For those who don’t need to tap their savings yet, however, ultra-low interest rates have some hidden advantages. For example:
You can pay your bills early. I used to hoard the money I needed to pay big annual or semi-annual bills, such as property taxes and life insurance. I’d send in the payments at the last possible moment to squeeze as much interest from our savings as possible. Now, I don’t bother. As soon as I get the bills, I set up the electronic payments and hit the send button. Life’s a lot simpler this way.
You save time. Back when the average savings account paid less than 1%, while online banks paid 5% or more, it was worth doing a little research to find a great rate and to move your money around once in awhile. Now that the gap has narrowed so dramatically—the best online accounts pay about 1%, while the average savings account rate is around .25%–it’s hardly worth the bother unless you’ve got a substantial cash stash.
It’s easier to avoid fees. If you have some cash savings, you can avoid a lot of the silly fees your bank wants to levy—without having to worry about the opportunity cost of keeping your money in a non- or low-interest-paying account. If you have to park $2,500 in your accounts to avoid fees, it’s likely smart to do so, since you’d earn only about $2 a month on the money in a higher-rate online bank account. If you’re required to keep a five-figure balance to avoid fees, though, it may be worth finding a new bank.
There’s no reason to take a chance with money markets. If you still have cash in a money market mutual fund, check the rate you’re getting. It’s probably less than a quarter of a percentage point, and may be as little as a tenth of a point. Remember that money market funds aren’t FDIC insured, so you do have a risk of losing principal, however small. Here’s one of the rare instances where you get a better deal with a safer product—you’ll get a higher yield investing in CDs or an online bank.
It’s clearer that there are no truly “safe” investments. Back when rates were higher, it was tempting to just park money in higher-yield bank accounts rather than risk it in the stock market. The problem with that approach is that your money had no chance of beating inflation over time—your purchasing power was being eroded by inflation and taxes. Today, it’s pretty obvious that you aren’t going to beat or even keep up with inflation if you put all your money in “safe” investments. You need to take at least some risk to get the long-term growth you’ll need to beat rising costs.
Dear Liz: I’m desperate and need your input. My brother is in his 50s and makes only $10 an hour. His paycheck is gone after two days from eating out and bar hopping. He’s in collections with doctors, colleges, credit cards and more, and has been for 20 years. He’s draining my mother both financially and emotionally. The rest of my family says to let him go and make him realize the consequences. I keep helping him out with gas money and trying to help him budget, but he really doesn’t care. His thought is, “Take care of your needs now and worry about paying for it later.” What are my options?
Answer: Your options are pretty simple. You can continue to bail him out. Or you can stop.
A longtime spendthrift is unlikely to change his behavior. That’s particularly true if he still has people around him willing to give him money, but he may not change even if your entire family cuts him off.
Understanding that you don’t have the power to change your brother is an important, but difficult, first step. You may want to seek help from a counselor or a 12-step group that helps people deal with problem relationships. Since bar hopping is such a big part of his life, you (and your mother) may benefit from attending Al-Anon, the 12-step group for people who have alcoholics in their lives. You can find more information at http://www.al-anon.alateen.org. Another similar group is Codependents Anonymous (information at http://www.coda.org), which aims to help people develop healthier relationships.
Dear Liz: I am expecting a settlement from an accident at work that will allow me to pay off my credit card debt completely, but in the meantime I am having a difficult time financially. If I were to pay less than the minimum amount required on my two credit cards, I assume that my credit score would take a drastic hit. How long would these negative marks remain on my credit history and affect my score? Would this prevent me from getting financing on a new house if I have since paid off all creditors?
Answer: If you have good credit scores now, it could take up to three years to restore them after you’ve failed to pay a bill. The negative marks themselves will remain on your credit reports for seven years, but their effect on your scores diminishes over time if you make no other credit mistakes.
Clearly, the best solution is to pay at least the minimums on your cards until your windfall comes through and you can pay off the debt entirely. Going forward, you should avoid carrying credit card debt. The only smart way to use plastic is as a convenience, not as a way to live beyond your means.
If you’re not able to pay the minimums, you can talk to your issuers to see if they have a temporary hardship plan that will allow you to reduce the amount you pay. Ask about the hardship plans’ effect on your credit, though, since these arrangements also may hurt your scores, depending on how they’re reported to credit bureaus.
I got a call this morning from the Girl Scouts of Los Angeles. A staffer had tried to charge my American Express for our annual dues and donation, and the charge had been rejected. She tried again while I was on the line; same result.
A few minutes later I got an email from American Express emblazoned “Fraud Protection Alert.” I called the toll free number and identified the attempted charges as legitimate. Then I called the main number to ask why the Girl Scouts was suddenly considered a risky operation.
The rep first tried to blame it on the fact that there were “multiple transactions,” but she had to back off when I pointed out there were only two, and that didn’t explain why the first charge was declined. When I asked her if there was a way to get American Express’ overly vigilant fraud protection software to back off a bit, she said no.
As I wrote in “Big Brother is helping you?“, these programs flag about 20 transactions for every one that’s truly bogus. It’s up to the card issuer to decide how and when to follow through. American Express has obviously set its bar pretty low, opting to inconvenience and possibly embarrass customers rather than risk a loss.
A surprising number of people tell me they appreciate these alerts and blocked transactions. They feel like the card issuers are looking out for them. But the card issuers are really only looking out for themselves, since customers aren’t on the hook for fraudulent transactions if they’re reported promptly.
Issuers certainly have a right to try to protect themselves, and reducing fraud theoretically reduces costs for everyone. But they should find a way to do so without needlessly annoying their customers. Otherwise, we’ll take our business elsewhere. As I did. The charge using my Visa went right through.
Dear Liz: I’m 64 and have a master’s degree in education but can’t find a job. Is it too late to go back to school? I was thinking of majoring in occupational therapy.
Answer: It’s never too late to go back to school — but it is possible to spend too much doing so.
The good news is that occupational therapy is a fast-growing field with many job opportunities. The bad news is that you typically need a master’s degree to be an occupational therapist, and master’s programs (as you know) aren’t cheap.
Plus, your age is a factor to consider. Getting hired after 50 is tough, regardless of your field.
So rather than invest a ton of money in a master’s program — or, worse yet, borrow to fund this education — consider becoming an occupational therapy assistant. This field is relatively high paying and usually requires an associate’s degree, which you can get at a low-cost community college.
Before you begin, though, you should research the job opportunities in your area to make sure demand is high enough that your age will be less of a factor.
Dear Liz: I need help. I am getting ripped off by a company that advertises on television. The company bills your credit card for stuff you didn’t order. They need to be exposed and stopped. Can you help me? They don’t even have an email address to contact, and they seem to be ruthless. How can they be allowed to advertise on TV and fool the public? It is sick! I tried to cancel and they said it was already shipped.
Answer: You have far more faith in television advertisers than you should. Just about anyone can buy advertising time, including scam artists, as long as their check to the station or channel doesn’t bounce.
Call your credit card company and let it know you’ve been scammed. Then create a paper trail: Follow up with a written letter asking that the charges be removed, your account closed and a new account opened with different numbers, since the scammer may try charging you again.
In the future, you should regard all advertisers, whatever the medium, with skepticism. If you’re purchasing from a company for the first time, at a minimum you should research its return policy and make sure it has multiple ways to be contacted in case there’s a problem. An Internet search that combines the company’s name with the word “scam” also can be illuminating.
Dear Liz: This is a response to your answer to the reader who asked why home refinancing wasn’t simpler. All the reasons you cite are the same ones that banks cite. But they are all irrelevant for refinances conducted by the same lender. I am assuming two things about the reader’s situation: (1) they haven’t been late on any payment, let alone missed one, and (2) they are seeking to lower an interest rate that is higher than current market. If so, then it doesn’t matter if the house is in poor condition, if the person’s income has declined or even if the person has a job. While the new tighter standards are relevant to new loans, the bank already has this one and it’s in the bank’s best interest to make sure it remains a good loan. If a keystroke refi with a lower interest rate helps ensure that, then why not?
Answer: If it were in banks’ best interests to make sure their home loans remained in good standing, we probably wouldn’t be in the real estate mess we’re in today. Banks would have been far more willing to refinance or modify loans than they have been.
In fact, most banks don’t hang on to the loans they make. The loans are sold to investors, and the bank becomes the loan servicer, essentially just processing the payments.
Once you understand that, you understand that a refinance is, in fact, a new loan that must meet the criteria of the investors that will eventually buy the loan. Today, the vast majority of home loans are purchased by Fannie Mae and Freddie Mac, taxpayer-owned entities that already have billions of dollars in bad loans on their books. They aren’t interested in adding any more.
Dear Liz: I’m 27 and have been working hard for the last few years to bring up my FICO credit score. I’ve paid off all my credit card debt and disputed errors on my credit report. I’d like to purchase a home in the next few years and am trying to get my score over 700 (I am currently at 615). I have three credit cards that I regularly use and pay off. Do you have any suggestions on how I can continue to bring up my credit score? Should I take out a personal loan? Should I apply for another credit card? An auto loan, perhaps? This has been a frustrating experience, so anything that you can offer would be appreciated.
Answer: First, you need to understand that you don’t have one FICO credit score — you have three, one from each of the three major credit bureaus. You can buy two of your three FICOs from MyFico.com, the only source for the FICO scores that lenders use. (You can’t buy your third FICO because credit bureau Experian has stopped selling those scores to consumers, although it continues to sell them to lenders.)
Your mortgage lender will use the middle of your three scores to help determine your interest rate, so it’s important to review all three of your credit reports for errors and other problems. You can get free access to your reports at http://www.annualcreditreport.com.
Ignore the pitches for credit scores you see when you visit that site, since the scores typically offered aren’t FICOs.
If you continue to use your credit cards responsibly — charging no more than 30% of your limits, and preferably 10% or less — your scores should improve over time. You don’t need to carry a balance to improve your numbers.
An installment loan could help you rehabilitate your scores somewhat faster. The problem is that it may be difficult for you to get a loan, and the interest rate is likely to be sky high. If you’re considering an auto loan, make sure you can make a substantial down payment (25% or more) so that you can refinance to a more reasonable rate when your scores improve. Another option is getting a small personal loan from a credit union or bank that reports to all three credit bureaus.
There’s no easy, quick fix for battered credit scores, so be patient. In the meantime, you can work on saving up a substantial down payment so that you can better afford to be a homeowner when the time comes.
Dear Liz: Is there a reason not to panic? I see my investments tumbling and I am already very conservative. I don’t want to put it all under the mattress, but what else can a person do to hang on to what I have saved? I am fast approaching retirement age.
Answer: If you’re prone to panic, you should turn off the television pundits who like to scare people, which seems to be most of them.
What you need are perspective and balance. If you’re within 10 years of retirement, you should invest in a session with a fee-only financial planner to make sure your portfolio is appropriately diversified. Taking too little risk can be as dangerous as taking too much when you have a 20-year (or longer) retirement horizon.
Over time, the stock market does march upward, although it’s never a smooth path.