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

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.

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.

Take Control of Your Finances: Don’t Let Inertia Rule the Day

We tend to think that history repeats itself. I believe that’s because we have no idea how to predict the future. Or maybe we’re lazy. Whatever the reason, we think that because things have happened one way in the past they will continue that way in the future. Psychologists call this inertia bias.

This assumption of continuity might be convenient, but I’ll show you why it’s poison for your wallet.

Financial success relies on knowing when to change and when to stay the course. For example, how do you know whether to stay with your auto insurance company or switch to a new one? How do you know your cable company isn’t ripping you off? Do you still use that land line or is it there out of habit?

Just because you found a great deal today doesn’t mean it’ll still be a deal a year or 5 years from now. Your goal is to save and be more efficient, so you have to put in some effort. You can’t afford to assume things will always stay the same.

Auto Insurance

I’ll admit – it’s a pain to shop around and get several quotes. The internet hasn’t provided an easy way to compare prices between companies, so we’re forced to call each one separately. Calling to get three quotes could easily take an hour. This is well worth your time though, because yearly premiums can vary by $1,000 or more.

Insurance companies differ in how they assess risk and how much of that risk they’re willing to take on. To one company you might be a moderate-risk driver, but to another you could represent a low risk. In addition, companies often raise and lower their premiums based on which area of the country they’re targeting. If they’re trying to rid themselves of customers from your zip code, you may find your premiums increasing quite a bit.

Those who remain with their auto insurance provider year after year are probably paying more than they should for coverage. The same goes with home and renters insurance, so shop around at least every two years.

Cell Phone Providers

I’ve covered how to save on your cell phone bill several times in the past. Most people remain with the same old provider they’ve always used – most likely one of the Big Four (Verizon, AT&T, Sprint and T-mobile). If you’ve been reading the news recently you know that these behemoths are passing through large price increases whenever they think they can get away with it. They’re doing away with unlimited data, which is ironic because that’s where we’re headed with cell phone usage in America.

What does this mean for your wallet? You’re probably paying 50% more for cell phone service than when you signed up a decade ago. You’re also stuck in one of those nasty two-year contracts, where they lock you in and provide inferior customer service. Instead, switch to one of the low-cost, no-contract providers like Straight Talk, Virgin Mobile or Metro PCS. With Straight Talk for example, you’ll get unlimited across the board for $45 a month, no contract.

Here, remaining in an overpriced contract with one of the Big Four will cost you about $500 a year, or more if you have additional lines. Just because it may have made sense before doesn’t mean it does now. There are better options out there.

Buying a Home

Since the start of the crisis people have moved out of houses based on economic necessity and have moved in with parents or other family members. Some have become renters. Housing prices have tumbled the past five years as a result.

Now it looks like housing prices have finally hit bottom, and interest rates hover around 3.5% for a 30-year loan. That’s the lowest rate on record. If buying a home makes sense in your life, this is the time to act. Prices don’t have anywhere to go but up.

If you’re looking at the gloom of the past five years you might assume prices will continue to drop indefinitely. You may be sitting on the sidelines, waiting for the economy to pick up again. When it does you will have missed your chance.

So Much “Normal”

With inertia bias such a large part of our lives, is it any wonder we have so many words in the English language to describe how things are always done? Typically. Usually. Normally. Generally. Ordinarily. Regularly. Characteristically. Did I miss any?

Like bad habits, inertia is tough to break. But your financial health depends on your ability to know when to change and when to stay the course. Shatter those molds and watch the savings add up!

Can you think of a time when inertia caused you to spend more than you should have?

Photo by thestrategyguysite.com

Your Loyalty Could Be Costing You

No, I’m not talking about your loyalty to your spouse or significant other. What I’m referring to is the companies you regularly do business with. Your loyalty to them could be costing you a lot of money.

Companies used to reward loyalty. Take pensions, for instance. It used to be that you went to work for a company after finishing school and you worked for that company your entire career. Both my father and father-in-law have been working for the same company their entire working lifetimes. In exchange for our loyalty, the company provided us with a nice pension for retirement. Today, pensions have all but disappeared.

This same sentiment carried over to the consumer world as well. Now, companies routinely punish loyalty while rewarding new customers with specials and discounts. This trend is taking hold in more and more industries. Below are some specific areas where your loyalty could be costing you.

Cable and Satellite Providers

These companies are among the worst when it comes to punishing loyalty. How many times have you seen an ad for a steeply discounted rate for TV and internet service? If you read the fine print you’ll see that the rate is only valid for new customers and only for the first six or twelve months.

To get the best deals, you need to shop around every time your contract ends. If switching providers sounds like too much work, at least make some calls to competing providers and ask for their new customer specials. Then use that information to negotiate a better deal with your current provider.

Banking Services

Big banks love to reward loyalty with increased fees and minimum balance requirements. They don’t care about you, your family or your future, no matter what they might claim. To get free checking and better service, go with a credit union or online brokerage company like Schwab or Fidelity.

When it comes to savings accounts and CDs, there isn’t one bank that consistently offers the best interest rates. To find the best rates, go to Bankrate.com and select the product you’re looking for. Rates are updated daily, so you can be sure you’re always getting the best rate for your savings.

The Dentist Office

Occasionally when I pass a dentist office I’ll see a large banner announcing a “New Patient Special”. This could include an exam, x-rays and a routine cleaning. As an uninsured college grad on a strict budget, I took advantage of one of these offers a few years ago. At $85, the service was as good as I received from my regular dentist in the past. If you don’t have insurance, you could save over $100 using these offers.

Car and Homeowners Insurance

Insurance companies have different methods for determining the rate they will charge you. Because of this, you might be overpaying for insurance. Take car insurance, for example. Young men aged 18-24 are notorious in this industry because of their high accident rate, so they tend to have a hard time finding reasonable coverage. Progressive is known for taking on this group at lower rates than other insurers would. This isn’t a guarantee, but it shows that comparing rates can save you real money regardless of age.

It’s a good idea to compare rates for car and homeowners insurance (or renters insurance) every 2-3 years when your premium comes due. Sites like NetQuote.com and Insweb.com can help you get quotes.

Grocery Store Brands

Your loyalty at the supermarket could be costing you greatly. The typical family spends $6,500 a year on food. By shopping at discount stores and Walmart for the majority of your groceries, you could save 30%, or about $2,000 a year!

As I mentioned in a previous post, buying store brands is one of the best ways to save on groceries. But what if you just can’t bring yourself to try generic? Then look for the brand that’s on sale, and combine it with a coupon when possible. A couple of examples will drive home the point.

I’m a big frozen meal nut — I eat them 5 days a week at work instead of going out for lunch. There are certain meals I like, but I’ll only buy when they’re on sale. If none of my usual suspects are on sale I’ll try something new.

My wife really likes ginger ale, and sends me to the store weekly to buy some. There are always about eight different brands, but I only consider ones which are on sale. She gets her ginger ale and we save on our grocery budget!

Never be afraid to try things differently from the way you’ve always done them. You’ll save dough and you just might discover something that works better in your life.