A couple of weeks ago, I was working with a first time homebuyer whose purchase was far above her affordability. The multifamily home had the potential to produce rents adequate to support the mortgage and with contributions from her household and very careful budgeting, she will be able to maintain her home. Note that I said potential. There are no tenants. Her mortgage is 3 times her current rent.

When I asked what her plan was if she is not able to get tenants, she said, “Oh, my mother and brother will help me out.” I was puzzled. Do they know that she is expecting them to deplete their savings, their retirement funds, and their emergency savings for her dream? Does she have the right to assume that they will help her support her $3000 plus mortgage payment? Will she pay them back?

Don’t get me wrong if my young adult children lost their job, became ill, or had a true emergency (definition: serious, unexpected, dangerous situation requiring immediate action), I would help. Helping comes after they have used their savings, spoken to their insurance company, and used other safety nets. That does not include when they walk into a situation that they could not afford when they entered it. They are on their own. They know this. They will have to work it out. It is part of being an adult. Sometimes it is painful to watch but it is better for all of us if they learn to navigate life.

As adults, we should be responsible for our finances. Before committing to large, long-term financial decisions, ask yourself:

1. What is my current income? Is it going to increase, decrease, or stay the same?
2. What are my current expenses? Are there going to be any changes?
3. Can my financial situation support the current obligations of this purchase as well as all of my other financial obligations
4. What do I have saved for an emergency?
5. Are there insurances in place?
6. Can I support the maintenance of my new asset?
7. Do I need to purchase this or can I find a deal that will fit my financial situation?
8. If you are counting on others to support you in the event you cannot afford it, did you ask them and discuss the support that will be needed.

If your first response to “what will you do in the event of financial difficulty” is that someone else will pay, rethink your purchase. A more affordable home would be a better answer for this homebuyer.

Tis the season for receiving college acceptance letters.  It is a very exciting time for parents and students alike. Now the important question – how will you going to pay for it? Of course, funds from savings can be used to pay tuition and other college expenses. Fortunate is the student who also receives a letter saying that he or she has been awarded a full scholarship. Unfortunately, that is not the case for most students. Financial aid comes in the form of scholarships, grants, loans, and work/study.

·      Scholarships are a form of financial aid that does not have to be repaid. It does, however, come with conditions to maintain a certain grade point average and/or perform specified activities (athletics, research, performances) related to the type of scholarship.

·      Grants are similar to scholarships but some grants may have a repayment clause.

·      Loans are funds that are borrowed to use for tuition and other expenses related to the college experience such as room, board, transportation, and books.  Federal loans may be subsidized with a delayed interest clause or unsubsidized where payment is delayed but the interest starts to accrue as soon as the loan is taken. Parent loans have payments that begin right after the loan is disbursed.

·      Work/study provides the student with a job through the college, on or off campus, with earnings that will be credited toward the college expenses. The student is given limited hours to work at a predetermined rate. The student cannot work extra hours on the work/study employment to make more money for school or personal expenses.

·      One of the forms of payment that is rarely discussed is the tuition payment plan.  Many schools have a 10-month interest-free payment plan that parents and students can use to pay all or part of the student’s tuition and related expenses. There is a small fee to enroll but it is nowhere near the amount of interest that is paid with a loan.

In addition to financial aid supplied through the school, a student can look for alternative sources of assistance through scholarship websites such as www.fastweb.com and www.collegeboard.com.  Some organizations provide scholarship opportunities for its members such as credit unions and unions. The internet is a great resource for finding information on colleges and the money to pay for it.

Some students go through school as they work part or full time jobs. There are employers that support employees’ efforts to improve their skills through tuition reimbursement (paying after the course has been completed and paid for) or through tuition remission (pay for the course up front). Either way, it is a great way to pay for college as a student gains work experience. It greatly reduces the amount of debt paid to complete an education.

However a student chooses to pay for college, he or she should consider the pros and cons the long and short-term implications of the decisions made to acquire an education. 

Gift cards (aka stored value cards) are becoming a popular gift to give and a favorite gift to receive. Although all gift cards require the giver to pay at least the face value when the card is purchased, things may be different for the card recipient. Here are some tips to help you use your gift cards to their maximum value.

1.     Read the terms and conditions that come with the card. Some cards include a pamphlet. Others write the terms and conditions on the back of the card.

2.     If your balance is not available at the register, you will be required to know the exact amount available on the card at the register. Always know your exact gift card balance before you go shopping.

3.     If your card issurer makes the card balance available by toll free number or website, keep that information available on your cell phone. It will come in handy when you are out shopping.

4.     Some cards have a deadline at which time the balance on the card will be reduced or expire. Some deadlines are based on the purchase date. Others are based on an activation date. Use your card in full before that date.

5.     The Credit Act of 2009 states that the card issuer must give you five years to use the card unless it is clearly stated otherwise. If the card has not been used in 12 months, the card issuer may charge an inactivity fee. All fees must be disclosed.

I keep my cards in one place so that I do not forget that I have them. It is a good idea to check on the balances periodically to make sure they are active. I look for sales at places that accept my gift card to get the most value. The best strategy may be to use the gift card as soon as possible so that it does not lose its value. Happy shopping.

The Credit Card Act of 2009 will affect how your credit card company can increase your interest rates as of February 22, 2010.  Currently your credit card company would increase your interest rate at will. Over the past 6 months, everyone with a credit card has received notices in the mail changing interest rates and the calculation of finance charges. For some of you, the increased interest rate has affected amount that you expected to pay on existing balances. The new law limits credit card interest rate increases on existing balances to the following situations.

1.    If you are currently charged a temporary or promotional interest rate  (for example - 0% until August 2010), your creditor can increase the rate when the promotional rate expires. These low rates are called teaser rates that are designed to draw consumers into applying for credit or transferring balances from other credit cards. The law requires that teaser rates last at least 6 months.

2.    If your interest rate is variable and tied to an index (for example: 8% + PRIME @3.25% gives you an interest rate of 11.25%),your interest rate may increase or decrease each month as your index decreases or increases. Your index can be the Prime Interest Rate, LIBOR (London Interbank Offered Rate), or any index of your creditor’s choosing. The index should be traceable on the business pages of your local paper or in any business publication or website.

3.    If you agree to a special credit repayment workout plan or you are in default of a workout plan, it will be likely that you will be presented with an interest rate higher than what would be charged if your payments were in good standing. This rate is most likely negotiable when the workout plan is established. It will be in your best interest to be an active participant in reading the documents and negotiating the terms before signing anything regarding workout plan.

4.    If you are more than 60 days late with a payment,your creditor has a right to increase your interest rate. This increase does not have to be permanent. Your creditor must restore your interest rate after 6 months of on time payments.

5.    Military members on active duty have an interest rate cap of 6% by federal law. The interest rate will be increased to normal levels after active duty is completed.

If your interest rate has increased for any reason, your creditor must review your account every 6 months for payment history, use of credit, and market conditions to determine if you could qualify for a decrease in your interest rate. If you believe that a decrease is justified, call your creditor’s customer service department and request a review of your account.

One of the best features of the Credit Card Act of 2009 is the banning of universal default.  Universal default was a practice of increasing your interest rate on a credit card because you were late on payments for other cards. For example you may pay your MasterCard on time faithfully but you are inconsistent with your Sears payments. MasterCard would raise your interest rate based on your “risky”behavior. Each card must be reviewed on the payment history for that card. 

Consider though, that your initial interest rate is a factor of your credit history so you may be charged a higher rate from the beginning based on you past payment history. It is good to know that as your payment history improves, you may have a chance to lower your credit card interest rates.

Last spring, federal legislation revamped the way that credit card companies can operate.  The first changes will take place on February 22, 2010. This space is too small to explain the entire legislation at once  but I can explain three components today.

1. Effective February 22, 2010, your credit card company must allocate your payments to the highest interest rate first. If you look at your credit card statement, you may notice multiple finance charge calculations.  The cash advance interest rate is usually the highest, followed by your rate for purchases, followed by a lower promotional rate. Currently, your payments will go to the balance in the category with the lowest interest rate first.  This meant that you would always pay the highest interest rate possible for as long as your bill was not paid in full. With the new legislation, cash advances would be paid before low-interest promotional rate balances.

2. Remember those bills that you get after you thought that you made the last payment? The charge was for finance charges up to the day that you made the payment in the previous month.  That is over! The only reasons the company can calculate an additional finance charge and send an extra bill are for an adjustment due to a disputed purchase or for a payment that was returned for insufficient funds.

3. Your credit card must have the same due date each month.This should make it easier for you to budget.  You should have the credit card bill at least 21 days before the due date. If the due date is on the weekend, you have until the next business day to be credited for on-time payment without penalty. If your creditor changes the payment address, it cannot charge late fees for 60 days.

If you are paying a credit card with multiple rates, your payments should be more effective in reducing your debt. You also will not see that surprise bill after you make your final payment. You will know when your payment is due. You may have already received information regarding specific changes in the mail from your creditors. Look for more information on this important legislation in this blog.  

During times of crisis, such as the horrific earthquake inHaiti, we want to reach out and help our brothers and sisters through the catastrophe.  Since most of us willnot be traveling to Haiti, we want to give what we can to help the efforts ofthose who can make a difference. Some charities have staff andvolunteers established in Haiti. Others have the ability to deliver physical donations such asfood, clothing, water, and medication to areas in need.

Our reaction is to give without question to the mostconvenient charitable organization – the one that sends us an email, a mailing,gives us a call, or comes to the door. How can we tell if our donation will beused effectively and get to the people we intend to help? Here are a couple of onlineresources that will help you check out the charitable organization of yourchoice.

The Massachusetts Attorney General’s website gives tips onhow to evaluate a charity (www.mass.gov/ago).You can search the site for organizations that have complaints filed againstthem. If you are not in Massachusetts, do check your state’s attorney general’soffice for complaints filed in your state.

The American Institute of Philanthropy has a website thatrates charitable organizations and the effective use of your donation.Organizations that use the majority of donations for the advertised cause are ratedhigher than organizations that spend a higher percentage of donations on the organization’s expenses.(http://charitywatch.org).

The generous act of giving to the citizens of Haiti will beessential in reestablishing their homeland and their lives.  Give wisely to charitable organizations that will make themost of your contribution.

Happy New Year Everyone! Today is a good day to start one of the most popular of New Year’s resolutions – to save more. Saving more is not just a function of spending less. Placing the money in a place that it is likely not to be spent in the near future is key. A strategy that works for many people is directly depositing the money into a savings account at specified intervals. Automatic deposits can be made weekly bi-weekly or monthly. Automatic deposits can be made through payroll deduction or through transfers from a checking to a savings account. Many deposit institutions allow you to set a deposit frequency that is convenient for you.

Avoid accounts that are attached to your most used debit card to prevent easy access.  The more inconvenient the withdrawal method, the more unlikely you are to withdraw it. Do make sure that the account is with a lender whose deposits are insured. Most banks and credit unions would comply with this requirement.

My savings has grown slowly by surely over the past few years since I instituted this method of saving. Every January I raise the amount that I save, forcing me to keep my resolution to save more.  Periodically I deposit additional funds but at least my base amount is deposited.

Everyone can save something. Consider starting with $25 biweekly if you don’t think you have much to save without withdrawing later in the month.  You can carve that amount from your budget with buying things on sale or reducing discretionary spending.  Watching the balance grow is inspirational and you will want to save more.

The small action of setting up an account today will help you reach your savings goal and give you a savings account that will have positive balance by the end of this year.  You will be surprised at how automating your savings will change how you feel about your ability to save.

In the ever-changing world of credit cards, many of us are pretty aggravated with our credit card companies. They are increasing minimum payments, increasing interest rates, reducing credit lines, cutting rewards, and increasing fees.  It just makes you want to not agree to the new terms, pay the balance if you have one, and just close the card. DON’T! Closing that credit card may affect your credit score in three ways, impacting up to 65% of your credit score. 

The first factor is the length of time that you have had that card. The length of time that you have had a credit line is 15% of your credit score. It is typical for our oldest card to have the worst terms so you may be tempted to close it. Closing that card will shorten your history and lower your score.

The second factor is your debt to credit ratio, representing 30% of your credit score. Closing the card will reduce your available credit, which will raise the ratio. If you have other debt, your ratio will be lower with the card open. The lower the debt to credit ratio, the better.

The third factor is the variety of credit used. I have known people to close all of their credit cards and lose the variety of credit that is needed for a good credit score. Variety of credit accounts for 10% of the credit score, but closing the credit card will also trigger one or both of the other factors listed above.

What should you do?

•                    Pay down on the balance. The less you owe, the less interest you pay.
  
•                    Stay within your credit limit to avoid over-limit fees.
  
•                    Pay on time to avoid late fees.
  
•                    Use the card periodically and pay as you go. This will keep the company from closing the card
•                    Use your rewards as you accumulate them to avoid expiring reward credits.

These tips should help you to peacefully coexist with your credit card company, placing you in a good position to increase your credit score. 

A couple of weeks ago, I was driving in my car listening to NPR. There was a very interesting story on credit card companies using data profiling to determine credit limits or whether if the card holder should continue to have the card at all.  What is data profiling? It is when the credit card issuer uses your credit card transactions to project what may be happening in the larger scheme of your life.

For example, you shop at Macy’s, Lord and Taylor, Saks Fifth Avenue but now you start to buy things at Walmart and the dollar store. That is a red flag to your credit card company. Have you lost your job? Are you cutting back on your spending? When you charge alcohol, visits to the spa, or visits to the doctor, the credit card company may see these transactions as a sign that you may be stressed as a result of  a declining financial situation. The credit card company may react to your changed habits by reducing your credit limit or by closing your account.

I spoke to someone who said, “I never do these things! It will not be a problem for me!” To that reaction, I will respond by sharing a personal experience. Our local health center had a copy center that was used as a community development venture. It provided photocopies, graphic design services, and graphic art training to the youth of Dorchester. As an entrepreneur and community supporter, I frequently used the center to copy materials for my business.  This was at least a monthly venture. When credit regulations started to change, my business credit card company cut my line by 60 percent.  Even though my bill was paid in full each month, I now suspect the cause of the reduction in my credit line was that the copy shop charges were defined as health care transactions by my credit card company. I must have appeared to be quite ill by the amount of some of the charges.

In case you are wondering, the copy center closed. I continued to support them until the end.

You may ask " What transactions are monitored?"  Here is a list of 10 things that you should never charge:

1.   Counseling and health related services (Marriage counseling in particular)
   
2.   Alcohol (package store or bar)
3.   Traffic ticket payments (slow down, park right)
4.   Lottery tickets and casinos
5.   Income taxes (make a payment plan with the IRS)
6.   Retreading tires
   
7.   Dollar stores and Walmart (especially if youhave never charged there before)
   
8.   Spa and luxury treatments
   
9.   Cash advances
   
10.   Adult toys
    

You should review the transactions on your credit card for the places you frequent to make sure they do not violate the "no no" list.

How do you pay for these items and services? Cash or Debit Card.  Although your debit card may look like your credit card, it is actually cash and is not monitored by credit card companies.