Credit cards Archives - The Broke Professional

How to Kill your Credit Score

Your credit score is one of the most overlooked parts of personal finance.  Most people don’t know what their credit score is, why it’s important, what contributes to your score and how you can improve it.  I will go into all of that and more.  If you take away only one thing from this discussion, it should be that improving your credit score is a sure fire way for you to save THOUSANDS of dollars across a lifetime.  This is because if you have a great credit score, you will get the best interest rates on mortgage and car loans.  Getting the best rate can save you tens of thousands of dollars on your mortgage alone.

Credit Score basics

Your credit score is a number between 300-850 that lenders use to determine if you are a risky borrower or not.  Generally speaking, the lower your credit score, the more risky you look to lenders.  Which means they will offer you the higher end of their interest rates.  The opposite holds true for those with high credit scores.  This means you will get a great rate for your mortgage, car loan and be accepted for all of the awesome credit cards available.

What goes into your credit score?  Let’s go straight to the source:  The Fair Isaac Corporation (FICO).  Your credit score is also called your FICO score, so it pays to listen to what they tell you.  Here is a nice little pie chart that lays it all out there for you:

Creditsesame

Looking at the chart, it’s easy to see what makes up the majority of your score: payment history, amounts owed and length of credit history.  So as long as you make your payments on time, don’t go near your credit limit on your cards and do that for a few years, your credit score will most likely be excellent.

Conversely, there are a few things that can absolutely KILL your credit score.  And it’s a lot easier and faster to lower your score than it is to increase it.  Making late payments is the #1 surefire way to kill your credit score.  Looking at the chart makes that obvious, but it also makes perfect sense from a lender’s point of view.

If you’re shopping for a home loan, the lenders will look at your credit score.  If your score is low, it tells them you probably don’t pay your bills on time.  While this may or may not be a fair judgement based on one number, a low credit score will nonetheless discourage them from offering you their lowest interest rates.

And late or missed payments can include anything:  Credit card bills, past mortgage payments, rent, car payments, cell phone bills, utility bills and student loan payments.  All of this stuff gets reported to the credit bureaus, so staying on top of your payments is vitally important.

Do Business Online

What’s the best way to make all of your payments on time?  Do everything online.  This makes things really easy as you can just bookmark all of your monthly bills and pay them right online.  Many also allow automatic payments, which pretty much guarantees on time payments.  Use technology to your advantage when it comes to your credit score.  Your future self will thank you.

Another way to hurt your credit score?  Getting really close to your credit limit.  This usually refers to credit cards, and it specifically refers to your credit utilization ratio.

If you have a $20,000 credit limit across all of your cards, and are consistently charging $19,999 every statement period, this shows lenders that you’re using too much credit.  You are a risky borrower in their eyes.  There are two ways to fix this.  The obvious one is don’t spend up to your credit limit!  Either switch to cash for some payments or go through your spending history and cut out the unnecessary stuff.

Another way is to request a credit limit increase.  Just call the number on the back of your credit cards and ask if you can get your limit increased.  Some will do it and some won’t.  But any increase in your credit availability will help your ratio.  Increasing your credit limits and decreasing your spending at the same time would be the ideal way to go.

Conclusion

According to the FICO pie chart, new credit and types of credit used also contribute to your score.  This is only 20% of your score, so it’s not really worth focusing a lot of your time on, especially if you have problems with late payments.  Opening a lot of lines of credit will temporarily decrease your score a few points, but it will go back up once they realize you’re still making your payments on time.  Focusing on late payments and high credit utilization ratios, the two credit score killers, is the quickest and most important way to improve your score.

Share

Why Doctors Tend to Have High Credit Scores

(Hey everyone.  The following is a guest post from my friend Ryan, who specializes in financial planning for physicians.  He’s doing great work since many physicians and other health professionals are clueless when it comes to their finances.  In this post Ryan talks about a unique aspect of doctor’s credit scores.  Enjoy!)

As a financial planner who specializes in working with doctors and their families, I’ve realized over time that many doctors do have high credit scores. Having a high credit score enables doctors to get competitive interest rates on mortgages, car loans, and more. It also shows lenders that they’re not only accomplished physicians but responsible borrowers who pay their bills on time.

I’ll expand more why doctors typically have high credit scores by outlining how a credit score is actually calculated. That way, if you’re a doctor who wants to raise your credit score in anticipation of a big purchase, you’ll know the steps to take to increase your score to get the best opportunities available to you.

Here are some of the reasons why physicians typically have high credit scores:

1.  Length of Credit History

The length of your credit history definitely factors into your score. For many doctors, taking out student loans is the first step in establishing a credit history. If you start taking out loans as an undergraduate, you’ll have at least 7-8 years of credit history by the time you finish residency.

If you didn’t take out student loans as an undergraduate but you did as a graduate student or medical school student, you’ll still have a few years of credit history under your belt. This helps to improve your score.

2.  Payment History

Your payment history is probably the most important aspect of your credit score because it makes up a whopping 35% of your score. This is the part of your score that shows lenders you’re a worthy investment and that you’ll pay them back on time.

The great news is that once you take out student loans, you’ve started a credit file. Even if your student loans aren’t due yet, your account is in good standing month after month while you’re in school. Lenders love to see this.

If you have credit cards in addition to your student loans, be sure to pay these on time as well. Even if your student loan accounts are in good standing, missing a credit card payment will be detrimental to your score. So, make those payments on time every time solely because your payment history factors so heavily into your overall credit score.

3.  Debt Utilization

 Having a low debt utilization percentage is a fancy way of saying that you’re living within your means. Your debt utilization percentage is how much debt you have relative to the amount of credit available to you. So, if you have 5 maxed out credit cards, your debt utilization percentage will definitely hurt your credit score. However, the more available “space” you have on your revolving credit, like credit cards, the better your credit score will be.

The great news is that student loans are considered installment debt, not revolving debt. They’re a different type of debt than credit cards and thus aren’t factored into this debt utilization score. So, if you have hundreds of thousands of dollars in student loans but you’re not carrying a balance on your credit cards, your debt utilization percentage will be low, which is good for your credit score.

Now that I’ve listed the three parts of a credit score where doctors typically excel, I want to take the time to write about what can hurt your credit score too.

After all, the goal in life is generally to become financially well off, self-sufficient, and happy. Having a strong credit score can enable you to get lower interest rates on some of your biggest purchases, saving your thousands and thousands of dollars over the course of your life. This, in turn, will allow you to use your hard earned money for the things you actually want to do.

So, be aware of these two parts of a credit score as well:

1.  Credit Mix

 Lenders actually want you have a few different types of loans, called a credit mix, because it shows them that you’re able to successfully handle various types of payments like a house payment, credit card payment, and a car payment.

If you only have student loans, this could lower your score, but if you mixed it up a bit (see what I did there?) you could raise your credit score by a few points.

For older doctors who own houses, cars, and have business loans, it’s easy to have a decent credit mix. However, newer doctors who are just finished training might not have many different types of loans.

Keep in mind that credit mix is a small portion of your score and you shouldn’t go and take out loans that you don’t need for the sole purpose of improving this part of your score. However, if you need to bump up your score a few points to qualify for a better mortgage interest rate, diversifying the types of loans you have is something you can try.

2.  New Accounts

This might seem a little counter-intuitive to the point mentioned previously, but it’s something worth mentioning. Basically, lenders don’t like it when you open a bunch of new accounts at once. It signals to them that you’re in need of a lot of credit quickly or that you’re somehow in need of financial help.

So, avoid opening several different credit cards in one year. At the same time, avoid closing your old accounts. Lenders might not like to see a lot of new accounts but they love seeing old accounts in good standing. It shows that for many years you’ve been good about having loans and paying them back on time.

Keep in mind that as you go through your daily life, your credit score will fluctuate. It’ll fluctuate as you pay down debt. It’ll change if you refinance your student loans. It will also change if you get a new travel credit card or a new house. It’s okay for your score to go up and down some, as long as you’re consistently making your payments and checking your credit report regularly to ensure your identity is safe. I tell my clients to sign up for an account at Credit Karma because it’s free, you can check your score whenever you want, and you can dispute anything that’s not right your credit report easily and most importantly, quickly. After all, you don’t have a lot of free time to worry about your finances, right?

So, the good news for all the doctors reading this is that you probably have a high credit score already due to the points I mentioned above. However, if you don’t or if you’re looking to boost your score a few points, that’s absolutely possible by understanding how your credit score is calculated and knowing how you can improve it over time.

Ryan Inman is a fee-only financial planner who specializes in helping physicians and their families build a solid financial future through his firm, Physician Wealth Services. As the husband of a physician, Ryan has a unique insight into what it’s like to be a part of a physician family and thoroughly enjoys helping his clients. To schedule a free 30 minute consultation, feel free to contact Ryan at any time.

Share

3 Easy Steps to Becoming a Travel Hacker

You hear the word “hacking” a lot nowadays.  Traditionally, hacking was thought of as something negative.  Something we would not want our kids to do.

We think of a recluse living in his parents basement trying to break into a federal organization.  Or a group trying to take down a big evil organization’s website (which is pretty cool depending on who the big evil organization is).

But hacking has evolved recently.  Now you see articles about hacking your sleep or hacking your parenting.  You can find hacks to make it easier to cook dinner or decorate your home.  A hack is essentially a quick shortcut to make your life better.

The term travel hacker has also been in the media lately.  You read about people that have taken month long expeditions around the world for free (disclaimer: it’s not really free).  I’ve talked to many people about travel hacking and most shrug their shoulders and adopt a “must be nice” attitude.

As in, “must be nice for them but I would never be able to do something like that.”  While not everyone has the time or resources to travel hack their way to around the world trips, I will show you how pretty much anyone can travel for a lot less money.

Levels of Hacking

I’ve played basketball since I was a little kid.  I still enjoy playing it whenever I can get time.  Technically, I would call myself a basketball player.

You know who else is a basketball player?  Steph Curry.  While he is a (slightly) better basketball player than me, we’re both basketball players.  He is just on a (much) higher level.

The same thing applies to travel hacking.  If you just look at those “Steph Curry’s” of travel hacking who make elaborate trips to every continent with points, you will get disappointed.

But travel hacking, specifically travel hacking with credit cards, is a very accessible endeavor that can be scaled up as much as you wish.  It just depends on how much time you’re willing to put in.

I’ve been doing some low level travel hacking with credit cards for a few years now.  My wife is from the West Coast so we make trips there every so often.  Our goal is to at least make those trips with points along with a couple of vacations per year.  This is very attainable with a few hours of planning per month.

If you want to travel with your family of 5 to fancy European cities in first class, this is attainable as well.  But it’s going to take a lot of work.  It will amount to a full time job between signing up for credit cards, and staying on the phone with airline reps.  But it is possible, if you’re willing to put in the work.

My strategy:  Get the most lucrative credit card offers I can find and use those points to take our eventual West Coast trips.  This is essentially getting the “low hanging fruit” of travel hacking and optimizing it as much as possible.

It’s kind of like the 80/20 rule.  Give 20% effort to get 80% of the results.  That’s good enough for most people.  If I want to get better results, I need to give more effort but the work will be a lot more.  I currently don’t have the inclination to work 20+ hours a week to get better point redemptions, but I can if I choose to.

Anyway, here are the nuts and bolts of my current travel hacking strategy.

3 Steps to Travel Hacking

BIG Disclaimer:  Travel hacking with credit cards should not be an option if you plan to make late payments and not pay your balance off in full.  Any interest or late fees will quickly erase the reward benefit.  You have been warned!!

Without further ado here are the three steps it takes to get started in travel hacking:

1.  Apply and get approved for a credit card with a great sign up bonus.  (See some examples at the end of the post.)

You will need a pretty good credit score to get approved for most reward cards.  While there is no hard and fast rule, a credit score of 700 or above is usually good enough.

2.  Meet the minimum spend to snag the sign up bonus.

If a card offers a bonus of 50,000 points, for example, you will have to meet a minimum amount of spend in a certain amount of time to get those points.  A common one is spend $3,000 in 3 months.

While there are a ton of ways to increase spending artificially (and there are many blogs that will teach you how in depth), start with a bonus offer that is attainable with your regular everyday spending.  You can always scale up to a bigger offer once you feel comfortable.

3.  Repeat with another card.

You should cancel the first card if it has an annual fee and you don’t plan on using it.  If there is no annual fee, just keep the card and stick it in a drawer since having more credit will improve your credit score over time.

Something for Everybody

And that’s all there is to it.  There are so many strategies involving finding the best cards to apply for and when to apply.  Countless methods also exist to “manufacture” spend which will allow you to spend more to meet sign up bonuses without actually spending any of your own money.  So this stuff can get deep.

You can take a deep dive if you wish to find out more about these strategies.  Two sites that will provide you the advanced strategies you need for travel hacking are Million Mile Secrets (where I was featured once here!) and Frequent Miler.

But if you want to just stay on the surface and do one credit card bonus at a time to get easy rewards every few months, that’s okay too.  Travel hacking has a place for everybody.

Here are some good credit card bonuses that are currently available and some brief information about them (I don’t make anything off of these links):

Chase Sapphire Preferred:  Get 50,000 Ultimate Reward points after spending $4,000 in 3 months.  This is the go to card for many people including myself.  It gives you double points on travel and dining purchases.  And Ultimate Reward points are very versatile.  You can use them for cash back, flights or transfer to airline or hotel programs.

Chase Freedom:  Get $150 cash back after spending $500 in 3 months.  This is a great cash back card to have since the bonus is easy to get and it features 5% categories each quarter.  So one quarter of the year you will get 5% cash back on dining purchases, for example, and the next month will get 5% on gas purchases.

Chase Southwest:  Get 40,000 Southwest points after spending $1,000 in 3 months.  I fly Southwest a lot and I know a lot of people that do as well.  Southwest points are pretty valuable, and this sign up bonus can easily get you $500 worth of flights.

American Express Premier Rewards Gold:  Get 25,000 Membership Rewards points after spending $2,000 in 3 months.  AMEX has many good travel cards and this is one of the best.  Membership Reward points can be used to book flights directly and can be transferred to other programs.  This card also gets you double points at restaurants, grocery stores and gas stations.

Share

I Would Love to do Peer to Peer Lending but…

check-cashing

Our state is too good for P2P lending, but not too good for establishments like this.

Update:  As of February 2016, Lending Club is now open to Maryland residents!  Click here for the details.    I will be doing some heavy research into this before I take the plunge, so look for an update on my journey into P2P lending.  Edit:  Still no Prosper though 🙁  

I’ve been hearing a lot about Peer to Peer Lending (also known as P2P lending).  It’s one of those topics I just kind of glossed over since I had more “pressing” things to learn about like student loans, investing and trying to freelance.  Before last week I had a rough idea of how it worked.  Many people were reportedly getting great returns, but it seemed like a lot more work than I would have liked.  It seemed complex and then some bloggers reported that they were still getting good returns, but not as high as before.  I didn’t think it was worth my time.

But last week I heard an interview on the Stacking Benjamins podcast (which is a great podcast by the way).  The interview was with Simon Cunningham, who runs a website called Lendingmemo.  His interview pretty put P2P lending in a much clearer light for me and I was itching to learn more.  I went over to LendingMemo and got some great information.  Here are what I believe to be the pros of P2P lending:

  • You’re loaning capital to actual people, and not a big corporation.  The vast majority of borrowers on P2P sites are looking for help paying off credit card debt.  I could definitely get behind that.
  • It’s relatively low risk.  The two big P2P sites are Lending Club and Prosper, and they each have their own algorithms they use to determine the risk that a borrower will default on their loan.  According to LendingMemo, the default rate for Lending Club is around 5%, which was a lot lower than I expected.  Higher risk borrowers give investors the potential for higher returns, while low risk borrowers give less a return but a good chance that you will get a return at all.  It’s like a balancing act between risk and reward, which is what investing generally is.
  • Returns are solid.  According to Lending Club, historical returns of their lowest risk loans range from 4.91%-8.38%.  That’s a very good return for what seems like a low risk investment.  And it certainly beats the pants off of an online savings account or CD.  While past returns don’t reflect future performance, it’s good to keep them in mind.
  • It seems like fun.  My preferred method of long term investing, making regular contributions to index funds, is pretty boring.  The only thing I may have to do is rebalance, which takes just a few minutes.  Otherwise, it’s set it and forget it.  With P2P lending there are a few more decisions you have to make, and while they do have an automatic contribution system to make things super easy, you still have to check on your loans from time to time.  This seems like it would be be a fun mental exercise.

I say it SEEMS like fun, because I will not be able to see if it is really fun.  Here’s the notice I received when I tried to sign up for an account at Lending Club:

lending club deniedYes, because I live in the state of Maryland, I can’t participate in direct P2P lending as a borrower or as an investor.  As a medical professional, I’m used to the zany differences from one state to another, but this was just a little annoying.  Some states allow you to use Lending Club only.  Some states allow Prosper only.  There are only 3 states that don’t allow any type of P2P activity (Kansas, Ohio and Maryland), and I happen to live in one of them.  This would firmly fall into the category of a first world problem, but it’s still a problem.  (Here is an interactive map that diagrams all the craziness between states).

So what is an aspiring P2P’er from Maryland to do?  My plan is to do some more research on P2P lending until I know it front to back.  In the meantime I’m still working on getting rid of a 6% student loan, so paying that off would be a pretty good use of my money.  And then I’ll just wait until the curmudgeons in charge of Maryland join the P2P bandwagon.

Share

Get a 2%+ Return on Every Credit Card Purchase

credit cards

The idea of getting something for nothing has always been the holy grail.

The goose that lays golden eggs.  The Fountain of Youth.  Turning lead into gold.  All these stuffs of legend involve getting something amazing without having to expend any resources.

We usually have to spend our time or money in order to get something of value.  If you could find something that automatically rewards you while not expending any effort, you will be immortalized into greatness.

However, there is something pretty close.  And almost anyone can do it: Using reward credit cards for all of your purchases.

Many people use credit cards to make purchases at the grocery store, doctor’s office or shopping online.  Why not use a credit card that earns you rewards for those purchases you make anyway?

It’s almost like getting something for nothing.

But there is a little upfront work that needs to be done.  Not too much work, but once everything is in place, anyone can easily get at least a 2% return on every single purchase they make without paying any extra to a credit card company.

But it all begins with a plan.

Have a Strategy

Anyone who uses credit cards needs to have a strategy.  At best, using any random card just because you have it will not really get you anywhere.  At worst, it can get you into credit card debt.

If you don’t have a coherent credit card strategy, you might as well save yourself the trouble and just use cash.

The lowest credit rate interest rates I’ve seen are around 8%.  The highest I’ve seen are about 30%.  There is absolutely no reason to get into credit card debt if you’re somewhat mindful of your spending and you have a strategy.

My philosophy on credit cards is pretty simple:

-Use credit cards for every purchase for great purchase protection that cash will never give you.

-Look at each statement as it comes in to track your spending and make sure you’re not busting your budget.

-Use a rewards credit card that will give you the best reward depending on what you’re buying.  For example, if a card gives you 3% cash back on gas, only use that card and not another one when you buy gas.

Pay off your complete statement balance in full each and every time.  If you don’t do this step and start building up credit card debt,  then you have no business using a credit card.

-Bonus:  I like to submit my payment one week before the due date.  That way, I’m taking full advantage of the interest free loan the credit card company is giving me without having to worry about the payment being late.

When it comes to deciding which rewards card to use, analyze what you spend the most money on and pick a card that maximizes that.

If you cook at home and have kids, you probably spend a lot at the grocery store so pick a credit card that gives rewards for grocery purchases.

If you tend to eat out a lot, pick a card that gives you rewards for restaurant purchases.

If you travel a lot on a specific airline or stay at a specific hotel for work, pick a card for that airline or hotel to get the maximum benefit.

Once you have your strategy to stay out of debt and figure out where you spend the most money, it’s time to sign up for your cards and use them to optimize your rewards.

My Credit Card Choices

Every few months, I sign up for new credit cards with big sign up bonuses.  Some of these sign up bonuses can be worth several hundreds of dollars so it is well worth my time to do this.

But when I’m not chasing sign up bonuses, I have some cards I fall back on for my regular spending.  You can click on the links to learn more about the cards.  They are not affiliate links so I receive nothing if you decide to sign up:

Citi Double Cash Card:  This is my default everyday card.  It gives 2% cash back (1% when you buy something and 1% when you pay off the bill).  You can redeem the card for a check in the mail or a statement credit.  Really easy to use.  And no annual fee which is great.

American Express Blue Cash Preferred:  I use this card for grocery purchases.  It gives you 6% cash back on purchases at any grocery store (except warehouse stores) up to $6,000 for the year.  It has an annual fee of $95, which brings the actual cash back percentage to around 4.5%, which is still pretty good.

Bank of America Cash Rewards:  I use this card for gas purchases.  It gives 3% cash back for money spent at gas stations.  I also get a tiny 10% bonus for having the cash back deposited into my Bank of America checking account.

Chase Freedom:  This is one card you have to pay attention to.  It gives 1% cash back on all purchases, nothing special, but has 5% cash back categories which change every quarter.  They have some good categories like gas, groceries, restaurants, and Amazon purchases.

Discover It:  Similar to Chase Freedom, this card also has rotating 5% categories.  They usually have different categories from each other, so if you have both cards you’ll probably have at least one 5% category that applies to you per quarter.

And that’s pretty much it.  Using these cards strategically gets me 2.5% cash back easy on all of my purchases for the month.  Some months are even better depending on what I’m buying.  I especially like the Blue Cash Preferred card since you can buy so many different things at grocery stores.  Like gift cards!

There are also many travel specific cards that will give you things like airline points or travel reimbursements instead of cash back.  Using credit cards for travel can get complicated so check out one of the many travel blogs available ot find out more.  A couple of my favorite are Million Mile Secrets and The Frequent Miler.

Choose what works for you and get some easy money.

Share

When You Don’t Want to Be Making More Money

Having a child was one of the best decisions we ever made.  Seeing our son go from sitting up to crawling to walking to running and now parroting everything he hears (gotta watch what I say now!) has been a joy and a privilege to be a part of.  Raising a child has its ups and downs, but there is no sweeter challenge in my opinion.

Old Faithful

Through all the highs and lows of trying to corral the little guy long enough to shove some food down his throat, there is one thing that has always been there through thick and thin.  My wife, of course, but also our emergency fund.  While many people complain that you just can’t make any money in a savings account in today’s low interest environment, I would argue that having adequate emergency savings has allowed our family to avoid getting into credit card debt, which is huge.

Credit card debt is something we never plan to take on (have you read this article people?!), and it is our emergency fund that ensures this doesn’t happen.  I give the example of our son earlier, because we needed the emergency fund right when he came into the world.

Born to be Expensive

When you become pregnant, the doctor gives you an expected delivery date.  This is based on millennia of evidence that kids are usually formed in the womb and then released in about 9 months.  In our experience, however, consider the delivery date as a guideline, because that’s exactly what my son considered it when he decided to come out early.

He was slated to arrive in early January, an assessment that the doctor was “fairly confident” in.  Our son was fairly confident that wasn’t going to happen and decided he wanted out 2 weeks earlier.  Coming out a little earlier is fairly common, so what does the emergency fund have to so with it?  I planned to use 2013 FSA money (mistake #1) to pay for all the hospital costs, which were many.  Since he wanted to be born in 2012, that was no longer a possibility.  And since we didn’t really budget for the costs (mistake #2), we had to get the money from somewhere.

E-Fund to the Rescue

Luckily, ever since I got my first job I began socking away a portion of my income into a savings account every month.  Once I became an optometrist, this amount increased accordingly.  So we had a nice amount saved up and hadn’t touched it for a while.  All it took was a simple transfer from my savings account to my checking account.  No worries where the money would be coming from, no working extra to scrounge up the money, and more importantly, no going into credit card debt like most people end up doing.

Many people balk at having healthy a healthy emergency fund, or an emergency fund at all, because of the opportunity cost involved.  That is, money which is earning very little interest in an emergency fund could be earning much more money if invested in the stock market or in real estate.  This is most likely true, but it’s off point because the purpose of your emergency fund is to give you the ability to pull out money quickly when needed, which investing in the stock market or real estate will not allow (except a Roth IRA, which is just one of the reasons why it is awesome).  Having the ability to draw cash in a short amount of time should be a cornerstone of any financial plan, no matter what type of investor you are.

My emergency fund has saved my skin a bunch of times, and I would imagine it will keep doing so.  Unless you’re independently wealthy and have gobs of money just laying around, having a well stocked emergency fund will give you piece of mind and keep you out of the red.

Share

The Best Retirement Account for Young People

Dude.  Check out this new HSA I got.

Dude. Check out this new HSA I got.

When I graduated optometry school and was finally making real honest to goodness money, I didn’t really know what to do with it.  I knew I should save some for a rainy day, so I did that while paying off my student loans.  I wasn’t even doing that efficiently until I learned the Avalanche method.  I decided to start reading up on investing and money management in general, and eventually got my 401k funded, maxed out a Roth IRA and even started a 529 plan for my son.  Let me just pat myself on the back real fast.

But the account that I think has the most bang for the buck, especially for young people just out of school, is the Health Savings Account, or HSA.  I have written before about how great the HSA is, but over time I’ve come to realize that it’s not just a great account for most people, but it is an amazing, and dare I say “must have” account for young people especially.  That’s because it can serve as an emergency fund for short term healthcare expenses and also act as a retirement account.

A Versatile Account

HSA’s aren’t usually advertised as retirement accounts.  They are shown to be a benefit that comes with signing up for a High Deductible Health Plan (HDHP).  These plans usually have high deductibles and low monthly premiums, so you end up paying for your care out of pocket, but you pay less every month for the plan.  The HSA is there to set aside some money ($6,660 is the limit for families for 2015) pre-tax that will help you pay for those out of pocket costs.  This can serve as a kind of personal healthcare emergency fund, which you can use to augment your regular emergency fund sitting in your savings account.

While this is a great benefit in itself, it starts getting more interesting for the following 2 reasons:

  • Many HSA providers give you the option to choose investments.  These range from ultra conservative money market funds to aggressive stock funds.
  • Any type of non healthcare related expense that you use an HSA distribution for before the age of 65 will be taxed and you will have to pay a penalty.  But after 65, any type distribution can be taken penalty free.

Having investment choices and penalty free distributions after 65 makes this account almost exactly like a Traditional IRA.  But why is this a good thing for young people?  It’s because, for the most part, young people are healthy and don’t spend much on healthcare.  If you’re someone who is in relatively good health and doesn’t spend much on healthcare throughout the year, then the HSA is a fantastic choice.  You can leave the money in the account to grow from a young age, and when you get to be 65, you can start withdrawing the money for any type of retirement expense.  Along the way, you can always tap the money for any large healthcare expenses that come up.

Final Thoughts

For people like this, my advice is as follows:  Open an HSA as soon as you are able.  Contribute the maximum amount every year since this will help you save money on taxes.  If your provider has investment options, simply choose an aggressive fund with low fees and let it ride, changing to less aggressive funds as 65 gets closer.  Any small healthcare expenses can be paid out of your own pocket (with a credit card that earns rewards of course).  You may have to tap the account for any large expenses, but ithat’s okay since that what the account is for anyway!

This is a fairly simple strategy that can provide great diversification among your accounts.  If you are a young person with few healthcare costs, you will be doing your future self a great favor by signing up for an HSA and using it the right way.

Share

How Your Credit Score Can Affect Auto Insurance Rates

gecko

Save 15% or more with a great credit score

There are all sorts of myths and ideas out there about what exactly affects car insurance rates.  There are the obvious things like income, history of speeding tickets and how long you have been driving.  There are also those seemingly unrelated things like the color of your car, where you went to college and who your favorite sports team is.  I made that last one up but I could see how being a New York Knicks fan could make me an angry and distracted driver.

Because state insurance laws vary and insurance companies don’t really reveal how they come up with rates, it’s hard to find out what exactly matters.  But there is one factor that plays a role in how much you will pay for auto insurance, and that is your credit history.  Yes, your auto insurance company cares if you pay your credit card bills on time.

“Credit Based Insurance Score”

According to the National Association of Insurance Commissioners, auto insurance companies use a something called a credit based insurance score as a factor in deciding how much to charge an individual for car insurance.  Because insurance companies are run by vampires who hide in the shadows, it is not known what exactly goes into this score and how much it can affect your insurance rate, but it is safe to assume that your FICO credit score is a big factor.

Now what in the world does your credit score have to do with driving a car?  One can only guess as to why exactly insurance companies value your credit score, but any factor that affects insurance rates usually comes down to one thing: money.  As in the insurance company wants to make as much money as possible while giving you as little as possible.  If you look at it from the insurance companies perspective, a perfect customer is one who pays their bill on time every month and never files a claim.  You could then come to the conclusion that someone who has poor credit is not “responsible” so they will be late on paying their bills and likely be a reckless driver.  It sounds a little far fetched, but insurance companies do lots and lots of research and it’s reasonable to think they have found some research that shows drivers with poor credit make more claims than those with good credit.

Is it unfair?

Some argue that taking into account someone’s credit score to determine auto insurance rates is unfair.  I agree somewhat, because there are many reasons that someone could have poor credit that have nothing to do with irresponsibility or recklessness.  People with egregious medical bills that have no way to pay them are just one example.  Another example is someone who has been a victim of fraud and has had their credit dinged in the process.

Immigrants are also affected unfairly by this.  They usually have little to no credit history when entering the country, so even if they are the most responsible person in the universe, having insufficient credit history can affect them.  Indeed, there are some states (Massachusetts, Hawaii and California) that have banned auto insurance companies from using a credit based insurance score.  So there is some sentiment out there which feels this is an unfair practice, but most states do allow it so I don’t see it going away anytime soon.

Bottom line

If you live in a state which allows this practice, you need to make sure your credit score is pristine.  There are many many reasons to have a great credit score, and this is just one more reason to add to the list.  Having a good credit score gives you a chance to have lower auto insurance rates, an expense every driver will have for the rest of their lives.  Even a savings of $10 a month can have a profound effect on how much you spend on auto insurance over a lifetime.  So do what you can to keep that credit score high because it can help you in more ways than one.

Share

Why the Target Prepaid Card is Awesome

Some red cards.  But not THE red card.

Some red cards. But not THE red card.

I usually try to stay away from any type of store credit or debit cards.  Even though they offer some decent discounts, they wed you to one store which may not have the best deals all the time.  But all that changed when I laid my eyes on the relatively new Target Prepaid Card.  Just to clear up any confusion, Target has 3 separate products which are all called Redcard: a credit card, a debit card and the new prepaid card which is what this post is about.

As a brief introduction, the Target Prepaid card is basically what it sounds like: a prepaid card you load at Target and use everywhere else.  When you load it up with money, you can use it anywhere and for anything, but if you use it at Target you get a 5% discount off your purchases along with free shipping.  Not bad.  But it gets much better:

Disclaimer 1:  None of these links are affiliate links.  I don’t even know if there are affiliate links for this.  This post just describes my personal experience with the card.

Disclaimer 2:  The card is currently available in a few states.  Check here to find out where you can get one.

Once you find the card at a participating store, you have to register it online and wait for your actual card in the mail.  Once it arrives, the fun begins.  Here is what you can do with the Target Prepaid Card in two easy steps:

Step One:  Load the card

Most prepaid cards only allow you to load with cash.  But with the Target Prepaid Card, you can go to Target and load with cash, debit or credit.  That’s right.  You can use a CREDIT CARD to load your prepaid card.  This is not a mistake and is virtually unheard of in the prepaid card world.  There are so many possibilities as you can use a cash back card to get some cash from the load, or load it with a card you are using to get a sign up bonus.  There’s a load limit of $5000/month so you can’t go TOO crazy.  But you can go a little crazy.

Step Two: Unload the card

Target would love for you to load the card and spend money at its store.  After all you get 5% off every purchase.  This is what I do to some extent since I buy my son’s diapers and other various baby stuff from Target anyway.  I’ll take that 5% off thank you very much.

But what if you don’t shop at Target?  What do you do with the rest of the money?  It’s simple.  I recommend one of two things to easily unload your card:

-Use the bill pay feature of the card to pay off your credit card bill online.

-Link your checking account and transfer the money

And that’s all there is to it.  You can get some easy sign up bonuses every month with this card.  For anyone starting off in the world of manufactured spending, this is a nice and lucrative place to start.

Share

Credit Card Churning and a Free Credit Score

Know the score

Know the score

I love samurai movies.  My favorite movie of ALL TIME is The Last Samurai.  I also love the classics like Seven Samurai.  I also really enjoy the fantasy genre.  I can’t tell you how many times I have watched Lord of the Rings and how many times I will continue to watch it.  I also really enjoy martial arts.  I have dabbled in Aikido, Taekwondo and Muay Thai, and my ultimate goal in life is to become a full time martial artist.  I greatly admire Bruce Lee and his work ethic.

So why am I giving you all the proof you need to call me a nerd?  That’s because it helps me break down things in life into a battle of good against evil.  It makes really dull subjects sound pretty darn epic.  I previously wrote about how inflation is a beast and you need to slay it.  I’ve also written about the monstrous nature of student loans and the need to keep attacking them.  Noticing a pattern?

The next beast I would like to attack is credit cards.  But this is not just simple attacking and killing it by not getting into credit card debt.  We are actually going to take this beast and make it our pet, turning it into an easy source of tax free income year after year.  How do we accomplish such sorcery?  Through credit card churning of course.

Battle plan

It is said that the battle is won even before the first strike.  This usually means that victory goes to the most prepared.  When it comes to credit card churning, I couldn’t agree more.  We want credit cards to work for us, but the fact is that most people end up working for credit cards.  This is not an easy task but all it takes is a good battle plan and good execution.

For the uninitiated, many credit card companies offer sign up bonuses with their most popular cards.  For example, one of my favorite credit cards is the Chase Ink Plus.  It gives you 5 points for every dollar spent on TV/internet bills and purchases at office supply stores.  This is a decent percentage of my monthly expenses, so it helps me to use it every month.  But the key point is the sign up bonus.  Currently, Chase is offering 50,000 Ultimate Reward points for signing up for this card and spending $5,000 in 3 months.  That seems like a lot, but it comes out to spending $1,666.67 a month for 3 months.  Some people spend that much in a week.

50,000 Ultimate Reward points translates into $500 cash back at the minimum, and can save you even more if redeemed for travel.  To keep things simple, let’s assume we’re only using the points for cash back, as redeeming for travel presents a whole other realm of possibilities.  So in essence, you got $500 for doing your normal spending.  Not a bad deal.  Now find another credit card with a sign up bonus and repeat.  This is what credit card churning essentially is.  It sounds like a dangerous game, and it really can be if you’re not careful.  But if you follow just two rules, you’ll be be able to turn this dangerous beast into your little pet puppy:

1.  Know your Credit Score

This is the most important weapon to have in your utility belt.  Having a GREAT credit score will almost ensure your approval for many of the awesome sign up bonuses out there.  Having a poor credit score will keep you out of the credit card rewards game entirely.  There are a number of factors that help in increasing your credit score, but one of the most important things is to be able to monitor your score.  You can get your score from the FICO website for $20 a pop, but that can get to be a little pricey if you want to check your score every month or so.

Credit Sesame allows you to access your free credit score anytime.  I have been using it for a couple of years and it works great.  It uses some demographic that you provide to get your score.  While it is not an “official” score, it is almost exactly the same as my real score.

I’m a skeptical person by nature, because I know companies offer sales or “free” products in order to make some money for themselves.  So what’s the catch?  The catch, if you could call it that, is that Credit Sesame makes its money by suggesting certain credit cards or accounts that may benefit you based on your information.  You certainly don’t have to accept those offers, and even if you don’t, the credit score is always free.  Pretty simple business model.

2.  DO NOT OVERSPEND

Credit card debt is one of the worst things in the world.  Credit cards charge very high interest rates and you usually have nothing to show for the debt except clothes and electronics that go stale in a few weeks.  Don’t start spending more than usual and get into debt because of it.  If you don’t want the pet dragon to turn against you, you would be wise to remember this.  Just do what you’re comfortable with.  If you only want to do one sign up bonus every 4 months, that’s fine.  If you feel confident in hitting sign up bonuses for 6 cards every 3 months, that’s fine too.  I’m somewhere in the middle, around 3 cards every 4 months or so.

Again, do what you’re comfortable with.  It’s not worth a few hundred dollars in rewards to find yourself in debt to Visa.  I find credit card churning fun, and once you start overspending, the fun is over.  That’s when you call it quits and focus on getting your spending back in order.

This post provides a very basic overview of credit card churning to get sweet, sweet sign up bonuses over and over again.  There is SO much more to the process, such as finding the best sign up bonuses and ways to meet spending requirements without actually “spending” money, but those topics will be for future posts.

Just remember to keep an eye on your credit score to make sure it’s nice and high, and absolutely do not spend more than you usually do.  With this knowledge in hand, the beast doesn’t stand a chance!  Get your credit score and get started.  Remember that you can ignore the other offers and stick to just getting your free score.

Get your free Credit Score and More

Share