College Students Using a Credit Card

The best way to use a credit card is only for emergencies. A blown transmission is a good example. Not everyone has $2,000 to fix it when it goes. But that transmission is an integral part of your car and your car is an integral part of your economic development; i.e. it gets you to class and to work on time. So fixing that transmission quickly and being able to pay it off over time may be very important for many students.

This brings me to my second point beyond emergencies, use your card to only purchase assets; not liabilities. The transmission is an asset to your car. Liabilities? Vacations are a liability. When you pay for a vacation on a card, you are only deferring the costs. After the vacation, you only have memories. Pizzas, movies, concerts, fancy dinners, fashionable splashy clothes and such are drags on our monthly budgets if we decide to place them on our card. These things have virtually no value after we pay for them and have the experience of the movie etc. You want to go to a concert or a movie? Save your money for it. Make it a special part of your budget. Paying for it with saved money is much more satisfying.

Use the card to purchase assets. Your school books are an asset to your education. If you use your card to buy household items, use it for furniture like a couch. Then you are buying an asset for your house. Then, when you sit on that couch and write out your checks for your bills, you are sitting on your asset. J (A little banker humor.) But, think about it, if you suddenly fall on hard times, you can sell that couch and pay down your card. You can’t sell the memory of a concert or the taste of a meal from three months ago.

Also, whenever one uses their credit card, consider how you will pay it off before you charge it!

Here are some other ideas fresh from my blog:

1. When establishing your first credit, consider using a secured credit card; a card where you have to make a deposit in a savings account in order to establish and maintain the card. The money on deposit is your collateral for the credit. You now have an additional incentive besides maintaining our credit to be on time with your payments; your own money is at stake. Meriwest Credit Union offers this type of Secured Visa Card. Info on our Secured Visa Card is here.

2. Another secured type of credit option is the credit union share account loan. Most credit unions have this. You make a deposit to an account and then take a loan out against the funds in the account. As you pay it back on time, your CU lets the credit bureau know and it helps get you get established in managing credit. Secured Share Account Loan info is available here.

3. When you get your first credit card, do not celebrate. There are those who like to go out and get a quick pizza or a movie when their new credit card arrives. A new credit card is not a good excuse to go out to spend and celebrate.

4. Avoid gas cards issued by Shell, Chevron, and other oil companies. Those who are new to credit are often unaware that gas purchases on oil company cards have to be repaid monthly. Only repairs and major purchases, (tires, transmissions, etc.) can be paid over time.

5. Check your credit report annually at AnnualCreditReport.com to verify your current outstanding credit and prevent identity theft. Do you see a card on your report you didn’t order or apply for? If you are reviewing your report annually, you can take action fast and stop identity theft.

6. It seems simplistic, have a budget and plan your spending. A good budget can keep you from using your credit cards to supplement your monthly budget and help you pay off the debt you already have. 

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Our next Free Financial Education Workshop will take place Dec. 11th at our Main Office. 

Credit Myths and Repair
6:30pm to 7:30pm
5615 Chesbro Ave
San Jose CA 95123

Please RSVP with Greg Meyer at gmeyer@meriwest.com or 408-365-6328

Should I close a Credit Card? Will that hurt my credit score?

A question I hear often is, “Should I close out old credit cards that I don’t use anymore?” Is that a good idea? First we will talk about why closing a credit card may not ever be a good idea and then we can look at some reasons to close out a credit card.

Closing credit cards should never be taken lightly. Closing a card removes that available balance from our overall available credit. Removing these available balances by closing the cards can reduce our FICO/Credit score. 30% of your score is based upon the ratio of used vs. available credit. Reduce the ratio and reduce your FICO score.

Example: A person has $20,000 in available lines of credit and has $5,000 charged up. They are using 25% of their available credit; a 1:4 ratio of used credit to available credit. Then they close a credit card with a $5,000 available balance. This decrease in their available credit, from $20k to $15k, increases the percentage of credit they are using to 33% and takes them to a lower and less desirable 1:3 ratio in credit usage. This will lower their FICO Score.

Closing cards can be a big deal if consumer credit cards are your only form of credit. If you have other types of credit, a mortgage or car loan for example and have other credit cards, closing one card may not be a big deal. But if one has a thin or minimal credit file, it could be detrimental.Also, the history of your card usage will drop from the report after 18 months and it will no longer be a factor in your FICO score. Ouch!

Why close a card? Fees. Some cards have instituted annual fees; one must pay an annual fee just to possess the card. These annual fees can range from $25 to $100 depending on the card and its features (rewards, vacation insurance, travel services, etc.). If the fee is too much for you to afford or you just won’t pay it on principle, then it might be time to look for a new card to replace this one or close it altogether.

Interest rates can be an issue for people who carry balances. An increase in the APR of 3%, say from 15% to 18%, can cost a cardholder an extra $150 over a year on a $5,000 credit card balance. If the APR is a concern, I would recommend finding a lower rate replacement. Credit card issuers will often offer reduced rates for balance transfers. This may be an opportunity to transfer the balance to a new card with a lower rate and close the old card.

The card has been stolen or compromised by an identity thief. Good reason to close it. Often your card issuer will offer to replace the card with an entirely new account, transferring your balance to the new account.

Sometimes people get tired of making payments and are simply through with debt. They will cancel their cards to prevent further accumulation of debt. If you are ending your relationship with debt, that may be a good reason to close a card or two. That being said, keep one general purpose card such as a Visa or Master Card open for emergencies. Go to McDonalds once every six months and buy yourself a Happy Meal for lunch. Pay that bill at the end of the month and your card will remain active. Do this every six months to keep that card active. You never know when you will need it! 

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Our next Financial Education workshop will be taking place at our Sunnyvale Financial Center at 563 E. El Camino Real in Sunnyvale, next to Togo's Sandwiches. To attend, please RSVP with Greg Meyer at gmeyer@meriwest.com or 408-365-6328.

Credit Myths and Repair - Learn how to access your credit report from all three credit bureaus and your credit score for free. How do inquiries effect your score? What happens to your credit after you pay a collection? Have a late payment? Get a divorce?

6:30PM - 7:30PM on Oct. 23rd 

Sunnyvale Financial Center

Meriwest Credit Union

CAR SALE!!!

 November 9th and 10th at the Meriwest Credit Union Main Office 

5615 Chesbro Ave, San Jose CA 95123

Come to see our wide selection of late model, gently used cars offered at bargain prices by our MCU approved dealers.

5 Things New College Grads Should Know About Money and Credit

 

Let’s start with five things every new college graduate should know about money and credit. We will end with a few words of advice for new grads facing an uncertain economic future.

1. Everyday, more and more employers are now looking at credit reports as a condition of employment. If you are responsible with your personal credit, you will likely be a responsible employee. Manage your credit well and enjoy the low rates and easy availability of money good credit management brings. You will want this when you buy a car or a new home.

2. Review your credit report annually! Reviewing your report annually for free at AnnualCreditReport.com can keep you abreast of your personal credit situation and help you spot Identity Theft.

3. Paying Bills: Very simple, your utilities need to be paid on time just like your credit card bills. Sure, you can let your light or water bill float for a couple of months and paying them 30 or 60 days late won’t count against you. As a matter of fact, you have 89 days to make your payment and have your account reinstated. However, if you wait to that 90^th day, you are now delinquent. Your water, light, or phone bill amount will now be placed in collection and exist as a negative item on your credit report for seven years whether you pay it or not. (Paid collections remain on our credit reports for the balance of the seven years after payment as a reminder to others that you were irresponsible once or twice or repeatedly depending on how many collections one has.)

4. Social Security: Social Security will exist in a very different format for these Gen Y students. They need to be self dependent and plan for their retirement early. No one will do it for them. In my workshops, I often ask who wants to retire with a million dollars in their retirement account. Of course, multiple hands go up. The point: When your employer offers you a 401k, pension, or any other type of “qualified” retirement plan, simply say “YES!” Start contributing to the retirement account. Put in at least 6%. You won’t miss it, you will save a few dollars on your taxes, and you will be pleasantly surprised when you get your retirement account statements and see it growing. This is especially gratifying if your employer matches your contribution or provides pension plan contributions from profit sharing.

5. Social Media: Restrict your personal information that is shared over the internet. Too many young adults share too much as it is and do not take proper advantage of privacy controls in websites like Facebook. If you don’t want your next potential employer to see your spring break photos of drunken debauchery in Palm Springs or Palm Beach, tighten up your privacy controls, Dude!

I think following these five ideas can save you from living in your Mom’s basement forever.

In my work with recent college students and grads, one of their greatest fears is that they will never own a house. Recent grads are facing a difficult time in some areas with the homes they may want to buy being priced out of site for them due to the current demand. Don’t worry. The average age of a first time homebuyer is 30 years old. Most people I know did not buy a home until they were well into their 30’s. There is no rush to buy a home despite the increases in overall prices. You have time to save your money. You have time to evaluate where you want to live and whether a house or condo would be best for you. You have time to gauge the economy and pick your best time to buy.

I have noticed it and it has been expressed to me by some students, the financial markets are too volatile. Why would they want to put their money into the stock market? They fear the return of the great recession. When I was 21 in 1981 there was a recession on and it was pretty serious. Interest prime rates had risen over 20%. No one could get a decent interest rate to buy a home. Unemployment was 8% and rose to 10% over the next two years. In the early 80’s, we had many of the same fears today’s grads suffer.

What happened? Eventually, markets went into recovery. Unemployment was under 6% by 1988. The stock market doubled, tripled, and eventually grew to 14 times its size by the present day. This didn’t happen in a nice even fashion. It took a market crash in 1988 (22% drop in the Dow in just one day!) and three recessions in 1992, 2000, and 2008 to get here. Financial markets are cyclic and, historically, have always recovered and surpassed previous high water marks. 

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Can 25 FICO Points Keep Me from a Good Interest Rate?

This really depends on how much credit you have to manage at once and what your current credit score is as it relates to the credit tiers. If you are near the edge of a tier, than yes, 25 points could affect the interest rate you may have to pay. If you have only one credit card, it would be difficult to maintain a high score and utilize more than 30% of the card’s available balance. The 30% rule is still valid, meaning that to maximize your score you should not utilize more than 30% of your available consumer lines such as credit cards. As your credit usage increases above 30% you will likely have a corresponding decline in your FICO score. That is not to say you cannot ever max out a card. They would not allow you such high available balances if you could not max them out. But, before anyone maxes out a card, they should have a plan on repayment. Consider your budget and manage your money so you can pay a larger amount than the minimum payment monthly. This will pay the card down faster and help build your score.

Quick Example: In Debt Forever

Credit Card Balance:      $2,500

Interest Rate:                 18%

Minimum Payment:        $  45

Years to Pay Off               10 (120 payments @ $45 each)

Total Payments:            $5,400

Total Interest Paid:         $2,900

Now you have actually paid a total of $5,400 on that original $2,500 balance, More than twice what you originally owed. In this example, a $100 monthly payment at this rate would pay off the balance in 31 months, 75% faster!

Your credit report shows your high balance usage on all of your cards. It also indicates how you have made payments. If there have been any late payments, delinquencies, etc. Lenders look at this data. It tells us if this person has the ability to pay off debt or live with it by paying their minimum payments.

Now, let’s say someone has a car loan, a home loan, and couple of credit cards. They have installment and revolving credit in their financial portfolio. This person can utilize a higher level of their credit cards and still maintain a high score due to the other accounts they have.

FICO looks at your total credit usage. As you gain experience and manage your credit where you have no late payments and have maintained credit cards and other credit given to you, and paid back balances, you will see your score get stronger and more resilient and less effected by the credit line usage factor.

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Credit Myth in California: If I get a divorce, I am not responsible for my spouse’s debts.

Credit FACT: California is a community property state. A spouse can be liable for debts entered into by the other spouse during the marriage, even if they were unaware of them. In these community property states, debts entered into during the marriage are considered community debts, and both spouses can be liable.

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Special Events

Family Financial Education: Identity Theft Workshop

This is a great workshop for the whole family. This one hour workshop is worth a lifetime of identity protection knowledge. You will learn how to protect your identity from thieves and hackers.

March 20^th at 6:30 PM

Meriwest Credit Union Main Office

5615 Chesbro Ave, San Jose CA 95123

To RSVP: Greg Meyer Gmeyer@meriwest.com or 408-365-6328

Credit Union Pre-Owned Car Sale

Take the Car of your Dreams and put it in your Garage!

All Day March 23^rd and 24^th   

Meriwest Credit Union Main Office

5615 Chesbro Ave, San Jose CA 95123

For more info: Link to Car Sale Page

Federally insured by NCUA. We do business in accordance with the Federal Fair Housing Law and Equal Credit Opportunity Act.
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