of money students borrow has long been on the rise:

New numbers from the U.S. Education Department show that federal student-loan disbursements—the total amount borrowed by students and received by schools—in the 2008-09 academic year grew about 25% over the previous year, to $75.1 billion…Today, two-thirds of college students borrow to pay for college, and their average debt load is $23,186 by the time they graduate…

With the cost of higher education soaring and the pressures our society places to become as educated as possible, this number will surely continue to grow. That’s a problem, but I’ll leave the debate about how much is too much student loan debt for another time.

The fact is many of us have student loan debt. And how we tackle that debt is one of the first big financial decisions we make once we’re on our own.

1. Understand the Difference Between Private, Subsidized, and Unsubsidized Loans

Student loans come in a variety of “flavors”. Federally-guaranteed student loans are backed by the U.S. Government and, as a result, have low interest rates and are available to most students regardless of credit history. The most common federal loan programs are Stafford loans, Perkins loans, and PLUS loans (for parents).

Subsidized federal student loans are available to students meeting income requirements and do not charge income while you are still in school or during grace periods.
Unsubsidized federal loans are available to more borrowers but charge interest as soon as they are disbursed.
Private student loans are not federally-guaranteed, require good credit, have higher interest rates, and charge interest as soon as they are disbursed.

2. Grace Periods and Deferment

Federal Stafford loans have a six month grace period; Perkins loans have a nine month grace period. That means you aren’t required to start paying them back until six or nine months after you graduate or cease being a full-time student. If your loans are subsidized, you won’t pay any interest on the balance during that time. If the loans are unsubsidized, however, interest will accrue, so it’s a good idea to make payments anyway.

If you are having trouble finding a job or are not working, you may be able to contact your student lender and defer your loan. Just remember that if you have an unsubsidized loan, interest will be accumulating.

3. Student Loans Must Be Paid!

The consequences for defaulting on a federal student loans are more severe than failing to repay other debts (e.g., a credit card). If you fail to repay a student loan, not only will you ruin your credit, the government can seize your federal tax refund, garnish your wages, sue you, and cut off federal benefits like social security. Finally, federal student loans cannot be discharged in bankruptcy; so even if you hit rock bottom, you will still have to pay up for your education!

4. Student Loan Interest is Tax Deductible

On a more positive not, if you earn less than $70,000 a year, you can deduct up to $2,500 of student loan interest on your federal tax return, even if you don’t itemize your deductions. Each year, you should receive form 1098-E from your student loan lenders, detailing how much interest you paid (and can deduct).

5. Student Loans May be Forgiven

If you enter a career that serves the public in high-need areas (such as teaching or delivering healthcare in rural, low-income regions), you may qualify for programs that will forgive a portion of your federal student loan debt. Consider, however, that you may have to work in the qualifying field for several years before qualifying and that the amount of the loan forgiven may be taxable as income. Check with your school or professional organization for information about loan forgiveness programs. Additionally, federal student loans are canceled if you die, meaning your spouse and children won’t be burdened by them.

6. Some Consider Student Loans “Good Debt”, If There Is Such a Thing

You may read about “good debt” and “bad debt”. Basically, some credit experts classify mortgages and student loans as “good debt” because they’re investments in your future, while consumer debt like credit cards is considered “bad debt” because there is little value attached to the debt. This distinction may come into play when you apply for new credit, for example. A lender will look more favorably on somebody with $200,000 in student loan debt from medical school than on somebody with $20,000 in credit card debt. The doctor has ten times the debt, but still looks better to future creditors than the guy with credit card debt.

What about consolidation? Read more about student loan consolidation.

The other reasons student loans are sometimes called “good debt” is because they tend to have very reasonable interest rates and that interest may be tax deductible. At the end of the day, however, student debt is debt. When people ask whether you should pay down student loan debt early, I say: Only after you’ve paid down all your other non-mortgage debt, have an emergency fund, and are saving at least 15 percent of your income for retirement.

Student Loan Consolidation

David Weliver — Mon, 09 Nov 2009 19:03:00 +0000

It’s common to graduate with four, eight, or even a dozen student loans from a handful of lenders. Even if most of them are from the same two or three service companies, each loan may have a different interest rate and due date. Talk about intimidating!

And then you get a mailing or a phone call. Consolidate all those student loans into one low payment! Student loan consolidation sure is tempting. But is it wise?

What is Student Loan Consolidation?

Student loan consolidation is taking one or more student loans and repackaging them into one loan with one fixed interest rate and one payment. There are consolidation options available for both federal student loans (Stafford, Perkins, and PLUS loans), as well as private student loans.

Most student loan consolidation programs are completely legitimate and may, in fact, make it easier to manage your student loan debt. That said, many consolidation programs market benefits that are misleading. Before consolidating student loans, make sure you have all the facts.

The Benefits of Consolidation

Consolidation can allow you to make one payment for all of your student loans. That’s far easier than making several payments and remembering different due dates. Not only will you save time and frustration, you’ll be less likely to accidentally miss a payment and incur fees and/or a negative mark on your credit report. Note: If you have both federal and private loans, don’t consolidate them together; you’ll likely end up paying a higher interest rate on your federal loans than necessary.

Student loan consolidation can lower your monthly payment. If you’re struggling to make your student loan payments, consolidating can lower you monthly payment. But watch out! Lowering your payment means extending your repayment period from 10 years to 15, 20, or even 30 years. The longer you take to repay the loans, the more interest you’ll pay, although you can always start to pay down your loan balance faster when you’re earning more.

Consolidation gets you a fixed interest rate. Most student loan consolidation programs move loans with a variable interest rate into a loan with a fixed interest rate. If you still have variable-rate student loans, this may save you money over time if interest rates get higher. Note, however, that all federal loans disbursed after July 2006 and all Perkins loans already have fixed interest rates, somewhat negating this benefit.

No credit check for federal consolidation. There are no credit requirements for federal student loan consolidation.

Consolidation Pitfalls

Don’t consolidate until after you graduate. It’s wise to wait until after graduating to consolidate your student loans. Of course, you want to make sure you include all your loans in the program. But you also want to make sure you don’t give up one of the biggest perks of subsidized federal loans—interest does not accumulate while you are in school or during your grace period.

Be careful with Perkins loans. Perkins loans have unique benefits like a fixed five percent interest rate, nine-month grace period, and a forgiveness program for qualifying teachers and Peace Corps volunteers. If you consolidate, you may lose some of these benefits.

Don’t trust every offer. Your best bet is to pursue consolidation through one of your existing loan service providers or a company recommended by your financial aid office. If you have Direct loans, visit http://www.loanconsolidation.ed.gov/.

Be wary of consolidating loans jointly. Two benefits of federal student loans are:

You can defer them if you become unemployed and
they are canceled if you die.

If you and your spouse consolidate both of your student loans and one of you becomes unemployed, you won’t qualify for deferment (you’d both need to be out of work). Similarly, if one of you were to die, the other spouse is still required to repay the loan.

Read More: Six Things To Know About Your Student Loans

What about you? If you have consolidated student loans or considered consolidation and chose not to, please share your experience in a comment. What would you recommend?