Put The Psychology of Wealth on Your Reading List Immediately

& ENTER TO WIN A COPY OF THE PSYCHOLOGY OF WEALTH HERE. Contest ends May 15.

“Action is a great restorer and builder of confidence. Inaction is not only the result, but the cause, of fear. Perhaps the action you take will be successful; perhaps different action or adjustments will have to follow. But any action is better than no action at all.” by Norman Vincent Peale as quoted in the Psychology of Wealth

At the risk of sounding self aggrandizing, when I was contacted by the marketing department at McGraw Hill Publishing to review this book, I assumed it would be a boring rehash of everything I already knew. Having read a multitude of finance, personal finance, and psychology texts, I thought I knew pretty much everything on the subject.

Charles Richards, PhD, author of The Psychology of Wealth

I WAS WRONG

Quick Recap of The Psychology of Wealth

Based on research, anecdotes, and and personal experience, Dr. Richards accomplished a very difficult task. He took the breadth of wealth, psychology, mindfulness,  and money management fields and integrated them into an inspiring and informative book. Richards starts out with a definition of wealth, and it’s integration with self esteem.

Wealth has less to do with money and more to do with personal responsibility, risk taking, achievement, and determination.

Don’t let me suggest that this book has a pollyannaish approach. On the contrary, the role of debt and wealth is front and center, yet there is so much more.

The central concept of The Psychology of Wealth is that wealth and poverty are both states of mind. This singular statement reifies both the simplicity and complexity coexisting in this book.

How Your Life Will Improve from Reading The Psychology of Wealth

If you really consume this book and take the messages to heart, here are some outcomes you can expect;

An awareness of how your family operating system programs your beliefs, attitudes, skills, anxieties and expectations and contributes to your life satisfaction.

How to get beyond the awareness of your background, and use it to overcome any negative messages about wealth, success, and prosperity. Get inspired by real life stories of people from difficult backgrounds who transcended lack of financial wealth and prospered.

For example, Leticia manifested a sense of abundance which led to great personal success, in spite of an impoverished upbringing. Her family had little money, yet her father ingrained a sense of value by focusing not on Leticia’s appearance but upon her accomplishments and intelligence. He helped her to understand that the tiny size of their family home did not define her.

Learn the true meaning of money. Currency, another word for money, represents transferring cash for services or work. In and of itself, money is without value. So many folks focus on the magic “number” to signify their financial status. It is a fact that money is only a means of barter to help you buy goods and services.

According to Dr. Richards, “Price is what you pay. Value is what you get.”

Giving back is another familiar concept in the wealth literature, but Richards take on this subject can be summarized by one quote,

“The psychology of wealth requires trusting that, no matter what happens, we will have enough.”

The story of Donald Trump stopping his limousine on the way to a speaking engagement to give advice and encouragement to a bevy of young people clamoring for his attention is a perfect example of the types of stories Richard’s interweaves to enliven his prose.

Chapter 7, “Living Consciously” discusses the popular living in the moment concept. Have you considered this concept in relation to debt? The book links conscious living to conscious debt and offers a rich rubric for the debt decision-making process. Carry the living consciously concept into every corner of your life and you will master the psychology of wealth.

The book is so rich with anecdotes, advice, and action steps, I want to savor every page. It’s not often that a money book is so satisfying.

It’s difficult to find a criticism with the book, but in order to be evenhanded, following is my one complaint; the seamless integration of money and life fulfillment concepts makes me sorry that I didn’t write the book myself .

Enter to WIN a free copy of the Psychology of Wealth, by signing up for my Wealth Tips Newsletter. Let me know that you signed up for the newsletter in the comments section please.

You’ll even get a free bonus eBook of my award winning 20 Minute Guide to Investing, just for signing up. The winner will be chosen on May 15 and will be selected at random.

Don’t believe my review? Read what other personal finance bloggers are saying about The Psychology of Wealth

• Financial Samurai
• Retireby40
• Enemy of Debt
• Balance Junkie
• CNBC review by Dr. Richards

Stop by next time and read The Secrets of Wealth an inspiring 2 part interview with the author, Dr. Charles Richards.

How does your mind impact your feelings of wealth or lack thereof?

Three Ways to Benefit from the Low Interest Rate Environment

In part 1 of What do Low Interest Rates Mean?, I talked about the cyclical nature of interest rates and the economics behind the interest rate trends. Today is advice day where you get some tips about how to benefit from the current interest rate environment.

It is a certainty that economic environments change. The low interest rate environment will not last forever. At the outside, you have less than two years before interest rates will rise. After reading Part 1of this article you understand a bit about the economic and monetary policy behind the interest rate environment. Next learn how you can profit. After all, I can’t write an article without giving strategies for wealth building.

Time to buy a home?

3 Strategies to Grow Your Wealth in Spite of Low Interest Rates

1. In How to Get a Decent Return on Your Cash, I wrote about options for savers. The best savings option right now for cash you won’t need for a year or more are Government I (Inflation) Savings bonds. The I bonds pay 3.06% until April 30^th when they will reset for their six month adjustment and reflect the current rate of inflation.  The return on these investments has two parts; a fixed rate of interest which does not change and an adjustable rate of interest that moves along with the inflation rate. The beauty of I Bonds is that there is no chance of default and your investment is guaranteed to keep up with the pace of inflation. In other words, the purchasing power of your investment is protected.

Buy these risk free investments on line at Treasury Direct. You can purchase up to $10,000.00 worth of these bonds annually in increments of $25.00.I bonds are even available for purchase with your tax refund. Except for paying off debt, there is probably no better use for your tax refund.

2. For lenders, I recommend peer to peer lending. This type of loan is about lending money directly to folks who need it. The peer to peer lending investment cuts out the bank and directly matches lenders and borrowers. I am loaning money to other borrowers through a peer to peer lending site and so far am earning 10.69% Returns With Prosper. 

I started investing in October, 2011 with Prosper.com. You can read about my initial experience in this article; My Experience with Peer to Peer Lending. In contrast with government bonds, please realize that this is a risky investment. Borrowers might default on a loan in which case, you would lose your total investment in that particular loan. For that reason, I only invest $50.00 in each loan that I fund. There is also the option to invest $25.00 per loan, further reducing the default risk of the loans. Although I currently have over one hundred loans, our total invested capital in peer to peer lending is only a very small portion of our investable assets.

I only recommend this for folks that can afford to take a loss on their investments in the expectation of receiving out sized gains. The Social Lending Network is a blog devoted to peer to peer lending. If you’re interested in the topic, it is a great place to learn more. If you do decide to loan through peer to peer lending, make sure that you only invest a small portion of your investment funds in this type of opportunity.

3. Take advantage of the historically low interest rates and borrow. Don’t borrow on your credit cards as those rates are way too high (and probably always will be). But if you are considering buying a home or refinancing your current abode, now is the time to do so. Home prices have sunk across the country and mortgage rates are at all time lows. There are even FHA loans with low down payments available for those that lack enough saved up for a 20% down payment. The FHA website has a handy calculator to help figure out if you qualify for a low down payment FHA loan.

For those looking to lock in a low interest rate loan or refinance their current mortgage, according to Bankrate.com, a 30 year fixed mortgage can be had for about 4.0% and a 15 year fixed mortgage for 3.27%. In many parts of the country, your house payment would equal or be less than a comparable rental.

Although we just bought our condo seven months ago, we are refinancing with a low interest rate 15 year mortgage. Our thinking is that when retirement rolls around, it will be a bonus not to have a mortgage to worry about. So even though our new interest rate will be lower than that on our current 30 year mortgage, the payment on the 15 year loan will be  a bit more. The monthly increase is worth it to us to save over $100,000.00  in interest payments over the life of the loan and pay it off in half the time.

Don’t forget to check out the first article in this series, What do Low Interest Rates Mean?

Please add your strategies to capitalize on the current low interest rates.

image credit; Madison short sale.com

HOW TO BOOST YOUR CREDIT SCORE

Life was a lot simpler when what we honored was father and mother rather than all major credit cards.
Robert Orben

Bad things happen when your credit goes down the toilet. Even if you think you don’t need a good credit score because you aren’t going to buy a house, consider this; landlords and employers check your credit score as well. With a lower credit score you could miss out on a great apartment or a good rate on a loan. Check out these myths and tips to boost your credit score and gain some useful personal finance information.

CREDIT CARD TIPS

Myth Number 1: It’s best to have no credit cards at all.

Having several credit cards is helpful in maintaining a solid score. After all, a lender wants to know that you can handle credit responsibly. Here’s the catch, have a few cards, pay them off in full every month, and don’t use more than 20-30% of your available credit.

Myth Number 2: Wealthier people have better credit scores.

Income has nothing to do with credit scores. If you are wealthy and don’t pay your bills on time, your credit score will suffer. Just because you have a big salary doesn’t mean you know how to handle your income or your bills. If you don’t pay your bills on time, you hurt your credit score.

Myth Number 3: You will have a poor credit score if you don’t have a credit history.

Starting out you will probably have a credit score in the 600′s, according to the founder of Credit Karma, Ken Lin (from an article by Mary Cornatzer of McClatchy Newspapers). He recommended those without a credit history (or a poor one) get a secured credit card, requiring a cash deposit. Use the card responsibly and pay the bills on time. Your score will rise along with the improved credit usage.

Myth Number 4: You must be in debt to have a good credit score.

On the contrary, those with credit scores above 800 have less debt than those with scores in the 600 to 700 range.

EASY TIPS TO BOOST YOUR CREDIT SCORE

• Have several credit cards, but don’t use more than 30% of the available credit on any one card.
• Pay your bills in full and on time every month.
• If you are drowning in debt, make a commitment now to get it paid off. Your credit score will increase as will your peace of mind.

Can’t Get Enough?

Read a bit more about Credit Karma at Bargaineering

Wise Bread has some great articles about improving your credit score

Free From Broke tells how An Excellent Credit Score Saved Him Money

Learn from PT Money where to get a Free Credit Report

 Action Steps

Get a notebook and label it: “(your name) Personal Finance” and keep it by the computer. Use it for all of your personal finance thoughts, activities, and plans.

Make today the day you look up your credit score; it’s free and this government website can tell you how to get a free credit report.

If your credit score is not where you want it to be, make a goal and take action towards a better score.

What are your tips for an improved credit score?

IMAGE CREDIT; 401K

Quick Money Tips to Increase Your Wealth in Time and Money

& Links

Small and steady steps lead to great success. Today, get some inspiration to make those small life changes to boost your overall well being and happiness. Implement these ideas in small bits for lasting success.

In reading Money Magazine’s, Get Happy in 2012, I was intrigued by the research based money tips to improve well being. The following suggestions are shamelessly borrowed from that article.

I found it incredible that in a survey of 28,000 Americans, from the University of Georgia, having an emergency fund is the greatest predictor of financial satisfaction. I wasn’t surprised that having a rainy day fund was important, I’ve been stressing that for eons. But, that is was the largest predictor of financial satisfaction, even greater than paying off credit cards or owning a home was a surprise.

For financial satisfaction, make saving for that emergency fund PRIORITY NUMBER ONE.

It’s not news that having credit card debt causes stress. But here’s an easier way to eliminate it according to State College, Pa. financial planner Jeff McClarren. Choose a monthly amount to pay off (make sure it is much bigger than the minimum payment) and focus only on that amount! Worry less about the total amount of the debt, which can be overwhelming and scary and keep paying that monthly amount and the debt will decline before you know it. Of course, do not charge anything else. Apparently, it’s overwhelming to look at the aggregate amount of debt. You can handle tackling that payment every month.

Frequent little splurges, yield greater happiness than infrequent big indulgences. The result, more happiness at less cost. So get that special bottle of nail polish, spring for a CD or DVD at the used media store, or indulge in a gourmet box of cookies. You’ll feel rewarded and satisfied, on a budget.

Next, check out what I’ve been reading. Lots of money and happiness articles .

BARB RECOMMENDS

Time Magazine reported about happiness and money in a study which found that you need to earn $75,000.00 per year to be happy. I don’t claim to know whether this is true or not, but if you need a benchmark to shoot for, here it is. Read about what others have to say on this money and happiness topic.

Arthur Brooks from The American Magazine also asks, Can Money Buy Happiness? The response is no, but success can! So here’s another take, become successful and increase happiness, of course I bet money will also follow.

Ben Edwards writes, 5 Reasons Money Can Buy Happiness for Wise Bread.

Can Money Buy Happiness? Yes it Can, according to Suba at Wealthinformatics. What are your thoughts?

Happiness and Money; How Much Money do You Really Need? asks KNS Financial? Are you one of those folk who reaches one financial level and then raises the bar? Well what do you think is the limit?

Money and Happiness; What Say You? at the Millionaire Nurse Blog. More thoughts on this age old question.

PT Money says You Need to be Happy to build wealth. I’m not so sure. What about you?

Krantcents asks, Will Money Make Me Happy? Certainly having no money will not make one happy.

Narrow Bridge want to know If Money will Make You Happy? There certainly is a lot of discussion on this topic.

Money Reasons has a new solution to happiness: Multitasking and Making My Family Happy.

5 Reasons Money Can Buy Happiness at the humorous Cracked.com.

Jeff Rose’s guest article on Smart Passive Income is a must read for anyone with a dream! He maps out how his persistence led to both blogging and personal business success.

Barbara Friedberg Across the Blogosphere

Take some time to visit these excellent sites which recently featured my work.

The Yakezi.com; Featured article, Patience and Persistence-The Path to Unlimited Success

FindtheBest; TD Ameritrade Research Tools

Len Penzo Black Coffee

Totally Money Blog Carnival at Mother Miser

Carnival of Personal Finance-Ask the Right Questions at Wealth Pilgrim

Tax Carnival #95 at Don’t Mess with Taxes

The Frugal Toad Weekly Round up-Playoff Edition

Carnival of Financial Planning at Credit Cards Canada

Do you think money can buy happiness?

image credit; Princ Arora

You must subscribe to my WEALTH TIPS newsletter on the right. You get invaluable wealth building information and a FREE e-copy of my award winning 20 Minute Guide to Investing. Do not hesitate!

It’s All About the Interest Rate

When shopping for a mortgage, it’s all about the interest rate. The interest rate, also called the annual percentage rate or APR, is essentially the cost you assume for paying back the mortgage over a period of time rather than all at once. Your credit score will heavily influence the mortgage rate you qualify for – lower credit score means, higher interest rate, and higher

BUY A HOME

monthly payment. When you realize how much money you can save over the mortgage life by improving your credit score, you’ll want to wait to purchase your home until you can qualify for a lower rate.

Best vs. Worst Interest Rate Examples

The difference between APRs with a good and bad credit score can be as much as 1.5%, possibly more depending on the lender. The difference is significant for monthly payments and total interest paid. For example, on a 30-year fixed rate $200,000 mortgage loan, a person with a 630 credit score qualify for a higher 5.19% interest rate. The monthly payment would be $1,097 and the borrower would pay a total of $194,915 in interest on the loan.

Now, consider a person with an excellent credit score of 770. This person would typically qualify for the lowest interest rate, which is around 3.6% these days. On a $200,000 mortgage, the monthly payment would be $909 and total interest paid over 30 years would be $127,385.

The bottom line, you’ll spend almost $100 more on your monthly mortgage payment if you have the lowest credit score. But the real shock is the $67,530 more you spend over the life of the mortgage. That’s enough money remodel the home, pay for a child or grandchild’s college, or put toward retirement.

The Difference Just 50 Points Makes

The first two examples are the extremes – the lowest and highest credit score/mortgage scenarios. If your credit score is at the lowest range, it might take several years to bring it all the way up to excellent. Raising your credit score just a little bit can still produce significant savings. For example, a borrower with a mediocre credit score, around 680, might get a 4% interest rate, pay $955 monthly, and spend a total of $143,739 in interest.

With just a 50-point increase in your credit score, you could shave $46 off your monthly mortgage payment and $51,176 off the total interest you pay over the life of the mortgage.

With higher mortgage amounts, the interest rate differences become more significant and saving money is more imperative. On a $250,000 mortgage, there’s a $234 difference in the monthly payment and a $84,413 different in the amount paid over the life of the mortgage.

The numbers in this scenarios were generated from my FICO.com’s Loan Savings Calculator. You can use the calculator yourself to see how much money you could save on a mortgage of a different amount.

Before shopping for a mortgage, check your credit score to see where you stand. If your credit score is in the low range, spend a few months repairing your credit and focusing on your credit score. The money savings will be well worth delaying your home purchase.

J.D. Roberts is a seasoned writer in personal finance, specializing in credit repair. You can find more of his articles at CreditRepair.org.

image credit; inspiration gallery

What steps have you taken to improve your credit score?

Which Credit Card is Right for You?

For a quick overview of Investing Strategies, pick up my FREE eBook; 20 Minute Guide to Investing (top right of the page). If you like what you’re reading, sign up for my RSS feed or email subscription and follow me on twitter so you get the word immediately.

You probably have, like most of us, more than one credit card. But did you know that there are many different types of cards? It’s possible that you might not be using the card that’s best for you!

You can compare rates and apply online for new cards these days at online comparison sites such as moneysupermarket.com.

Here are some of the main types of credit cards:

A balance transfer card has an extremely low rate of interest – often as low as 0% – on balances that you transfer onto the card from elsewhere. If you already have an amount of money on a credit card, it can often be worth transferring the amount onto a balance transfer card in order to reduce the amount of interest that you pay.

A purchase card keeps interest rates low for purchases you make on it. As with the balance transfer card, the rate can be as low as 0% for many months. A purchase card is ideal if you know that you will be making large purchases over the next few months and want to spread the payments over a longer period.

A reward card is one in which spending made on the card gives you points which can be traded in for rewards. Rewards can be anything from airline travel to free holidays or goods.

Reward cards are best for those who pay their balance off in full at the end of each month, as this will keep charges to a minimum. Many cards will not charge you interest at all if the credit is paid off in full, so this can be an excellent way of maximising the value of your spend.

Credit Scoring

Whether or not you’ll be given a credit card upon request – or if your credit limit will be increased – is determined by a system called Credit Scoring. It’s used to measure what sort of risk you’re considered to be and therefore how likely you are to pay back any money that is lent to you.

A large part of the Credit Score is due to how much credit you already have – so if you’ve already maxed out all your cards, you’re unlikely to be given another.

On the other hand, if you never use a card at all, they might not want to give you a card either!

Sometimes through no fault of your own, you may end up with a low credit score. The best way of rebuilding your credit score is to borrow and repay money.

Bad Credit? There’s Hope

Some credit cards are specifically designed for those with poor credit scores.

A secured credit card acts as a normal card, but the debt is secured against one of your assets. This could be a car or savings in the bank, for example.

You should take special care when using secured credit cards, though, as if for any reason you find yourself unable to repay the debt, you could find yourself losing whatever property it has been secured upon!

Secured credit cards also tend to have low credit limits – but if they are used carefully, they can prove to lenders that you are a good bet, which will improve your credit score.

Guest article

Which type of credit card do you prefer? Or, are you a cash only shopper?

image credit; catfishstu

& 3 REASONS TO BE WARY OF THEM

UPDATE; Over the next month my family is moving across the country to a new home. Please enjoy a variety of guest articles from top notch bloggers and sponsors. Also, catch up with earlier favorites from Barbara Friedberg Personal Finance.  

For a quick overview of Investing Strategies, pick up my FREE eBook; 20 Minute Guide to Investing (top right of the page). If you like what you’re reading, sign up for my RSS feed or email subscription and follow me on twitter so you get the word immediately.

No Debt MBA writes at NoDebtMBA.com about personal finance and education.  No Debt MBA has been accepted to a top 5 business school and is trying to graduate without taking out any student loans.

These days it seems that no college education is complete without a mountain of student loan debt.  College costs are rising faster than inflation and in a recession families have fewer resources to put towards the back breaking price of tuition, room, board, fees, and books.  Student loans are pitched as necessary, normal and a great investment.  But only one of those things are true – student loans are unfortunately a normal part of our college and university landscapes.  But here are three reasons you, your family or your student shouldn’t be “normal”:

1. Once you take them out you’re stuck with them.  Unlike most debts you can take out like a mortgage, car loan, or credit cards student loans are extremely difficult to get rid of during bankruptcy proceedings.  There’s also nothing associated with your student loan to foreclose on or repo. This often goes for cosigners too.
2. They’re hardly “cheap money”.  With origination fees of 1%, 4% or more of your disbursements and interest rates at 6% or above, most student loans hardly qualify as inexpensive in the current economy.  Their interest rates (and interest typically accumulates as soon as the money is distributed) are higher than those for mortgages right now.
3. They can encourage you to lose track of costs.  When the money going out for another semester’s bill doesn’t come directly from your pocket it can become easy to end up with a higher than intended student loan balance.  Experts recommend not taking out more loans than you can reasonably expect to pay for with your first year’s salary. But with tuition hitting $50,000 or more per year at some private colleges and graduates expecting less than that in salary it can be easy to blow recommendations out of the water.

So great, we’d all like to avoid student loans, but college is expensive, how can we do it? 

 Here are five ways to reduce your usage of (or maybe even avoid entirely!) student loans for college:

1. Pick a cheap school.  Not the most fun suggestion, I know, but your selection of college or university is the single biggest factor in the cost of your education and it is under your control.  Think about state schools, scholarship offers, financial aid packages and more. (Barb’s comment; I attended 3 state schools and received an excellent education at each one)
2. Negotiate.  Did you know that you could do this?  My SO got a full tuition scholarship from one college and got another to match it.  The second college hadn’t offered any aid or scholarships to start with.  If you’re a high performing student or have significant financial need you can ask, very politely, if the school of your dreams can match a better offer you have on the table.  
3. Appy, apply, apply.  Not to schools, that gets expensive and excessive, but for scholarships, internships, financial aid and other opportunities like being a resident assistant (RA) to help defray your
   costs.  Getting scholarships can be even harder than getting into your top college so keep practicing.
4. Get cheap textbooks.  Plan your course schedule ahead of time if possible so when students want to unload their books at the end of the semester you can snatch up books for your next semester’s
   classes.  You can also look online for used books and there are several useful aggregators that will comparison shop for you. These saved me hundreds of dollars with just one search. (Barb’s comment; Amazon.com has great affordable textbook options)
5. K.I.S.S. – Keep it short smartie!  An extra year in school means 25% more in costs and even more in student loans.  Many scholarships will only cover your first four years.  So go in and get out!  Stay focused so college isn’t extended by failed courses, irrelevant minors, or leaves of absence.   Even better, if you can get AP credits to transfer in, take courses online or during breaks you might be able to graduate in three years for much less than the full four years.

 In theory, there is no reason a student or their family has to take out student loans to pay for a college education and there are many reasons why they should try to avoid it. There is no substitute for planning ahead and saving, but there are many strategies you can take advantage of to keep the total tab low and prevent student loans from becoming an enormous burden.

What are your suggestions for saving money while receiving a higher education?

image credit; Bill McCallen

UPDATE; Over the next month my family is moving across the country to a new home. Please enjoy a variety of guest articles from top notch bloggers and sponsors. Also, catch up with earlier favorites from Barbara Friedberg Personal Finance.

Guest article; NerdWallet.com is an online resource that gives people information to make the best decision amongst available credit card rewards, and was founded by its current Chief Executive Officer, Tim Chen.  Tim goes further to educate folks about credit and debt management by writing for major publications including the Huffington Post, US News, and the Forbes Moneybuilder Blog.

Should You Insure Your Credit Card Payments?

It’s possible for Payment Protection insurance to seem like a good idea when you’re being sold by a pro. With some variation, depending on the issuer, this service costs around one percent of your monthly balance, along with keeping up on minimum payments. Your benefit is that if you are not capable of making your payments due to losing your job or becoming seriously ill, you can have that obligation deferred for up to two years.

That’s a pretty good deal on the surface. One percent isn’t much, and if you sacrifice that, you don’t have to be concerned with being charged extra for being tardy.

Be Skeptical About What You’re Getting…

There are some snags to watch out for when considering whether to purchase this service. Firstly, think about what it is you’re purchasing insurance on: unsecured debt. Unlike secured debt, which is anchored by some form of collateral like a home or automobile, unsecured debt is only based on your continuing to be capable of paying off your balance.

In a case where a debtor goes bankrupt, the creditors who have secured collateral are the first priority for restitution of outstanding debt. Only after the balances owed to these creditors have been resolved are the creditors without collateral able to be paid…assuming there are still assets that can be paid to them.

Because of the fact that they deal in unsecured debt, firms issuing credit cards actually tend to be fairly lenient with their customers. A long history of reliable payment can easily get you forgiveness for a few months in case you end up out of a job or in the hospital.

The reason for this is because they ultimately want to get paid back. So, if getting a few installments late means avoiding taking your entire debt as a loss in the end, then credit card companies tend to see it as worth their trouble.

…And What You’re Paying For It

Insuring your ability to pay your monthly minimum is also costlier than it often seems. However, charging 1% monthly comes out to 12% annually if the amount you owe remains the same. Except for those who carry a low interest credit card, your annual interest is probably around 15%, so tacking on this insurance would bring your total within the range of 28%.

The difficulty is easier to see when discussed in regular dollars. If you have a $1,000 balance on your card, the average issuer might oblige you to pay 2% of that amount monthly—in other words, a minimum payment of $20 per month. If you get your payment ability insured, it’ll tack on $10 per month, bringing the total you pay to $30 monthly. So, let half a decade pass and you will have parted with $600 for this service. While this amount could be smaller if you shrink your balance, a larger balance will make this insurance even more expensive.

The drawbacks are compounded when you realize that our theoretical $600 does nothing to pay down the $1,000 balance. And that sum only benefits you in case of a major problem. Plus, if you do invoke the coverage, the monthly payments on which a grace period is given will still include added charges for the very same insurance that allows them to remain unpaid, for a period, without consequence. Not to mention the fact that since those waived bills are just added to the balance of what you owe, that coverage instantly becomes more expensive.

Given this information, it’s clearly beneficial to be skeptical about how much insuring your ability is worth and the value of the coverage they’re offering.

Wouldn’t you get more out of your dollar if you deposited $600 into an emergency savings account?

In that case, you could use that money for anything you deem necessary and won’t need to worry about the card issuer’s assessment of the situation blocking the availability of those funds.

Or, short of that, just use the amount you’d otherwise use to pay down one percent of what you owe every month. If you don’t have a balance, then you don’t have to think about insuring your ability to pay it.

For a quick overview of Investing Strategies, pick up my FREE eBook; 20 Minute Guide to Investing (top right of the page). If you like what you’re reading, sign up for my RSS feed or email subscription and follow me on twitter so you get the word immediately.

Have you considered credit card insurance? Do you think it is a good investment?

image credit; insurancekatytx

UPDATE; Over the next month my family is moving across the country to a new home. Please enjoy a variety of guest articles from top notch bloggers and sponsors. Also, catch up with earlier favorites from Barbara Friedberg Personal Finance.  

For a quick overview of Investing Strategies, pick up my FREE eBook; 20 Minute Guide to Investing (top right of the page). If you like what you’re reading, sign up for my RSS feed or email subscription and follow me on twitter so you get the word immediately.

Aren’t Credit and Debit Cards the Same? 

Credit and debit cards seem, on the surface at least, much like each other. In fact there are several important differences worth exploring that might save you money.

 The credit card system is based on the credit worthiness of the user where the card issuer provides a revolving line of credit to the user. This means that the user is effectively spending the issuer’s money.

 The card issuer is the bank or institution to which a user will apply for a card. You can read more here to find out about the issuers and their terms and conditions.

 The debit card system is based on the account holder’s personal account details. While there are some subtle differences, a debit card is best understood as a form of advanced ATM card.

 Again, the debit card may be operated by Visa, Mastercard or one of the local equivalents. The important distinction is that with the debit card, you are spending your own money.

 This means that with a debit card, you only spend what is in your account and, unless previously agreed with your bank, you are limited to your available funds.

What Happens When You Spend More Than is in Your Account? 

In reality this is not always the case with a debit card, and in fact you may be able to spend more than your bank balance, but you will be charged for this facility.

In the US you have to ‘opt in’ if you want this facility, but most issuers will stop any transactions that are over and above your balance.

What Happens When You Go Over Your Credit Limit? 

 With a credit card, you have an agreed limit that you cannot exceed. If you pay off your balance within the “grace period” you will not have to pay any interest. However, in some cases, if your balance is $1.00 short of full payment you may be charged interest on the full amount that you spent for the preceding period since the balance was zero. 

The methods of calculating interest are complex and differ between institutions. It is always a good idea to get a firm handle on the fine print before signing.

 Should one be a victim of fraud, that is, you lose your card or it is stolen and somebody tries to use it, then you are better covered with a credit card than a debit card.

 In the US, the customer is liable up to $50 if the card is reported lost or stolen within two days (48 hours) of the theft or loss. In some cases, the issuer will swallow this cost to maintain customer loyalty.

 However, between 2 days and 60 days after the loss/theft is noticed, the credit card issuer is still liable for all funds over and above $50 but in the case of the debit card, the customer is now liable for funds spent up to $500. (Barb’s comment, when my credit card was compromised, the company waived my $50.00 liability)

 There is relatively good consumer protection on both debit and credit cards and until recently, both Visa and Mastercard prohibited minimum/maximum spends on cards controlled by merchants.

 There are advantages and disadvantages to both card systems and your choice will depend on your personal spending habits. (Barb’s comment; I use a combination of both debit and credit, as well as some cash)

 Guest post by Money Supermarket, from across the pond, with international applicability. 

 image credit; hmt08

UPDATE; Over the next month my family is moving across the country to a new home. Please enjoy a variety of guest articles from top notch bloggers and sponsors. Also, catch up with earlier favorites from Barbara Friedberg Personal Finance.  

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Having a credit card can be the best thing for your financial situation or a recipe for disaster. It is definitely an important financial decision, and if you don’t approach it with some kind of respect, using a credit card can bite you in the worst way. In today’s economy, you have to be very careful how you handle your credit cards, because although it might be easy to get one, it’s equally easy to end up in financial disaster.

Watch Out For the 5 Biggest Mistakes You Can Make With a Credit Card

1.            Take the first offer you receive. Shopping around for the right credit card for you is imperative. You want to choose one with the best rate, terms and perks that fit with your lifestyle. Don’t opt for the first one in your mailbox or email – shop around and compare before you fill out that credit card application. Shop around and compare credit cards from as many financial institutions as possible.

2.            Don’t read the fine print. If you don’t read the fine print, you’re going to get burned and that’s the bottom line. The credit card companies are not your friends. The only thing they care about is getting as much money out of you as possible. To this end, they will hide nasty little surprises  in their agreements. It’s complicated and difficult to read, but do it anyway.

3.            Missing payments or just making the minimum. Missing a payment will jack your interest rate right into the stratosphere. Making the minimum payment will, on the average, take you approximately 35 years to pay off your credit card, depending on your balance. Neither option does you any favors and will cost you a lot of money in the long run. One way to potentially get around massive credit card charges is to apply for multiple cards and use a 0% balance transfer credit card to shift the balance from one credit card to another.

4.            Exceeding your credit limit. This can also raise your interest rate and cost you expensive penalties. The credit card companies don’t mind extending you more credit as they cackle all the way to their bank account with your money in their pocket. Also, the closer you get to your maximum limit or exceeding it the worse it is for your credit rating. Keep track of your balance and where you stand.

5.            Purchasing things you don’t need. Oh, the temptation of that little plastic square. Hard to resist, isn’t it? However, the credit card companies are counting on that fact. By not paying your balance off at the end of every billing cycle, you’re putting money in their pocket. They like that. When you review your credit card statement, you will probably be amazed at the purchases you’ve made of things you didn’t plan for and probably don’t need. Impulse purchases just add to your balance and may put you over what you can comfortably handle every month.

Credit cards can be a great asset, but only if you handle them with forethought and responsibility. Take a look at your spending habits and how your credit cards impact your financial life and avoid the 5 biggest mistakes to optimize their benefits and minimize potential problems.

 What are your biggest problems with credit cards?

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image credit; ponyinarope