Don’t Feed the Alligators

A reader asks:

What do you think of the recommendations near the end of this article, specifically about 1) not closing old accounts, and 2) what percentage of your credit limit to use?

http://www.cnn.com/2008/LIVING/personal/02/22/financial.security/index.html

My research on these points seems to concur with the advice given in the article. Bankrate.com has an article on what factors affect your credit score posted here. According to the article and some research I have done on the impacts of credit card arbitrage, it would seem that 35% of your score is based on how you pay your bills, which your oldest credit accounts play a large roll in demonstrating. 30% of you credit score is based on credit utilization. My read is that you generally do not want to exceed 50% of your available credit on any of your accounts. So if you have a lot of outstanding debt, it’s easier on your credit report to spread it around to a number of cards so that no single card is over 50% utilized.  Lastly, there is a 15% factor for length or credit history, which is another opportunity for your oldest cards to help you out quite a bit. You should be able to go ahead and close any shorter term credit lines that you have open and not suffer a credit hit.

One other point that I also made in the comments of Getting Out of Debt Part II is that banks will often let you consolidate lines of credit.  So if you have 2 Chase credit cards, one with a 90% utilization and one with 0%, call Chase and ask them to transfer most or all of the line from the 0% card to the 90% card.  This should, depending on how much credit you have, substantially reduce the utilization on the 90% card and improve your credit score.

General questions to readers: Do you check your credit reports annually? You can do so for free at AnnualCreditReport.com. When was the last time you checked your credit score? Are you looking for ways to improve you score? Are you about to take on a large debt like a mortgage or car loan?

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A young reader writes:

“My husband and I got got into an argument after I paid a bill that he says he was going to pay. Since we keep our finances separate, what’s a good way to manage our combined bills?”

Firstly, let me tell you how my wife and I handle our finances, and then I’ll give you some ideas about what you can do in your present situation.

Mrs. MITBeta and I have combined accounts for all of our banking and credit accounts. Both of our paychecks get deposited into our Money Market account along with rent that we collect from our investment property. Our budget is set up such that all of our fixed bills are paid out of our Checking account. Periodically I make transfers from Money Market to Checking to be sure that all the bills are covered (remind me to automate this…). Our discretionary expenses — things that we don’t have to spend money on but choose to — all go onto our rewards credit card. This balance gets paid monthly out of Checking. Additionally, the following accounts are all held jointly:

• Mortgages
• Car Loan
• Some other credit cards
• ING Direct Savings Account

The only accounts that we own individually are my remaining student loan, our 401(k) accounts, and obviously our Individual Retirement Accounts (IRAs). Read the rest of this entry »

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Now that you have Stopped Contributing to the Problem, Reduced the Cost of Debt, and Freed up Some Extra money, all as outlined in Part I, it’s time to look at the best way to attack the debt itself.

There are a few schools of thought on this. No matter which way you go, you will still need to make a list of all of your outstanding debts. Each item listing should have the outstanding balance, minimum monthly payment due, and current interest rate charged. Separately write down how much extra you can pay monthly towards debt elimination from the extra money that you freed up in Step 3 of Part I. Here’s an example:

Extra money to put towards debt reduction: $350/month

Read the rest of this entry »

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Rick writes:

“Have you ever used a professional “financial adviser” and what are your thoughts on doing so?”

I have never used a professional financial adviser. But I also personally rarely use professional services for anything else I need, either:

• I perform all the maintenance and repairs on my cars: timing belts, brakes, struts and shocks, oil changes, etc.
• I fix and install heating appliances and accessories
• I planned, purchased, and redid the kitchen in my rental unit
• I fixed my sprinkler system
• I rebuilt my railing
• I have helped family and friends fix well pumps, install ceilings, satellite dishes, move, etc.
• I do my own taxes

I tend to be a very do-it-yourself kind of guy and managing my money is no different. I do things myself for 3 primary reasons, listed here in no particular order:

1. I get satisfaction from a job that I have done well.
2. I don’t trust most of the people whom I would have hired to do all these things.
3. It has saved me an enormous amount of money.

Read the rest of this entry »

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A young reader asks:

“Can you write more about how you got out of credit card debt?”

The most important principle that I recommend is to take to heart the point embodied in the following quote:

“Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.”

Charles Dickens (1812 - 1870), David Copperfield, 1849

Countless studies have been conducted over the years that indicate money does not buy happiness. What does buy happiness is learning to live on the money that you make — or better yet, a little bit less than the money you make. Far too many people spend more than they earn, and when they get more money, they spend more than that too. These people continually raise their standard of living as they get more money.

I have come to believe that the only way to be truly happy with my financial situation is to live on less than I earn, and when my income rises I do not allow my spending to increase proportionally. It pains me to see friends, family, coworkers, etc. forever believing that if only they had a little more money they would be happy. These people get raises, win the lottery, and come into more money in any number of ways and are happy for a short period of time, but inevitably become unhappy again and fall back into money problems, not necessarily in that order.

Read the rest of this entry »

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