Archive for the 'Credit Cards' Category

Fico

How things adversely affect your credit score

The formula that is used to calculate your credit score has always been, to quote Winston Churchill, a riddle, wrapped in a mystery, inside an enigma.  The following charts are very interesting indeed:

The original FICO blog post is available here.  They made the following notes, I found the magnitude effect on higher scores to be particularly interesting:

  • The magnitude of FICO® Score impact is highly dependent on the starting score.
  • There’s no significant difference in score impact between short sale/deed-in-lieu/settlement and foreclosure.
  • While a score may begin to improve sooner, it could take up to 7-10 years to fully recover, assuming all other obligations are paid as agreed.
  • In general, the higher starting score, the longer it takes for the score to fully recover.
  • Even if there’s minimal difference in score impact between moderate and severe delinquencies, there may be significant difference in time required for the score to fully recover.

Hat tip to Bargaineering.com who has some additional analysis.  You may also find 11 Credit Report Myths over at BankRate.com interesting.  Finally, My Money Blog, has a fun flow chart to getting your credit score.

Tax Time – Should you pay with a credit card?

The short answer is this is a pretty bad idea.  Let’s discuss why.  For the sake of this article, let’s assume you will not be carrying the balance on your card, have exceptional credit and are simply looking to use this option to maximize your points or rewards.

Let’s look at the economics of this method of payment.  The IRS’s web site has this handy table that provides all the options.

Service
Provider

Telephone

(English and Spanish)

Website

Convenience
Fees

(Credit Card Option)

Convenience
Fees

(ATM/Debit1 Card Option)

Customer
Service
Number

Link2Gov Corporation
1-888-PAY1040tm 

(1-888-729-1040)

2.35%3
$3.892
1-888-658-5465
RBS WorldPay, Inc.
1-888-9-PAY-TAXtm
(1-888-972-9829)
1.95%3
$3.892
1-888-877-0450    (live operator)
1-877-517-4881(automated,  24/7)
1-888-877-0450 (live operator)
2.29%3
$3.892
1-888-877-0450      (live operator)
1-877-517-4881(automated,  24/7)
Official Payments Corporation
1-888-UPAY-TAXtm
(1-888-872-9829)
officialpayments.com/fed
2.35%3
$3.952
1-877-754-4413
-
1.90%3
1.90%
1-866-964-2552
1 The ATM/Debit card must be a Visa Debit Card, or a NYCE, Pulse or Star Debit Card.
2
Flat fee per transaction.
3
Contact the service provider to receive up-to-date information regarding fees.  The minimum convenience fee is $3.89 for L2G and RBS, and $3.95 for OPC.

As you can see the cheapest “Convenience Fee” applies to the Official Payments MasterCard Option.  This method will cost you 1.9% of the amount charged.  This is limited only to MasterCard.  The RBS WorldPay, Inc. option via PayUSTax.com of 1.95% for credit, but offers the choice of Visa or MasterCard.

If we take a look at NerdWallet.com’s list of top rewarding MasterCard and Visa offers, for those with perfect credit, you will see that the most rewarding MasterCard is only 1% cash / value back, while with Visa you can get up to 2% back (in Venture Rewards).

So in theory, you may be able to scrap together 5/100ths of a % of value here and possible a bit more with sign up bonuses. But that is hardly worth it.  For example, if you had a huge $50k tax bill, this would only net you about $25 in bonus – hardly worth the effort.  More realistically, on $5000 in taxes that would be only $2.50.  Again, not worth it.

What if you don’t have any other choice?

First off you always have a choice and using your credit card is probably the worst possible option!

  • The interest on the credit card will more than like be 10% to 30% depending on your credit
  • Some credit cards will consider this a cash advance and charge additional fees and interest
  • There are better options

Here are some better options to consider:

  • $25,000 or less in combined tax, penalties, and interest can use the Online Payment Agreement (OPA) or call the number on the bill or notice (have the bill or notice available, along with the social security number). A fill-in Request for Installment Agreement, Form 9465 (PDF), is available online that can be mailed to the address on the bill.This does carry fees (Approximately $105) and interest (~4%), but both are way less than the credit card option.
  • More than $25,000 in combined tax, penalties, and interest may still qualify for an installment agreement, but a Collection Information Statement, Form 433F (PDF) may need to be completed. Call the number on the bill or mail the Request for Installment Agreement, Form 9465 (PDF) and Form 433F (PDF) to the address on the bill.
  • The IRS has a page on the topic here.  Note, financing through the IRS may be the best option as their rates are based on the Fed’s short-term rate + 3%… as opposed to credit cards which are usually the Fed Prime rate (3.25%) + something.  Tip: Be sure to shop around though!

  • Consider getting fixed 1, 3 or 5 year loan through a site like Prosper.com or LendingClub.com.  Here you can get loans starting at ~6% fixed for 3 years.  Way better than a credit card, assuming you have good credit.  Lower credit will have higher rates.

As always, be sure to get advise from your tax or financial adviser.

When is 3.99% not 3.99%?

When its actually 7.8% of course!  As a follow-up to my previous post on 0% balance transfers.  I figured I would at a deeper look at the other side of the offer: 3.99% for 18 months.  Now, if you are transfering a balance from a credit card that is at 29% interest, 3.99% sounds like a sweet deal.  But before you get too excited you need to read the fine print and understand how the transfer works.

For this example, lets assume we transfer $6500 to the new card and we plan to pay the balance off entirely during the promotional 18 month period.  You might the payment and interest schedule to look like this:

 

Unfortunately, that isn’t how it works.  This is because the 3% transfer fee is applied on the “transaction date” so your starting balance is actually $6500 x 1.03 or $6695.  This is a fee of $195 that is financed along with the rest of the balance at the 3.99% rate.  So not only do you pay interest on the balance, but you are charged a transfer fee and you have to pay interest on the fee.  The result is that you will pay an additional $8 in interest over those 18 months and your total payments above your original balance will be $213.37 in interest and $195 in fees, or a total of $408.37.  Plus, to pay off the balance in 18 months your monthly payment has to be $384 instead of $373 or $11 extra a month.

When you take these factors into account, the transfer (assuming you pay it off entirely in the 18 month period) is effectively being financed at an 7.8% interest rate.

The question is, is transfering the balance a good deal?  I believe the answer is “yes with an if”.  Yes, if:

  • You are transfering from a card with an interest rate of greater than 7.8%
  • You pay off the entire balance within 18 months
  • You are never late on the payments (if so, they jack up everything and the savings are gone in a flash)

Here is the full breakdown with fees:

Cheers,

This posting is provided “AS IS” with no warranties, and confers no rights.

When is 0% APR not 0% APR?

Why when its 6% annualized of course.  I just got this offer in the mail the other day:

As you can see, they are offering me zero present interest on all balance transfers, through October 2011. This basically equates to 0% for 6 months. Unfortunately, just a few sentences later you find that:

“Keep in mind these offers include a transaction fee of either $5 or 3% of the amount of each transaction, which ever is greater.”

While it was nice of them to not have this detail the small print, this 3% for 6 month period is effectively 6% on an annualized basis.  So either way, its not such a great deal.  If you are transferring the max of $6,350 you are going to pay at least $190.50 in transfer fees.  This amount of course is instantly added to your balance, so if you don’t pay it off the entire balance by the end of 6 months, you pay interest on the that $190.50 along with the rest of your balance.

Of course, this might actually be a good choice if you are on some other higher interest credit card paying 29% in interest.  However, unless you pay it off quickly (6 months) the rate goes right back up to 13.25% (in my example).  You could alternatively use the 3.99% offer for 18 months, but you still then have to pay the 3% transfer fee.  Finally, and the wording is confusing, it appears they start charging interest at the 13.25% “on the transaction date”, so unless it is all paid off within 6 months or 18 months, you are paying both the 3% fee, but also the 14% on both the transferred amount and the 3% fee. 

It is frustrating to me, how once you get in the debt trap there are a million-and-one fees and tricks designed to keep you there.  I like to follow the “Don’t buy stuff you cannot afford plan” and avoid this nonsense altogether.

Cheers,

Don’t Leave Home Without It

Some people will tell you that credit cards are for suckers or that the best thing to do is just “cut up your credit cards”. This might be true if you don’t have the willpower to resist impulse purchases or if you have trouble not buying stuff you can’t afford. But if you can control yourself and you can pay off your balance in full every month, credit card reward programs can be… well… rewarding.

I can’t stress this enough, reward programs, miles, points, etc are WORTHLESS if you make a late payment or pay a finance charge even once!!! So don’t do it!

Don’t believe me? How about we think about it for a minute. Let’s say for example, you have a point card that gives you $0.01 per dollar you spend. Now, lets say you manage to spend $3,000 in a year and have earned $30 in “rewards”. Now lets say you finance this on your card at 20% interest and pay it off over the course of a single year. This $30 in “rewards” cost you $334 in finance charges. How exactly is that a deal? What else could you have spent that $334 on? What if you plan to pay it off every month, but are late one time? That will be a $30 late fee and boom your “rewards” are now toast.

For those that care, here I use 3 credit cards I use and why:

Starwood Preferred Guests
American Express

I have always liked American Express and have been a member for 10 years now. Things I like about the card:

  1. One Starwood Point is worth between 1 and 5 cents depending on how wisely you spend them. This is far better than most point programs which lock points at $0.01 or lower. Some examples: 14000 Starpoints = $150 at Amazon.com and 9500 Starpoints = $100 at William Sonoma. Cash your points in for “instant rewards” and the points can be worth a lot more. $100 hotel credit at the “W” was 7500 Starpoints or 12,000 points for a $600 a night stay in Hong Kong.

  2. The card sync with Microsoft Money
  3. If you spend $30k a year on your card you get free Starwood “Gold Status” which let’s you earn bonus points on stays (making those dollars worth more)
Alaska Airlines Visa

I travel a lot and I have status on Alaska Air, so it make sense I get an Alaska Airlines credit card. Other airlines have similar deals, so if you travel a lot, I would be sure to pair this with your elite status. I like this card because:

  1. I get 3 miles for every dollar I spend at Alaskaair.com (this adds up) and 1 mile for every other dollar

  2. “Miles” are worth between $0.02 cents and $0.10 cents depending on how you use them. Hint: I only use them when I am getting the best value for the mile and that is usually international First Class. If I can only get $0.02 per mile of “value”, I usually just pay for the ticket.
  3. $50 Companion Ticket – This thing is AWESOME. I fly back East once a year with my wife and a coach ticket non-stop is usually $700 or so. This perk saves me $650 a year at least.

Chase Freedom Mastercard

I have had this card since it was a Shell Gas Card and I was getting 5% cash back on gas. I still use it now, but only for gas purchases as it was getting me 3% off whatever I purchased “the most of in a month”. Over time though, this card has become less and less rewarding and I will probably cancel it before too much longer.

The thing I absolutely hate about this card though, is that it does NOT sync with Microsoft Money.

Cheers,