Your Credit Affects More Than Just Your Finances

Isn’t this recession supposed to be over?

Millions of Americans continue to have their credit trashed as this unofficial recession drags on. According to FICO, a quarter of Americans now have a credit score below 600. Late payments, foreclosures and even mistakes on our credit reports have taken their toll.

Use this as an excuse to check your credit report and dispute any errors.

If you’re not buying a house or applying for a credit card anytime soon, you may think you’re in the clear. The truth is, your credit affects more than just your ability to get a loan or credit card.

Here are six areas of your life that are affected by bad credit:

1. Relationships First, and perhaps most surprising, having bad credit might affect your relationship with your spouse. To all you guys out there listening to your wives complain about how dingy your apartment is and how much she wants a house, you need to get your (financial) lives together. Do it for your marriage, your sanity, whatever. Your credit needs to be in good shape so you can get her that house someday.

Maybe those who need to worry most are the ones who aren’t married yet. I’ve heard stories about one person calling off the engagement after finding out the other’s debt level.

Whether you like it or not, debt attaches to you like a parasite. It is part of who you are. If you owe big bucks, you have a greater chance of falling behind on payments. And when that happens, your credit is trashed. That may make you look unattractive to your future mate. Don’t say I didn’t warn you.

2. Career It’s now common knowledge that having bad credit affects your ability to get a job. The most recent report I saw said that 47% of employers use credit checks to screen potential employees.

Personally I think this is a terrible idea. Credit reports are not good indicators of character or ability to do the job. The only reason employers should be checking your credit is when the job specifically deals with money.

3. Renting an Apartment Every apartment complex I’ve ever applied to live at has checked my credit. For good reason – you’re signing up to pay them over $10,000 a year in many cases. Your landlord wants an idea of how you’ve handled bills in the past.

An extra perk: I once had a landlord waive the security deposit because I had good credit. So make sure to negotiate when signing the lease.

4. Getting Insurance Car insurance companies think that those with bad credit are more likely to cause an accident. Baloney. In some cases they may outright deny you coverage, but it’s more likely that good credit will earn you the best rates. I’m not sure why, that’s just the way they play.

Homeowner’s and renter’s insurance works the same way. These companies believe that you’re more likely to set your house on fire if you have bad credit. You need good credit to play their game and get the best rates.

5. Setting up Utilities If you think about it, utility companies (water, electric, gas, etc.) extend you credit every month. They provide you service then bill you after the fact. If you have bad credit you may be required to pay them a larger deposit to open your account.

6. Cell Phone Service In today’s world it’s difficult to function without a cell phone. Similar to utility companies, cell phone providers bill you for service you’ve already used. Before they let you sign up for an account, they pull your credit. They just want to know if they’ll get their money each month.

Photo by about.com/careers

Gas Price Gotcha

I was filling up the car this week at a station I’d never been to before, enticed by the low price posted on their sign. After swiping my credit card at the pump I noticed the price I would be paying was eight cents higher than the one I saw on the sign. I looked closer and saw two different prices listed on the pump – one for cash and one for credit. Turns out they had posted the lower, cash price on their sign.

Some stations put “cash price” on their signs, but others try to be sneaky about it. I think it’s fine if stations want to charge different prices based on how you pay. But what’s not OK is trying to hide it. We should be given the information up front to help us make a decision.

I was digging around on Gas Buddy to see if they broke down the prices into cash and credit, but I didn’t find anything. This makes finding the best price in advance very difficult.

Just something to keep in mind as you’re traveling this holiday season.

Your Wallet’s 3 Biggest Enemies

We’re in a heap of trouble.

We’ve bought too many nice things and borrowed up to our eyeballs to pay for them. We watch commercials for the latest overpriced creations from chain restaurants, and all of a sudden we find ourselves at one trying it out. We look at our neighbor’s driveway and notice the shiny new car sitting there, and all of a sudden our car is old and needs to be replaced. And just when you’re starting to make progress paying off all this debt, your kid gets sick and you can’t afford to pay the hospital bills.

One

There are so many little things in life that try to pull us off track, it’s no wonder our best-laid plans and intentions so often don’t work out. Your car needs an expensive repair to pass inspection. The air conditioner in your house breaks and has to be replaced. I could go on and on. These things happen, almost always unexpectedly, to all of us. And they cost money. Money that we’ve already allocated elsewhere in our budgets.

That’s why the lack of an emergency fund is the first of your wallet’s three biggest enemies.

If things are going well right now, great. You’ve probably worked hard to get to this point. When it comes to your wallet though, you have to consider the what-ifs. What if you lost your job next week? Would you have enough savings to carry you until you found work again?

An emergency fund is your best friend because it provides a safety net when the unexpected happens. The idea is to sacrifice the surplus today so that when the chips are down tomorrow you’ll have something to fall back on. Start with $1,000. Save just $20 a week and you’ll be there in a year.

Two

Bad habits are the second of your wallet’s three biggest enemies. Daily coffee stops are singled out most often by financial people. Let me throw my voice in with theirs: If you have a habit of stopping for coffee every morning before work, you need to find a different route. Smoking is an another obvious habit that kills your wallet and your health.

But other habits are just as detrimental. Look at cell phone contracts. Yes, renewing that stinking contract every two years with one of the overpriced Big 4 providers is a bad habit. I’ve been guilty of this one too. Since I’m part of a family plan, I’ve assumed that it’s cheaper to stay with them. After looking at the numbers, it would actually be cheaper to go with a non-contract provider that offers month to month service.  Do you still have cable? Eliminate it, stop watching all those commercials, get outside for some fresh air and save over a grand a year.

Wanting everything to be convenient is a bad habit that costs you potentially thousands a year. If you think the dealership is a one-stop shop for buying a new car, you need to realize a few things. First, car salespeople are very good at what they do. They’ll dangle a low monthly price in front of you while loading all kinds of fees on the back end. They’ll upsell you every way you can imagine. Second, many dealers engage in disgusting tactics like car spotting, and prey on the feeble or those with bad credit. And last, you need to do some research. Look at reliability, features, crash test scores, and prices of the models you are considering. Being informed helps you fight back against slimy car salesmen. Lesson: Inconvenience yourself a little by arranging the financing at a credit union, negotiating through email, and researching before even setting foot on the lot for a test drive.

Three

The third and final of your wallet’s three biggest enemies is your insistence on keeping up with the Joneses. Free Money Finance says that out of his 52 best ways to save money, this is the #1 way, and I have to agree.

I would go further and say that avoiding competitive consumption is the #1 predictor of financial success. You don’t need to keep up with friends, neighbors or anyone else. The truth is, there will always be someone out there with a newer car, whiter teeth, or a bigger paycheck.

Of the three, this is probably the most difficult to master. Our world is driven by an affinity for stuff. Not only do we need things, we need them yesterday and we need them to be nicer than the neighbor’s. So often we’re driven by envy that we’ll settle at nothing to show off our wealth (or in most cases our lack of it) to others.

Your challenge: Think about everything you already own. You probably have more than you realized. More than most people on this planet actually. You have access to a computer as you read this, which most don’t have. Be content with what you have and spend time enjoying it.

Do you disagree with any of these three? What would you add?

Don’t Waste Your Time (or Money) with These 8 Types of Insurance

Should Fido have his own insurance?

My Insurance Buying Guide is now up! You can access it in the header at the top of any page.

It’s impossible to insure ourselves against every type of risk we’ll face in life. Even if we could, when it’s over we’d be broke. Learning which risks to accept will help your sanity and your wallet at the same time.

Last week I covered 5 types of insurance that make sense for most people. This time I have 8 types of insurance to avoid:

Extended warranties

Retailers like to sell this stuff like hotcakes on everything from digital cameras to office chairs. In fact, this is probably the insurance type you’ll be sold most often on this list. When should you buy an extended warranty? Never. The payout is generally between 9 and 12 cents on the dollar, meaning that for every dollar you pay into these policies you’ll get 9-12 cents in benefits. The other 88-91 cents lines the pockets of the salesperson.

Some people argue that extended warranties make sense for electronic gadgets. But new technology causes electronics to depreciate rapidly, so in the unlikely event your gadget breaks a couple years down the road you’re better off paying out of your own pocket to repair or replace it.

Life insurance for kids

I cringe when I hear about people who waste money buying life insurance on their kids. The purpose of life insurance is to provide a financial benefit to your dependent survivors in the event of your death. Nobody depends on your kids for income, so they don’t need life insurance.

Credit card payment protection

This insurance will make the minimum payment on your credit card if you lose your job, get sick or injured, or die. The cost is based on your balance – the higher your balance the higher the premium. As an alternative, get disability insurance which covers your minimum payments. Building an emergency fund is also a good strategy.

I’ve heard of credit card companies adding this garbage automatically to peoples’ bills each month. So check your statements to make sure you aren’t being charged.

ID theft insurance

Buying insurance to protect yourself from identity theft is reactive. ID theft insurance doesn’t protect you from becoming a victim – it simply pays for some of your expenses (legal fees and mailing letters to creditors) after you’ve become a victim.

But you want to be proactive. There’s a better way to protect yourself, and that’s freezing your credit files. This prevents anybody from applying for credit as if they’re you, and is the best thing you can do to prevent ID theft. It’s easy to do online and costs very little ($30 or less; free in some states).

Cell phone insurance

These policies are supposed to protect you if your phone is lost, stolen or broken. You pay a deductible (usually $50 or $100) and get a second-rate phone to use in place of your original one. The cost? About $5 to $7 a month. The problem is these policies have so many limitations that it’s difficult to make a claim. Most won’t cover you if there’s water damage, for example.

Unless you’re extremely accident-prone, this insurance is unlikely to be useful to you. Most smartphones come with a warranty, so check that first.

Pet insurance

Unless your pet is older and goes to the vet several times a year, skip this insurance. Instead, put the money you would have paid for premiums into a savings account to use if your pet needs treatment.

Home warranties

Home warranties supposedly give you peace of mind if your appliances break and need expensive repair. The typical policy costs $500 a year plus a deductible. But companies that sell this junk think up all sorts of reasons to deny you coverage, and they are notoriously difficult to deal with. You’re only allowed to use their contractors, who may not be able to schedule you in for weeks. Instead, start a home repair fund and give yourself the flexibility to find the best person for the job.

Mortgage life insurance

This is designed to pay your mortgage payment if you die or become disabled. But do you know what banks call it behind our backs? “Croak and choke” insurance. Like credit card payment protection, it only protects the bank. Make sure you have adequate life insurance and disability insurance to cover your mortgage.

Photo by jmpetresort.com

Insurance is Worthless, Until You Need it

You can insure pretty much anything these days. Did you know people are now buying health insurance for their pets?

Just because it’s out there doesn’t mean you need it. The idea of insurance is to protect your wallet against things you can’t afford to lose.

Here are 5 types of insurance that make sense for most people:

1. Health insurance. There’s a lot of noise right now about the new healthcare law (a.k.a. Obamacare) and how it will affect everyday Americans. It seems like everyone has misconceptions about the law. If you already have health insurance through your employer that you like, you’ll be allowed to keep it. Without getting political here, I think it’s a good idea for everyone to have some level of health insurance. The government shouldn’t force people to do so. But the fact is, we all get sick. Those without insurance force society to pick up the tab. At the very minimum, get a high-deducible health savings account to protect yourself against catastrophic injuries and illnesses.

2. Disability insurance. Somewhat related to health insurance, disability insurance provides a percentage of your income if you’re unable to work because of sickness or injury. There are two types: short term and long term.

According to some estimates, 3 in 10 Americans will become disabled at some point during their careers. After sick leave has been exhausted, short term disability (STD) insurance kicks in and provides typically 60% of your salary for up to 6 months. Common causes of STD claims are heart attack, back pain and arthritis.

Long term disability (LTD) insurance picks up where STD insurance ends. You generally receive 50-60% of your salary for up to 10 years, but a policy that covers you until age 65 is best. LTD insurance covers you for things like connective tissue disorders, cancer, or catastrophic injuries that leave you permanently unable to work.

3. Life insurance. Your career is your greatest asset. What would your family do if you weren’t around anymore to provide an income? I’ve written about this before, but you want your family to be financially stable in the event of your death. If you have a spouse, kids under 18 or other dependents, you need life insurance. A simple level term policy is best. And please, do not buy life insurance on your kids.

4. Auto insurance. In almost every state, auto insurance is mandatory for drivers. Not only that, it’s the responsible thing to do. Driving without the means to make others whole in the event of an accident puts others at financial risk, and is just plain dumb. At minimum you need liability coverage, which includes coverage for bodily injury and property damage you cause to others. If your car has significant value, you also need collision and comprehensive coverage, which pays to repair your car after an accident or other event. Prices vary widely, so shop around to find the best deal.

5. Homeowners insurance (renters insurance). Most people who own a home have insurance, but those who rent rarely do. If your apartment burned down, how would you replace your stuff? Your landlord’s policy only protects the dwelling. You need your own policy to protect your things. Replacement value coverage is best because it covers the cost to replace an item, rather than the actual depreciated value. See my previous post about how to buy renters insurance. A typical policy runs $150-200 a year.

Next week we’ll talk about some insurance policies you can skip.

Beware of Fake Online Job Postings

The Ripoff Alert is a new series appearing once each week on Fridays. It alerts you to the latest scams and ripoffs trying to get between you and your money, and gives you information you need to stay safe. This is #22 in the series. 

The official unemployment rate in the United States has been right around 8% for all of 2012. But there’s a more meaningful measure, known as U6, that includes people who are underemployed or who have given up looking for work. By this measure, unemployment has been right around 15% all year. In a healthy economy it’s somewhere between 7-10%.

With 15% unemployment, there are lots of folks looking not only for a primary job but extra part time work as well. Anytime you have a lot of demand for something you’re also going to attract scamsters.

Scam artists know these are desperate times, so they’re seizing the opportunity to post fake job listings on Craigslist, Monster and other online job boards. As an example, the once-legit car wrapping industry has roared back to life as a scamster’s paradise. The idea is that you get paid to wrap your car in an advertisement for a local or national business. A decade ago this was a good way to earn extra money, but the companies in this industry have all gone out of business.

After agreeing to wrap your car, you receive a check in the mail. You’re told to deposit it, keep a few hundred dollars for your trouble and wire the rest to the company who will supposedly do the wrapping. So you follow through with your end of the deal, only to find out weeks later that the check was bogus and you’re out thousands of dollars.

Here are some tips to help you avoid these fake job postings:

  • If you receive a check and are told to wire a portion to somebody, just trash it. The check is bogus and they are just trying to rip you off.
  • Avoid handing out sensitive information like your Social Security number or date of birth until the end stages of the hiring process, after you’re sure the company is legit.
  • Be wary of anybody asking for any amount of money upfront.
  • If anyone claims to have access to secret government grants or hidden jobs they’re probably fibbing.

If you’re looking to earn some extra cash, check out my post about finding legitimate work-at-home opportunities. Keep in mind you’re not going to earn big bucks from any of these jobs. Think of them as a bit of extra income in your free time.

Insurance Buying Guide (Preview)

Insurance is one of the most confusing and misunderstood things we buy. So today and for the next couple of weeks we’re going to talk about basic rules for buying insurance, including what you need and what you don’t need.

First up – a preview of my Insurance Buying Guide which will go live in the next few weeks. It will have its own page, and you can access it from the header on the main page or at the top of any post. Here are three rules of thumb to keep in mind when buying any type of insurance. Stay tuned for the rest.

Only insure things you can’t afford to lose

When you insure you protect. You protect yourself from loss. But not just any loss. If you tried to insure yourself against every conceivable loss you’d quickly run out of money. That’s why you need to be smart about which insurance you buy.

A good rule of thumb is you should only insure things you can’t afford to lose. This helps you avoid insuring against every possible event. Think back to the time you were in the furniture store, looking for that new couch. When you found the right one, your salesman probably tried to sell you the extended protection plan to protect the fabric from damage. But ask yourself – Would I suffer irreparable harm if the leather got scratched? No! It’s just a couch.

The same goes with most other things you’re sold an extended warranty on. Office chairs, digital cameras, smartphones, washing machines, laptops…I could go on and on. Just say no.

Think about who you’re insuring

Banks love it when you pay to insure them. I’ll give you two situations where this is the case.

When you get a mortgage, the bank asks if you want to add an obscure insurance known as mortgage life insurance. They claim that if you die you or your survivors won’t have to pay off the mortgage. That’s true, but the policy pays off the lender if you die, not your survivors. And it costs ten times what term life insurance costs.

In a related example, some sneaky credit card companies have been putting unemployment insurance or other coverage onto people’s bills each month. Again, these products protect the lender if you’re not able to make your payments. Make sure you go through your statement every month to make sure your bank isn’t ripping you off.

In either case, a simple level term life insurance policy is best because the proceeds go to your survivors who can decide how best to use the funds.

Don’t buy any policy that’s narrow in its benefit

Many types of insurance fall into this category. Just to name a few: Accidental death and dismemberment, stroke insurance and cancer insurance.

These policies are so narrow in their coverage that very few people in very few situations are likely to benefit from them. They are riddled with exclusions and are designed to take advantage of your fear of getting one of these conditions.

It’s best to buy general insurance, such as life insurance or disability insurance, that covers much more than these single-issue insurance policies.