Personal Finance in Your 20s & 30s For Dummies. Eric Tyson
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to a level you’re comfortable with. Also ask your card-issuing bank not to automatically raise that limit in the future when you’re deemed eligible for an increase.
Discovering debit cards: Convenience without credit temptation
Just because you get rid of your credit cards doesn’t mean you have to always pay by check or cash. Enter the debit card, which offers you the convenience of making purchases with a piece of plastic without the temptation or ability to run up credit-card debt. A debit card looks just like a credit card with either the Visa or Mastercard logo. Debit cards have the following characteristics, which are different from credit cards:
Deduction from your checking account: As with checks, debit-card purchase amounts are deducted electronically from your checking account typically within one or two business days. By contrast, if you pay your credit-card bill in full and on time each month, your credit card gives you free use of the money you owe until it’s time to pay the bill.
Potential for overdrawing your checking account: If you switch to a debit card and you keep your checking-account balance low and don’t consistently track your account balance, you may need to start doing so. Otherwise, you may incur an overdraft (an attempt to withdraw more money than is available in your checking account) and unnecessary overdraft fees (fees charged when you overdraw your account). Overdraft protection may be worth considering, but beware of the temptation to use that as an ongoing, high-interest credit line on balances borrowed, similar to a credit card.
Shorter window of time for making disputes: Credit cards make it easier for you to dispute charges for problematic merchandise through the issuing bank. Most banks allow you to dispute charges for up to 60 days after purchase and will credit the disputed amount to your account, pending resolution. (Longer exceptions are allowed in some circumstances, for example when a contractor is doing work for you over a period of time.) Most debit cards offer a much shorter window, typically less than one week, for making disputes. (Despite widespread misperception, personal debit cards have identical fraud protection to personal credit cards.)
Also check out getting a Visa or Mastercard debit card with the asset-management accounts offered by investment firms. Asset-management accounts basically are accounts that combine your investments, such as stocks, bonds, and mutual funds, with a transaction account. Check out the investment firms that I recommend in Chapter 12 for brokerage services with competitive investment offerings and prices and asset management accounts. (Note: Unfortunately, Vanguard discontinued offering their asset management account but may reintroduce it in the future, so stay tuned.)
Lowering the interest rate on consumer debt
If you do have credit-card debt, you can slow its growth until you get it paid off by reducing the interest rate you’re paying. Here are some strategies for doing that:
Stop making new charges on cards that have outstanding balances while you’re paying down your credit-card balance(s). Many people don’t realize that interest starts to accumulate immediately when they carry a balance. You have no grace period, the 20 or so days you normally have to pay your balance in full without incurring interest charges, if you carry a credit-card balance from month to month.
Apply for a lower-rate credit card. To qualify, you need a top-notch credit report and score (see Chapter 4), and not too much debt outstanding relative to your income. After you’re approved for a new, lower-interest-rate card, simply transfer your outstanding balance from your higher-rate card.
www.erictyson.com/, for an up-to-date list of good, low-rate cards.
Negotiating better rates from your current credit card
Rather than transferring your current credit-card balance onto a lower-interest-rate card (as mentioned in the preceding section), you can try to negotiate a better deal from your current credit-card company. Start by calling the bank that issued your current, high-interest-rate credit card and inform the bank that you want to cancel your card because you found a competitor that offers no annual fee and a lower interest rate. Your bank may choose to match the terms of the competitor rather than lose you as a customer. If it doesn’t, get that application completed for a lower-rate card.
Be careful with this strategy, and consider just paying off or transferring the balance without actually canceling the higher-interest-rate credit card. Canceling the card, especially if it’s one you’ve had for a number of years, may lower your credit score a bit, especially in the short term. Just be sure not to run up new charges on the card you’re transferring the balance from.
Tapping investments to reduce consumer debt
If you have savings and investment balances available to pay off consumer debt, like high-interest credit-card debt and auto loans, consider doing so. Pay off the loans with the highest interest rates first.
Although your savings and investments may be earning decent returns, the interest you’re paying on your consumer debts is likely higher. Paying off consumer loans on a credit card at, say, 12 percent is like finding an investment with a guaranteed return of 12 percent — tax-free. You’d actually need to find an investment that yielded even more — around 18 percent if you’re in a moderate tax bracket — to net 12 percent after paying taxes in order to justify not paying off your 12 percent loans.
The higher your tax bracket (explained in Chapter 6), the higher the return you need on your investments to justify keeping high-interest consumer debt. This discussion refers to investments in nonretirement accounts. Unless your tax bracket drops because of an extended layoff from work or from going back to school, withdrawing money from retirement accounts is costly because of the requirement to pay current federal and state income taxes on the amount withdrawn, not to mention early withdrawal penalties.
Paying down balances
If you’ve been reading this chapter from the beginning, you know that I discuss numerous strategies for zapping your consumer debt. Now I take the discussion to a deeper level. How do you handle paying down multiple consumer-debt balances? It’s really pretty simple after you implement the advice I give up until