Friday, October 16, 2009

How bad are your credit card mistakes?

Grade yours on a 10-point scale

By Erin Peterson

Nobody's perfect. When it comes to our financial lives, we've all done things we later regretted -- whether it's getting slapped with a $3 fee for using an out-of-network ATM or going on a Las Vegas bender and losing the house on an overly aggressive poker bet. How bad are your credit mistakes?

The key is to understand the scale of the transgression. With credit card blunders, that's no easy task -- is it worse to take a cash advance or to pay a bill a day or two late? Experts graded a range of credit card mistakes on a scale from 1 (losing a few bucks to a cash machine) to 10 (losing the house). Find out which worry the pros most -- and which may (almost) get a free pass.

Paying late
How bad is it? 6
The details: Credit card companies are notoriously prickly about late payments -- even a payment that's late by a few minutes can pile up fees, interest charges and other penalties. Depending on how late the payment is, your card issuer may also report the problem to any of the credit bureaus, which can wreak havoc on your credit score. The good news, says Stacy Francis, president of Francis Financial, is that the error may be reversible. "You do have the option of giving the credit card company a call and asking them not to report it," she says. "If you've generally been an on-time payer, they may waive the fees and not report it."

Paying only the minimum on your card
How bad is it? 4
The details: Credit card companies love it when you pay off your debt slowly, but you should loathe it. It won't necessarily affect your credit score, but that doesn't mean it's a good practice. Sending in only the minimum payment "is definitely going to keep you in debt longer, and you're going to pay a heck of a lot more in interest," says Francis. "You may be paying twice as much -- or more -- as you would by paying in cash."

Buying on a card just for rewards
How bad is it? 1
The details: If you're paying off your balance on time and in full, using your cards to grab extra rewards isn't necessarily a bad plan, says Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling. "You can win the rewards card game if you know how to play," she says. "But you do have to know yourself." Because most people spend more when they're paying with plastic than with cash, be cautious and recognize when you're buying something only because plastic makes the purchase painless.

Missing a payment
How bad is it? 9
The details: Not only are you going to be slammed with fees, interest charges and other penalties when you miss a payment, but you'll likely see a rise in your interest rates. If that weren't bad enough, you'll also have to contend with a significant hit to your credit report -- about 35 percent of your credit score is based on your ability to pay bills on time. As a result, you'll pay more when you try to get a loan. "Missing a payment has both immediate and long-term consequences," says Clarky Davis, Care One Debt Relief's Debt Diva. "You may be dealing with the fallout for years."

Maxing out a card may not have an immediate financial pull, but it's a sign that you're not budgeting or spending your money wisely.

-- Clarky Davis
Care One Debt Relief

Having too many cards
How bad is it? 6
The details: If you're the type to apply for a card just so you can grab a discount on clothes or other merchandise, you likely have a huge stack of cards in your purse or wallet. You're probably not getting enough value from the card to make it worth the high interest rates or additional complications from additional bills and junk cluttering your mailbox -- and you're increasing the likelihood that a payment slips through the cracks or that you'll be a victim of identity theft. "There's rarely a good reason to get a new card if you've already got a general-purpose card, a rewards card and a low interest card," says Cunningham.

Maxing out a card
How bad is it? 7
The details: Maxing out a card can have a serious impact on your credit score, since about 30 percent of your score is based on "credit utilization" -- the amount of credit you've used relative to the amount you have available. More important, says Davis, is the fact that it likely signifies a distressing trend in your personal finances. "Maxing out a card may not have an immediate financial pull, but it's a sign that you're not budgeting or spending your money wisely," she says. "It means you don't have enough saved up to cover unexpected expenses."

Playing the balance transfer game
How bad is it? 5
The details: Moving your debt from a high-interest card to a low interest card with a balance transfer isn't as smart a move as you think, says Francis. "About 15 percent of your credit score is affected by your recent credit applications," she notes. Pile up a few transfers and your score will take a hit. "Credit bureaus don't [differentiate] that these cards are for the same [debt], they just see it as you getting pre-approved for more and more credit." Add in the fees that generally accompany balance transfers and you're not gaming the system -- you're getting hammered by it.

Debt settlement plans
How bad is it? 9.5
The details: If you're overwhelmed by debt, negotiating down your balance with the credit card company (also called debt settlement) sometimes helps you pay pennies on the dollar on your debt -- but you'll pay a steep price. First, there's the tax hit you'll take for the amount of debt that's forgiven -- it will count as income during that tax year. And your credit score will be decimated, so don't expect you'll be able to take out a loan soon after consolidation. Next to bankruptcy, debt settlement "is the most negative thing you can do to your credit score," says Francis.

Getting a cash advance?
How bad is it? 8
The details: It may feel like free money, but the truth is that it's anything but: You'll likely have a fee associated with the advance, and you'll likely pay a higher interest rate than you would by using the card associated with it. "You also have no grace period," notes Cunningham. "You'll start accruing interest from the moment you get the money." While these are all dangerous attributes in and of themselves, they're not the worst part, says Cunningham. "When you start using cash advances, you have to understand why you're using them as they're likely symptomatic of a deep financial problem."

Using a card in a pinch
How bad is it? 2
The details: If the fridge went on the fritz or the furnace conked out in mid-January, you might not have the means to fund its immediate replacement. Putting the bill on a credit card -- and paying it off quickly over the course of a few months -- is a pretty solid option, says Cunningham. "You don't want something like that to become standard operating procedure," says Cunningham. "But it's OK to have a balance on a card for a few months when you're going through a rough patch in your financial life. Just make sure it's on a card without an annual fee or with a very low annual fee."

Will cash gifts, inheritance go to creditors after bankruptcy?

It's best to put off receiving cash right after you file

By Sally Herigstad

To Her Credit
To Her Credit, Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006).

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Question for the expert

Dear To Her Credit,
I filed for bankruptcy four months ago and it was final last month. I had mostly credit card debt -- about $25,000 worth, and it was all discharged in a Chapter 7 bankruptcy. I live in Utah.

My mom has cancer and isn't expected to live much longer. She is still competent at this point. She wants to leave me about $20,000, but she is afraid that if the bankruptcy court finds out about it, they will just take it to pay my creditors. My stepdad has volunteered that if my mom wills my share of the money to him for now, he will turn around and give me $20,000 next year. I trust him and know he would follow through on that promise.

Should I suggest to my mom that she write me out of her will? Or maybe she can give me one of her cars instead of money? What should I do? -- Aurelian

Answer for the expert

Dear Aurelian,
I'm so sorry to hear about your mom. What a difficult time!

Federal bankruptcy rules are pretty straightforward on this issue. If you inherit money from a person who dies within 180 days of the date you filed for bankruptcy, you must tell the courts. The money becomes part of your bankruptcy estate and is distributed among your creditors. You filed for bankruptcy four months -- about 120 days -- ago, so if your mom dies within the next 60 days and you are named in her will, you must tell the courts.

If your mom decides to rewrite her will and strike you out of it, that's her decision. David P. Leibowitz, a business and consumer bankruptcy lawyer in Illinois, says, "You can plan to a certain extent. There's nothing wrong with that." And if your stepdad decides to give you a gift next year or sooner, you don't need to worry about the bankruptcy courts taking it. The bankruptcy court cannot take gifts made after the bankruptcy is final, according to Leibowitz.

You can always disclaim an inheritance if you don't want it to go to your bankruptcy estate. You never have to accept an inheritance.

Another option would be to have your mom set up a spendthrift trust for you. A spendthrift trust is out of the reach of creditors. You'll need professional legal help to set up the trust.

"Cars are treated the same as cash," says Leibowitz. If your mom gives you a car instead of cash, it doesn't change the rules. "Even family heirlooms or a dining room set are subject to the administration of the bankruptcy estate," he says.

Just because items become part of your bankruptcy estate, however, doesn't mean they are automatically up on the auction block. You can claim an exclusion on certain items or up to certain amounts, and the bankruptcy trustee has a certain amount of discretion in choosing what to liquidate.

Planning to avoid the long arm of bankruptcy courts is not illegal or immoral. Think of it the same way you would consider tax planning. Tax planning is fine; tax evasion is not. The difference is whether you play by the rules and are honest. Trying to hide an inheritance -- for example, by not telling the courts you received $20,000 -- would be illegal, and you could face penalties for doing so. But if your mom writes you out of her will or sets up a spendthrift trust, Leibowitz says, "You didn't make that happen." You can't help it if she makes arrangements to protect what she wants to give you.

It can be difficult to talk with your mom and stepdad about money at a time like this, but you are fortunate that your family is addressing money issues now while there are more options to choose from. I hope that your mom has some good days left with you and your family, and that she can give you a gift you can keep, as she intended.

Credit card APRs fall slightly, reversing recent rate-hike trend

By Jeremy M. Simon

Credit card interest rates dropped slightly this week, after several banks made a commitment to abstain temporarily from additional rate hikes.'s weekly rate chart
Avg. APR Last week 6 months ago
National average 12.60% 12.64% 12.35%
Business 9.69% 9.80% 16.74%
Low interest 11.92% 12.10% 12.05%
Cash back 12.36% 12.36% 13.90%
Reward 12.76% 12.61% 12.19%
Balance transfer 13.10% 13.10% 10.80%
Instant approval 13.32% 13.32% 11.49%
Airline 13.60% 13.97% 14.44%
Bad credit 14.29% 14.29% 11.79%
Student 14.45% 14.45% 14.90%
Methodology: The national average credit card APR is comprised of 95 of the most popular credit cards in the country, including cards from dozens of leading U.S. issuers and representing every card category listed above. (Introductory, or teaser, rates are not included in the calculation.)
Updated: 10-15-2009

According to the Weekly Credit Card Rate Report, the national average annual percentage rate on new credit card offers slid to 12.60 percent. The decline, which snapped a three-week run of rate increases, stemmed from the addition of cards to the Rate Report database and not from APR decreases by major credit card issuers.

Major banks left APRs unchanged this week following recent pledges from Bank of America, Discover and Capital One to not raise interest rates ahead of the Credit CARD Act, which will make it tougher for lenders to hike interest rates on their customers. The act's major provisions take effect until February 2009.

Other major issuers have declined to make similar promises, and even the ones that have are still making other changes to their terms and conditions. For example, BofA said this week it plans to begin charging annual fees on some of its cards beginning next year.

Banks had been raising rates amid an economic and regulatory environment that has become increasingly challenging. "At the end of the day, they've got to match their risk with their portfolio," says Michael Rubin, author of "Beyond Paycheck to Paycheck." "If the interest rates are no longer politically palatable, another option -- as appropriate -- is to introduce annual fees," Rubin says.

While some banks are still making moves, the Federal Reserve is unlikely to do so anytime soon. The Fed influences credit card APRs by changing its key lending rate, called the federal funds rate. The bulk of credit cards have variable rates tied to the prime rate, which moves up and down based on fluctuations in the fed funds rate.

In minutes released this week from the central bank's most recent policy meeting, the Fed said its members "anticipated that inflation would remain subdued for some time," thus limiting the need to keep inflation in check by raising the federal funds rate. That outlook was reiterated in a speech by Fed Vice Chairman Donald Kohn, who noted that the risk of further economic declines currently outweigh the risk of inflation.

Rubin says that banks may also leave the APRs on their card products unchanged in the short term. "I think they got done what they've got to get done, so they're priced the way they need to for the moment," Rubin says.