Tuesday, February 28, 2006

Car Lease Or Fleece Part II

In the last installment I discussed the pros to leasing a car. In this issue I will discuss the cons. Are you thinking that there can't possibly be a downside to leasing a car? Well I'm about to show you some of them.

1. You pay for excessive wear and tear on the car. What defines excessive wear? Anything for a scratch, to a ding or a big dent in the side door. You pay for the repairs to the car at lease end.
2. The car must come back to the lessor in its original condition. If not you pay to have it restored. This is not the same as #1. Suppose you want a CD player with a detachable face-plate, if you add this to the car you must remove it when you turn the car in and replace it with the original equipment.
3. The lessor owns the car, as the lessee you are just renting it until the end of your contract.
4. The lessee still has to pay for general maintenance (oil changes, etc.), any tickets incurred and insurance.
5. You usually pay a higher amount for insurance for a leased vehicle.
6. You pay any and all excessive mileage fees. An example of this is a 2006 Chevy Cobalt 3-year lease with 36000 miles with .25¢ per extra mile. Drive 40000 miles andthat'ss 4000 miles over. A hefty extra $1000 at lease end.

Bottom line is leasing is right for some people and not for others. Take all the pros and cons, apply them to your individual situation and make the right decision for you.

Some Common Lease Terms:
Closed-end Lease - with this type of lease, at the end of the contract you can walk away from the car and owe nothing more except for wear and tear and excessmileagee.
Disposition Fee - fees accessed at lease end for selling expenses or disposing of the car.
Gap Insurance - The difference between what you owe and what the car is worth in the event that it is stolen or totaled in an accident. This insurance pays the balance after insurance pays off.
Lessee - you, the person leasing the vehicle.
Lessor - the financial institution leasing the vehicle to you. Open-end Lease - at the end of the lease, if the cars appraised value is less than the amount stated in the contract, you the lessee must pay the difference. Generally not to your advantage.
Residual Value - Resale value of the car at lease end, as determined by the lessor.

Car Lease Or Fleece Part I

Is leasing a car the right option for you? Well, it depends on a lot of factors. Would you like a new car every two to four years? How about a lower payment? In the next two installments I will go over the pros and cons of leasing a vehicle so you can see if this is right for you.

1. You can drive a new car every two to four years. This is the most common reason people pick leases. The idea of a new shiny vehicle is a powerful inducement.
2. Lower monthly payments because you only pay for the amount time you use the car.
3. Since the monthly payments are lower, on average one-third less than buying a new car, you can get more car for your money. Goodbye Chevy Cavalier, hello Baby Beemer. It's estimated that between 45% to 55% of new BMW's on the road are leased.
4. Most leases require low or no down payment.
5. If you have a "closed-end lease", at lease end, you can pay any charges due, turn in the car and walk away.
6. Your security deposit is actually the last payment. Just like when you rent an apartment, the company want to ensure that you will take care of their property and return it when the time comes.

There are plenty of good reasons to lease. However, in the next installment I will discuss the downside of leasing.

Sunday, February 26, 2006

Ways To Improve Your Credit Score

There is no quick fix to helping you fix your credit score. Some companies will charge you mega bucks to offer a quick solution. But in the end, all you have is a worthless booklet and a smaller bank balance. Here are some tips from the myFICO website on improving your credit score.

Payment History Tips:
Pay your bills on time. Delinquent payments and collections can have a major negative impact on your score.
If you have missed payments, get current and stay current. The longer you pay your bills on time, the better your score.
Be aware that paying off a collection account will not remove it from your credit report. It will stay on your report for seven years.
If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor. This won't improve your score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time.

Amounts Owed Tips:
Keep balances low on credit cards and other revolving credit. High outstanding debt can affect a score.
Pay off debt rather than moving it around. The most effective way to improve your score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score.
Don't close unused credit cards as a short-term strategy to raise your score.
Don't open a number of new credit cards that you don't need, just to increase your available credit. This approach could backfire and actually lower score.

Length of Credit History Tips:
If you have been managing credit for a short time, don't open a lot of new accounts too rapidly. New accounts will lower your average account age, which will have a larger effect on your score if you don't have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.

New Credit Tips:
Do your rate shopping for a given loan within a focused period of time. FICO® scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.
Re-establish your credit history if you have had problems. Opening new accounts responsibly and paying them off on time will raise your score in the long term.
Note that it's OK to request and check your own credit report. This won't affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.

Types of Credit Use Tips:
Apply for and open new credit accounts only as needed. Don't open accounts just to have a better credit mix - it probably won't raise your score.
Have credit cards - but manage them responsibly. In general, having credit cards and installment loans (and paying timely payments) will raise your score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
Note that closing an account doesn't make it go away. A closed account will still show up on your credit report, and may be considered by the score.

Now that we know what a FICO score is, what it is not, how it's calculated and how to improve it, let's all strive to be at least the median of 723 or higher!

What A FICO Score Is Not

FICO scores use a lot of information to determine your score. Some information that they do not use includes:

1. Personal information such as race, color, national origin, sex, or marital status.
2. Whether you receive public assistance.
3. Your age.
4. Where you live.
5. Your salary, occupation, title, employer, date employed or employment history. The lender may use is information however. Especially if you have a fair score (620-659), but you have a stable job history.
6. Whether you have participated in consumer credit counseling.
7. Any information not contained on your credit report.

In the next issue I will discuss ways to improve your credit score.

What Is A FICO Score?

Lenders use your FICO score to determine your credit risk. The higher your score, the less of a risk you pose. To see the chart of FICO score see my post What's Your Score?.

So how is your score determined. The percentage that Fair Isaac uses is:
35% payment history
30% amounts owed
15% length of credit history
10% types of credit used
10% new credit

The percentages break down like this:

Payment History - 35%
Account payment information on specific types of accounts (credit cards, retail accounts, installment loans, finance company accounts, mortgage, etc.)
Presence of adverse public records (bankruptcy, judgments, suits, liens, wage attachments, etc.), collection items, and/or delinquency (past due items)
Severity of delinquency (how long past due)
Amount past due on delinquent accounts or collection items
Time since (recency of) past due items (delinquency), adverse public records (if any), or collection items (if any)
Number of past due items on file
Number of accounts paid as agreed

Amounts Owed - 30%
Amount owing on accounts
Amount owing on specific types of accounts
Lack of a specific type of balance, in some cases
Number of accounts with balances
Proportion of credit lines used (proportion of balances to total credit limits on certain types of revolving accounts)
Proportion of installment loan amounts still owing (proportion of balance to original loan amount on certain types of installment loans)

Length of Credit History - 15$
Time since accounts opened
Time since accounts opened, by specific type of account
Time since account activity

New Credit - 10%
Number of recently opened accounts, and proportion of accounts that are recently opened, by type of account
Number of recent credit inquiries
Time since recent account opening(s), by type of account
Time since credit inquiry(s)
Re-establishment of positive credit history following past payment problems

Types of Credit Used - 10%
Number of (presence, prevalence, and recent information on) various types of accounts (credit cards, retail accounts, installment loans, mortgage, consumer finance accounts, etc.)

Now that we know what your credit score is, in the next installment I will tell you what it is not.

What's Your Score?

Credit score that is. The fact is, the higher your credit score the lower the interest rates you qualify for.

Scores range from 350-850 using the traditional FICO method. FICO being the Fair Isaac Corporation which is the score most often used by lenders.

Scores of:
750-850 Excellent
660-749 Good
659-620 Fair
350-619 Poor

The median FICO score in this country is 723 which is good. How can a few points affect what rates you qualify for. An example of mortgage rates from myFICO are:

For a $216,000 30-year, fixed rate mortgage:
If your FICO® score is: Your interest rate is: ..And your monthly payment is:

760 - 850 5.92% $1,284
700 - 759 6.14% $1,314
680 - 699 6.32% $1,339
660 - 679 6.53% $1,370
640 - 659 6.96% $1,431
620 - 639 7.51% $1,511

The rates are valid as of 2/24/2006 and are updated daily. The are also national averages, you local rates may vary.

The difference between the median score or 723 and a fair score of 620 is $197 per month. I'm sure we can all use an extra $197 in our pocket every month.

Be sure to come back for my follow up posts on how your credit score is determined, what your score is and is not, and how to increase you credit score.

Saturday, February 25, 2006

Karyn's Been Saved

Anyone remember the girl who set up a website a few years ago called Save Karyn? The premise of her site was as follows... She was in credit card debt over $20,000 from buying life's necessities. You know, things like a new laptop, clothes, shoes and expensive sunglasses. All the things a fashionista in NYC needs. So she created her website and asked everyone reading it to send her $1.00 to help get her out of debt. And wouldn't you know it, people did it. There was outrage over her site. People wondered how anyone could be so bold and brazen. Her link was passed around like hotcakes. Usually with the accompanying question, "can you believe this?".

Apparently most people did and sent her money. Over the course of 20 weeks she was able to pay her debt completely off. To her credit, she did auction off some of her goodies on eBay. So what's Karyn up to now?

Well she has a new book coming out in July called 20 Times A Lady. The premise of the book is pretty good. A woman wakes up one morning and realizes that she has hit the maximum number of men she is willing to sleep with in her lifetime, in this case 20. Since he is not the one, she has to go back to her past men and make it work with one of them. There are also talks of a movie deal.

Pretty bold moves coming from Karyn, but it worked and I say good for you. Check out Karyn's blog for more on what's going on with her.

Till next time...

Spare Change

Do you have a container of change just sitting around? According to Coinstar, there is more than $10.5 billion in loose change is sitting idle in American households. Over 60% of Americans own piggy banks or some other means of hoarding change (jars, bottles, cookie tins, buckets, etc.).

I own several piggy banks. Among them: a blue plastic pig, two small porcelain pigs, and two glass jars. One of the porcelain pigs is for foreign change only. If I come home from vacation with a coin or two, I drop it in the bank. Or if I get a Canadian coin or two in change it goes in. This happens frequently and at the rate I'm going I'll be able to fund a Canadian vacation in the next year or two.

So what do you do with your change? Hoard it, cash it in, use it to splurge on something expensive. If you roll your change, make sure to contact your bank to find out their procedures before turning the change in. One of my banks just requires the coins to be wrapped. Another wants my account number on the roll - I don't turn coins in at this bank!

You can turn your change in at a Coinstar machine. Be aware that they charge a fee for this service. The processing fees are as follows - 8.9% in the U.S., 9.8% in Canada, and a 7.9% fee in the U.K. However, if you turn the coins into a gift card you can skip the fee. Starbucks, Amazon.COM, Borders, Linen N' Things, Pier 1 Imports, and Hollywood Video participate in this program. Check out the website for more info.

If your lucky enough to have a bank that provides this service, go with it. I know Commerce has their own machine in the lobby that you dump coins in. It then gives you a receipt that you take to the teller. Deposit it or take the cash. But the best part about it is, it's free!

So continue to save that change and let me know what you do with yours.

Till next time...

Tax Time!

Does the thought of doing your taxes strike fear in your heart? Take heed, there is plenty of free advice out there. Just go to the IRS website for help.

You can also go to Free File Home to find a website to file your taxes free. Some of the site have restrictions for gross income or filing status, so be sure to read each one to find the site that will work best for you. Make sure you use the link from the IRS site otherwise you may incur a fee. Also most of those free sites don't include your state taxes. Don't pay them a fee, usually about $14.95. Go to your states' website and file free. For example I would go to pa.direct.file.

If you are plain scared to death there are people that will do your taxes for you. Check in you local phone book under "tax preparer". You can choose from large companies like H&R Block or local CPA's. Just be sure to make an appointment early (everyone usually waits until a week before the deadline when these guys are under the gun) and bring all of your supporting documentation. Things like: W2's, interest, dividend and mortgage interest statements, etc. You can also have volunteers do your taxes. Check out VITA for more information or call 1-800-829-1040 to find the site closest to you.

Remember the filing deadline this year is Monday April 17th. (The 15th is a Saturday so we get a couple of extra days)

Good Luck!

Friday, February 24, 2006

What constitutes an emergency?

So you're surfing Priceline.com or your favorite discount travel site and you see the deal of a lifetime to paradise. Ah, the tropical drinks, sandy white beaches and all the umbrella drinks your heart desires. You want this trip, you need this trip. But you haven't set aside any vacation money at all. But there is that emergency fund just sitting there gathering its piddly interest. You could swipe it and put it back later. Your job is stressing you out, surely this qualifies as an emergency right? Wrong. Don't touch that emergency fund.

What an emergency fund is:
1. There for an emergency. Flat tires, appliances that have died and the like.
2. Three months of your salary in case of job loss. You said your job was stressing you out. This is money to tide you over when you get that new job. Don't forget, these jobs may be on different pay schedules and you might skip a check or two.
3. Co-pays for sudden illnesses. Or a new pair of glasses because the old ones broke.

What an emergency fund is not:
1. Vacation money. You should set up a new fund solely for this purpose.
2. A new pair of Gucci glasses because they're all the rage.
3. A big screen tv because the big game is coming up.

In short leave that money there for what its intended for, to tide you over in case of an emergency. If you want to take a vacation or go on a spending spree, open up a new sub-savings account. This way, what ever is in this account is fair game and can be used for whatever you heart desires. And hopefully, with any luck, you won't have to ever touch your emergency savings.

Till next time...

Emergency Fund

The rule of thumb in money management is to have at least three months' salary available in case of emergency. You know, an emergency like the furnace going out in winter, a flat tire or having an appliance suddenly die. The fact is at one time or another, we'll all have some kind of emergency that will call for us to tap our savings. "But what savings?" most of you are asking. That's what this edition is all about. But three months worth of salary? For most people this seems like a daunting task, especially if you have very little already in savings. So how do you get it?

Well first, you have to save it. One of the oldest tricks in personal-finance is to pay yourself first. This is a painfree way to save. The easiest way to achieve this is to have a set amount automatically deducted from your check each pay period. Get your last paystub and look at the net pay. Either take a percentage of this or a set dollar amount and have it transferred into your savings each pay period.

I know some of you are saying "Well yeah, but there's nothing left to save". That's why is so important to pay yourself first. Even if it's only $5 or $10 dollars per pay period. Have you ever heard the expression "Making mountains out of molehills"? Well, it doesn't have to only have a negative connotation. Turn those molehills into mountains of cash.

If cash is tight or you're living paycheck to paycheck this seems impossible. But it is possible. Each pay slip $1 or $2 dollars to the side. Do this faithfully every pay. Then, when you get your next raise increase that amount if only by another couple of bucks. Over time your reserve will be bursting at the seams.

I know it seems challenging but you can do it. Start of small if you have to, but do it! Don't be discouraged when by the small amounts that you may start with. Do this each pay, and before long those amounts won't be small anymore!

Just Save!

Till next time...

Thursday, February 23, 2006

Pay Down That Debt

The U.S. savings rate is at an all time low while debt is steadily rising. Most people will be receiving an income tax refund within the next few months. My advice use at least part of this money to pay down debt.

I know you want to use the money for your summer beach vacation, or that new pair of Manolo Blahnik slingbacks, or a flat screen plasma. The list goes on, but unfortunately sometimes so does the debt. So lets strike a compromise. Use part of the money for debt repayment. No it doesn't have to be half. That would be optimal, but I know for most people its highly unlikely. Where should you put that money? Let's discuss.

The first debt you should try to repay is high-interest credit card bills. With the rules changing and minimum payments doubling this is the best way to go. When you pay your credit card bill every month, the majority of your payment goes to interest. So it only makes sense to pay this off first.

If you have no credit card debt, then I would suggest you look at personal loans and/or car loans next since these types of loans generally have a higher interest rate. Since mortgage interest is deductible for some, and student loans are deductible for everyone, I would save these for last.

Point is, take some of that money and pay off that debt!

Till next time...


Welcome to my world of money madness. My job is to help you navigate the scary world of personal finances. I will help start you in the right direction as far as personal finances go.

Most of my friends come to me with their money questions. Now I'm no Suze Orman, but I do my fair share of research and can answer most of their questions. That's when I decided to start my own finance blog. I realized that there were tons of people out there who thought personal finances where scary. They start reading the financial section of newspapers and their eyes start to glaze over. People want information broken down into an easy to understand format. That's where I come in.

So sit back, grab a cup of Joe and enjoy. Always remember, money is a powerful tool. Use it wisely.