Tag Archives: budget

 

Mar19

When it’s Time to Cancel a Credit Card

Posted: March 19, 2018 by Ashley Dull

From the time we start building credit in our late teens or early 20s, many of us start collecting credit cards. Those credit cards inevitably begin to pile up, quickly overtaking even the most robust wallet.

 

By the time you can hardly sit for the bulk of your billfold, the idea of canceling a card or two starts to look pretty good. Even if your card collection has maintained a manageable size, you may need to consider whether it’s time for an upgrade; as your credit grows and financial needs change over time, your old cards may not be the best fit anymore.

 

For the most part, an unused credit card does little more harm than take up a slot in your wallet, and it may actually be helping your credit. That being said, there are two important reasons you may want to consider canceling a credit card: high fees or high interest rates.

 

To Stop Paying Unnecessary Annual Fees

 

The most pressing reason to close a credit card that isn’t pulling its weight is if it charges an annual fee. For example, while instant-approval credit cards can help build credit, they aren’t cards you want to hold on to forever due to the high annual and monthly fees they typically charge. If you’ve used the card responsibly, your credit score should increase enough to qualify for a better, fee-free card so you can leave the costly credit-builder behind.

 

At the other end of the spectrum, many elite rewards credit cards will charge high annual fees, with $400 to $500 fees not uncommon. While these cards often come with rewards and benefits that can make them worth the annual fee to some users, those who fail to make the most of the extra benefits may not be getting their money’s worth out of the annual fee. If you can’t justify the fee, cancel the card before your next fee is charged and look for a better fit.

 

To Avoid Paying High Interest Fees

 

The other main reason you may consider closing a credit card is if it charges a high interest rate. Although a card’s interest rate won’t typically matter if you never carry a balance, the temptation to use a credit card is always there so long as you have the card. If you have credit cards with interest rates above 20%, you may want to consider canceling the card and replacing it with one that offers a lower ongoing APR.

 

Credit Impacts to Consider Before You Cancel

 

While there are several good reasons to cancel an unused credit card, there is one solid reason to consider leaving it open: your credit score. Yes, closing a credit card account can potentially lower your credit score.

 

The impact of closing a credit card may be seen in several facets of your credit score, with the primary impact being to your utilization rate. FICO considers both your individual utilization rates as well as your overall utilization rate when calculating your score. Reducing your total available credit by canceling a credit card can increase your utilization rate if you currently have other credit card debt.

 

Other important FICO score factors can also be impacted by canceling a credit card, albeit to lesser degrees. Your average account age and overall credit history length (jointly worth 15% of your FICO score) can be reduced by canceling a card, particularly one that you’ve had for many years. While positive credit accounts will remain on your credit report for up to 10 years after they’re closed, closing very old accounts can have negative score impacts.

 

Lastly, creditors like to see a mix of several credit accounts and different types of accounts, as it shows you can handle a variety of credit products. As such, your overall credit mix, worth 10% of your credit score, can also be hurt by canceling a credit card, especially if you do not have very many other credit accounts.

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Feb27

How to Best Use Your Tax Refund to Pay Down Debt

Posted: February 27, 2018 by Ashley Dull

Despite the fact that it starts out as our money in the first place, it’s all too easy to think of your tax refund as “bonus” money. Once you know that check or direct deposit is on its way, you may be tempted to start daydreaming of a new big screen or that oft-postponed family vacation. Before you start shopping or packing, however, you should consider the positive impact that refund can have on your bottom line, particularly if you have outstanding debt.

 

Once you’ve made the (wise, smart, excellent) decision to use your refund to tackle your current debt, you’ll need to determine the best way to distribute the funds. When it comes to prioritizing debts for repayment, there are two main methods that experts recommend, each with a fun winter-themed name: the avalanche method and the snowball method. While both debt prioritization methods can give you the desired results (i.e., no more debt) the methods may vary in the amount of time it takes to reach debt freedom, as well as the total cost to get there.

 

The Avalanche Method

 

In general, the avalanche method is most commonly recommended because it will save you the most money during the repayment process. That’s because you’ll essentially be paying off your debts in the order of expense, with the most expensive debt being addressed first.

 

To follow the avalanche method, you’ll need to list your debts in order of the interest they charge, starting with the debt with the highest interest rate, then the next-highest rate, and so on. For example, any cash advance or short-term loans or high-interest credit cards will likely be at the top of the list, and lower-interest installment loans or introductory 0% APR credit cards will be at the bottom of the list.

 

While you’ll need to make your minimum required payment for all your debts, you’ll focus any extra money — in this case, your tax refund — on the debt with the highest APR. If your tax refund is enough to pay off your highest-interest debt, apply the remainder to the debt with the next-highest APR.

 

As you pay off each debt and cross it off the list, use the money you were putting toward that debt to pay off the next debt on the list. By the time you reach your final debt, which will be the one with the lowest interest rate, you’ll have freed up funds from your previous debts and should be able to pay it off fairly quickly.

 

The Snowball Method

 

Although the snowball method isn’t the most cost effective of the two prioritization plans, research has shown that it may be the more successful method for many consumers. This is thanks to the motivational boost you get from paying off a debt and crossing it off your list.

 

To follow the snowball method, you’ll need to list your debts in order of how much you owe for each debt, starting with the smallest debt, then the next-smallest debt, and so on. So, if you had three debts with amounts of $5,000, $1,300, and $2,700, you’d pay them off starting with the $1,300 debt, then the $2,700, then the $5,000.

 

As with the avalanche method, you’ll need to make your minimum required payments for all of your debts, but you’ll focus any extra funds — including your income tax refund — on the smallest debt first. If your tax refund is enough to pay off this debt entirely, apply the remaining refund to the next debt on the list (and so on).

 

By focusing on your smallest debt first, you’ll be able to pay it off very quickly, giving you a feeling of progress and an important boost in motivation, which can help you stay on track and keep to your debt repayment plan. As you pay off debts, roll the money you were spending on each finished debt into the next debt. By the time you reach your last and largest debt, you’ll likely be applying a significant amount of money to that debt, making paying it down a realistic idea (rather than a simply overwhelming one).

 

Your Best Method Will Depend on You

 

While the avalanche and snowball methods can both be effective ways to prioritize your debt and start paying it off, every consumer’s financial situation is unique. The best way to use your tax refund to pay down debt may involve a combination of the two methods, or may not be according to either method. So long as you are actively working to pay down your debt — and are making at least your minimum payments to avoid credit damage — the specific method you choose is less important than the fact you are working toward debt freedom.

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Nov26

Small Budget Changes to Help You Organize Your FinancesThe Time Is Now to Take Control of Your Money!

Small Budget Changes to Help You Organize Your Finances

Posted: November 26, 2012 by Rachel Shepard

It stands to reason that small changes in your lifestyle can lead to greater rewards. Think about the impact of a small gesture. Saying hello politely to someone can open the door to a healthier, happier day. Now, say hello to your finances in the same way and see what kind of happiness you can lovingly squeeze from your dollars!

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