Monthly Archives: October 2011

Should I Lower My Credit Card Limits?

Posted on by  at  5:00 am
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Emily writes in the following question regarding credit card limits:

“I would like to lower the limits on two of my credit cards from $6,000 to $1,500, and $7,200 to $3,500, but I’m not sure what the repercussions would be.”

“My FICO score, according to my credit union, is currently 762.”

“I read your blog several times per week.  I am happy to report that after many years of struggling, my total debt is less than $10,000 ($8,400 in student loans and $1,475 on a personal loan at my credit union).  I’m on track to be debt free in a little over a year!”

Thanks for being a loyal reader, Emily. Congratulations on your progress – you are on the homestretch now, and will soon enjoy the freedoms of being without debt.

Lowering your credit limit seems to be the responsible thing to do. After all, you are eliminating risk for the card issuer by reducing the amount of potential liability they are exposed to, and you are reducing the potential for you going on a wild spending spree and adding thousands to your debt.

Keep Credit Utilization at 30% or Lower

Unfortunately, the credit scoring gods don’t quite see it that way. One of the major components of your credit score is referred to as “credit utilization.” That is, the percentage of debt you owe in relation to your credit limit.

As an example, if you owed $3,000 on a credit card with a $10,000 limit your credit utilization would be 30%, which most agree is the sweet spot, or at least the upper end of the utilization ratio. Anything higher and it actually drags down your credit score.

If you reduced that $10,000 credit limit to $5,000, but still owed $3,000, your credit utilization would double to 60%. Maintain this level for too long and your FICO score could decline.

If you are concerned with maintaining a good credit score, and 762 is a certainly a good score, it might make sense to wait until you have paid off your balances entirely to reduce your credit limits, or to close a particular credit card account. At that time, consider how much you may be spending on the card each month and ask for a limit roughly 3.5 times that amount (round up to the nearest $500 just to be safe).

Assuming you plan to spend about $500 a month on items you purchase with a credit card (utilities, gas, etc) ask for a limit around $2,000 to ensure you stay under the 30% utilization threshold. If your billing statement cycles and a higher utilization ratio is reported to the credit bureaus, you could see a drop in your credit score, even if you pay off the card’s balance each month.

FICO Scores – Who Needs ‘Em?

Having said all that, a good FICO score is most important only if you plan to borrow again. Sure, credit scores are sometimes used to make employment decisions, and insurers often use credit scores to make underwriting decisions or to set premiums. However, it’s my opinion that we have become way too dependent on credit scores these days.

Make credit decisions that work best for your financial household, not because FICO suggests doing it one way or another. In the long run, you’ll be better off for it.

Thanks again for being a reader, Emily. Best of luck knocking out that remaining debt. Write back and let us know when you are officially debt free.

Ask the readers: Have anything to add for Emily? Have you considered asking issuers to lower your credit limit, despite the impact on your FICO score? Feel free to share in the comments below.

Frugal Dad Redesign Launching Soon!

Posted on by  at  8:02 am
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I started blogging nearly four years ago now here at FrugalDad.com. In that time, I’ve tinkered with the website’s design on a couple occasions, and I’ve had the logo redrawn at least twice. I think we’re due for a face-lift.

In an effort to give you, the reader, an optimal reading experience, we’ve decided to redesign FrugalDad.com. What you’ll see in the next couple days is a cleaner, more easily-navigable site filled with opportunities to save money while following along on my journey to financial freedom.

Since several thousand of you read these posts via feed reader or email, I’d encourage you to click over to the site later this week and check out our new look.

Thanks for your continued support – without input and motivation from readers I would have given up long ago.

The Student Loan Meltdown

Posted on by  at  9:15 am
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The following post originally ran here at Frugal Dad back in April 2008. I occasionally peruse my own archives to see what I was writing about years ago, and I found this one particularly relevant to recent discussions about the student loan program.

While much has changed since this post originally ran, I’m convinced student loans continue to be the greatest source of financial struggle for young people. Just last year, it was announced that student loan debt exceeded credit card debt for the first time. More recently, we learn that total student loan debt will soon exceed one trillion dollars.

With increased borrowing comes increased defaults, up from 6.7 percent in 2007 to 8.8 percent in 2009. It is all rather sad to me. Skyrocketing tuition prices are forcing more people to borrow. More legislation by the federal government is causing tuition prices to skyrocket. It’s a vicious cycle.

We continue to save for our kids’ education, with the hopes that they will be able to attend college debt free. To do so, they may have to work, or go to a smaller school, and/or work their butt off for scholarship opportunities. At the rate tuition is increasing, it’s unlikely Mom and Dad will be able to fully subsidize their education.

Here’s the original post from 2008…

A perfect storm may be brewing in the financial world, and this time it is not the fault of sub-prime mortgage lenders. Student loans are getting out of hand in this country, not because they are a bad product, but because of the amounts some students are willing to borrow to fund their education. 

Stories abound of students graduating with thousands of dollars owed on student loans. These loan payments sometimes represent as much as a new graduate’s housing costs (and many can’t afford housing because of the loan payments). The rising costs of tuition, a proclivity for borrowing, and changes in federal loan lending legislation are setting up a late-summer crisis for 2008-2009 college students.

Lenders and colleges are getting creative, and government legislation is not helping. An unintended consequence of the College Cost Reduction and Access Act is that federal subsidies are drying up for private lenders that make federal loans to college students. Many colleges are ending their alliances with these types of lenders, and instead pointing students to borrow directly from the federal government through their respective colleges. This will practically shut out private lenders, and we have already seen what taking away privatized options has done to other government programs (think Social Security, for example).

Of course, none of this matters to those who choose an alternative to student loans. Fortunately, there are several other options to borrowing money to attend school. However, similar to other areas of financial life it has become the norm for high school graduates to assume thousands of dollars (and sometimes hundreds of thousands of dollars) for the privilege of obtaining a college degree. I took on some small student loans myself early in my college career, but thankfully I took a different approach when I returned to school and worked full time to pay my way. Here are some alternatives to financing your college education:

  • Work. Work is a sure-fire money making scheme. College educators tend to frown on student employment citing poor class attendance and lack of participation in other extra-curricular activities which add to the college experience. Baloney. I don’t have a problem with someone working to pay their way through school. In fact, I encourage it. Graduates who have worked their way through school enter the job market with experience already listed on their resumes.They also tend to take school more seriously when they are footing the bill. Employers like to hire candidates who have worked their way through school because it speaks to the potential employee’s dedication, perseverance and all-around work-ethic.
  • Tuition Reimbursement Programs. Many companies now offer tuition reimbursement programs where employees are reimbursed for some or all of their tuition for pursuing degrees related to their careers. Some of these programs reimburse employees based on grades earned (100% for an “A,” 90% for a “B,” and so on) which provides an extra incentive to perform well in school.
  • Military Service. A commitment to military service comes with the perk of paid tuition upon completion of required duty. The G.I. Bill pays for military service personnel to attend classes that lead to a college degree, and even some vocational courses that lead to a degree or certificate. This is an excellent way for aspiring physicians to attend medical school. The government will typically cover the costs of your medial training in exchange for a promise to serve as a doctor in one of the Armed Services. During times of war, this can be a risky proposition, but maybe not as risky as financing $120,000 to attend medical school!

Bottom line? Stay away from student loans if at all possible. Consider alternative sources of funding, such as the ones mentioned above. If you do not have the money to attend college right out of high school, work for six months to a year and save up for tuition.

As part of this strategy, look for employers that offer tuition reimbursement. UPS reimburses part time employees for tuition expenses beginning the day they are hired through their Earn and Learn Program. Not a bad deal for slinging boxes a few hours in the evenings.

What are your thoughts on student loans, and more specifically, the latest proposed changes to the federal student loan program?

If You Don’t Establish Credit Now You’ll Hate Yourself Later

Posted on by  at  5:00 am
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The following is a guest post from Martin of Studenomics. Martin has just released a super-helpful guide that shows you how to completely conquer credit before you hit 30. You can’t live life on your own terms until you crush your credit card debt and get ahead of the game.

“The most important thing for a young man is to establish credit – a reputation and character.” — John D. Rockefeller.

We all know that we need to establish credit and create a budget. This is the sort of advice that’s very easy to hand out. We all have that friend that tells us to build credit or to create a budget. Why should we even bother with following this advice?

Do you know why you need to build credit? I honestly didn’t until I started writing about the topic so don’t feel too bad just yet. Let’s look at what I learned about why you need to establish credit in your 20s…

Your pockets will feel it.

When you go to apply for a car loan or home mortgage your interest rate will depend on your credit score. Even 1% on a home loan can impact your pockets by thousands of dollars over the duration of the loan. How much more money will you spend on a home mortgage with a poor credit score?

According to Ramit Sethi’s book, I Will Teach You To Be Rich, on a $200,000 30-year mortgage the difference between 4.384% and 5.973% is $70,560! Yes you read that correctly. That’s over 70 grand more. You could’ve got yourself a nice summer ride with that money instead of blowing it on interest. You could also use that money to pay down your mortgage quicker saving you even more money. All that money because of a credit score. It’s amazing when you think about it from this perspective.

Why does your credit determine your interest rate? Let’s look at it from this point of view.

You have lots of money saved up. You have two friends that are looking to borrow money. One friend, Steve, has only asked you for money once. When he did he returned the money within a week and bought you a coffee just to show his appreciation. In your mind Steve has great credit with you.

On the other hand, you have a buddy, Josh, that has a history of borrowing money from friends. You’re not even sure that you’ll ever see this money again. You know that he won’t even really appreciate your gesture. You’re hesitant to loan Josh the money because he has poor credit in your opinion.

Now on the same day both Steve and Josh come to borrow money from you. You tell Steve that it’s going to cost him a dinner and you expect the money back within 4 weeks. Josh (the dude with poor credit) doesn’t really agree to any strict terms. You don’t even want to loan him the money. He begs and pleads and even gets his father to co-sign the loan. When you finally do agree you tell him that you expect 10% on top of the loan just so that you ensure you’ll get your money back.

This is a simplified example. The general message is accurate. The person loaning you the money wants to know that they’ll get their money back. If you have excellent credit they’ll trust you. If you have poor credit and a history of poor decision they’re going to charge you a higher interest rate to ensure that they get their money back. It really is that simple.

You can live in the fantasy world and say that you shouldn’t buy a home or a car until you have 100% of the cash saved up. The reality is that very few of us will actually do this. Most of us will end up with a home mortgage or a car loan. If you don’t start building credit now you’re going to suffer by getting a higher interest rate.

Your employer will care.

A credit score is a tangible number that potential employers look at. For better or worse, it is what is it. You can complain about this all that you want, but your whining won’t stop from potential employers from checking out your credit score. The justification that I heard is that an employer will want to see if you’re reliable. Since so much of your credit score is based on how reliable you are with money it shows them if they should trust you or not. Another common reason that an employer will care about a credit score is that it’s just a filtering system when there are many candidates applying for the same gig. You don’t want a lack of credit to prevent you from getting that dream gig.

Now you know why you need t build credit now if you don’t want to hate yourself later. The great news now is that moving forward you now have an incentive. You can begin to make moves in the right direction. Good luck to you!

If you enjoyed this guest piece, then don’t forget to grab your copy of Martin’s new guide.

5 Frugal Tips for a Christmas to Remember

Posted on by  at  5:00 am
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The following is a guest post from Kyle James of Rather-Be-Shopping.com. Read more about Kyle immediately following the post.

Before I was a frugal Dad, I was a Dad who absolutely dreaded getting the credit card bill in early January. I would consistently overspend in December on gifts and eating out. Then I would try to figure out how to pay the bills. I knew there had to be a better way and it wasn’t until my first child came along 10 years ago that I took action and developed frugal Christmas spending habits. As we get close to the craziness of the holiday season, here are my five best tips for keeping this Christmas frugal yet memorable.

Gift Budget – The singles best way to keep Christmas frugal is to create a gift list of what you want to buy and how much you can afford to purchase for each person on your list. This makes you accountable to your spending. Stay disciplined in your buying and you will avoid those big credit card bills in January.

Shop All Year Long – If you start your shopping the last few weeks before Christmas the retail machine will typically have you over a barrel. They can set prices to meet demand and you have zero negotiating power. Instead, create your shopping list earlier in the year so you can shop sales and clearance racks all year long and store the gifts in your closet until Christmas. In other words, shop when nobody else is, you will be in a much better negotiating position, especially when shopping online sites like eBay.com.

Think Outside the Box – Consider making gifts this year. This can be in the form of baked goods, homemade jellies and jams, or my favorite, personal gift certificates. Do you have a talent that you can share with someone, or a skill the gift recipient would find very helpful? If so, then give them your time in the form of a personal gift certificate. Personal gift certificates my wife and I have given out over the years include babysitting, computer help, and yard work. On a personal note, my wife and I were given a babysitting certificate from some friends so I could take her out to dinner once a month for an entire year. What a great gift that was, by far the best gift I received that year.

Gifts from the Heart – If you are buying gifts for Grandparents, consider a photo gift of your children. Last year my wife and I, with our kids help, created a framed photo collage for the grandparents and it was a tremendous hit. We only spent $20 on supplies and frames to create gifts they now treasure. Also, consider sites like Shutterfly.com and Snapfish.com for some really neat and inexpensive photo gifts like coffee mugs and photo books.

Traditions That Help Others – I always try to implement new family traditions that focus on the true meaning of Christmas, not the stuff we get. Last year, I took my oldest son and daughter out to ring the Salvation Army bell. What a great experience for all of us and a great opportunity to talk to my kids about those less fortunate than us. I was blown away with the number of people who dropped their spare change in the kettle, took a candy cane from my kids, and then looked me in the eye and said how great it was that I was doing this with my kids. Truly gave me chills and is something we will do for years to come.

Do you have any tips to share on how you make Christmas frugal, yet memorable in your home?

About The Author: Kyle James owns and operate a website called Rather-Be-Shopping.com which specializes in coupon codes for over 750 stores, organized in 25 shopping categories. He also has a blog, where he writes about frugal living and personal finance tips as well as other musings about the adventures and mis-adventures of raising 3 active kids.