Saving money by picking up the phone

As I was perusing my Mint account the other day, I noticed that for the first time ever I had incurred a fee from my amazing bank, Charles Schwab. What? Didn’t they read my post about how much I adore their fee-free services?

It turns out that I had deposited a check that bounced. Now, this is the first time this has happened to me and it seems like a pretty unfair situation…I had no idea how much money the check writer had in her account, so how was I supposed to know the check was no good? And then I was charged a fee? I picked up the phone, called my favorite bank (24-7 customer service that employs Americans to work their call centers) and had the fee waived within three minutes. I didn’t even have to ask, they just fixed it for me! Charles Schwab maintains its gold-medal banking status! Hooray!

The lesson for you all is that when companies charge you fees- maybe you accidentally missed a payment, or there is a minimum balance that you didn’t meet- don’t just blindly pay the fees. Pick up the phone and ask that the fees be waived! This is more likely to be successful if you don’t make a habit of whatever it is you were charged for. I have had high success with the phone call technique.

The reason why this works is because banks/credit cards spend an awful lot of money on advertising and recruiting new customers…a few hundred for every new customer. It is in their best interest to keep you happy.

Picking up the phone to call can also help you if you are having trouble making your payments. Calling your credit card company or your student loan manager and explaining that you can’t make the payment and you would like to see if they can help you out for a month or two is significantly better than not making your payments and having it impact your credit. Actually every time I call my student loan manager they ask right off if I can afford my payment and tell me that they can put my payments on hold for a few months if I need them to- I think it is part of the call center script!

Life happens and sometimes that means you incur a fee, but any bank interested in keeping you as their customer should be able to accommodate the occasional hiccup from an otherwise excellent customer. Don’t be shy, don’t be embarrassed- just pick up the phone and ask!

 

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All About Credit

I’m sure you have heard quite a bit about credit. Good credit, bad credit. But what exactly is credit?

Quick answer: “Credit” generally refers to your credit score, which is a number that grades you on how risky it may be to give you a loan.

Having good credit means that you are expected to be a responsible money borrower- you will probably pay your loans back in full and on time. Good credit is often rewarded with the ability to borrow more money and lower interest rates on loans (you REALLY want this, because of compound interest!)

Bad credit means you are considered a higher risk loan customer. It might be harder for you to get a loan, and your interest rates will probably be higher than someone with good credit.

So what is a credit score? A credit score is a number between 300 and 850. Seems crappy that all of your brains and beauty and talent should be simplified into one measly number, but that’s how life works sometimes. Try to get the best number you can!

  • Below 600 is generally considered not so hot. You might have trouble getting a loan and your interest rates will not be great.
  • 600-674 is below average.
  • 675-710 is good.
  • 710 and above is excellent. You should have no trouble getting a loan and you should be able to get highly competitive interest rates.

How do you find your credit report? 

Under law, you can get a free summary of your credit report once a year. There is only one website that is authorized to give you the official credit report that you are legally entitled to. This is https://www.annualcreditreport.com/. They get their data from one of three sources and you can pick one to give you your free report: Equifax, Experian or TransUnion. Any other website has not been Federally approved and are considered scam websites (and you are putting your social security number in there, so be careful!).

Equifax, Experian and Transunion get their data from different sources, so theoretically your credit reports could be different from each company. You can only order from one of these companies each year for free, but you can always pay for reports from the other two companies.

It’s important to get your credit report periodically because it helps you make sure the information is accurate. It also protects you against identity theft.

What is in a credit report?

Information such as: your address, social security number, date of birth (to make sure it is you!).

How much credit you have access to (loans, credit cards, mortgages etc.) and the dates of opening these accounts.

How many loans you have requested (signing up for lots of credit cards can impact you negatively!)

Any outstanding debt or collections you have against you.

If information is not correct on the report, you can follow these instructions for getting it fixed. If this happens to you, I am sorry about the additional paperwork.

Is my credit score on the report?

Drat! No! You usually have to pay more (between $10 and $15) to get your credit score. If you are thinking about taking out a big loan in the future, it is probably worth your money to pay for the credit score so you can factor interest rates into your budget. I get mine every few years just to check in, because there are ways you can improve your credit score if you need to.

What impacts your credit?

Credit Pie
Credit Pie

Payment History

I hope by now you have already automated your bill payments so you know that 35% of your credit score is PERFECT!

If you had some errors in the past, those problems may stay on your report for up to 7 years. Sorry. If you are currently in a dispute over a bill or if you just missed one payment, make sure you call to ask that the late payment isn’t reported. Usually there is a grace period and you won’t get reported if it has only happened once, so don’t freak out. Also sometimes (for whatever reason this happens with medical bills frequently) the first time I get the bill in the mail it is already overdue. Just pay it as soon as you get it and save the envelope with the postage date stamp- they will send you second and third notices before they actually report you for nonpayment.

A benefit to being young: if you make a lot of credit errors when you are 21 (we all made a lot of mistakes when we were 21, don’t worry. Tequila was high on my list…), by the time you are ready to buy a house, you will probably have moved past the seven year mark and your errors will be off of your credit report. It is not as easy for a 35 year old to recover from credit mistakes because a 35 year old generally needs access to more credit than someone in their early 20s.

Amount Owed

The amount owed does not necessarily mean that if you are in debt, you have bad credit. It really refers to a how much you owe compared with how much people would loan you. If you have a credit card with a $15,000 limit and you owe $2,000, you still have $13,000 of credit available. That is good. If you have a credit card with a limit of $5,000 and you owe $2,000, you only have $3,000 left of credit. That isn’t so great.

One way to improve your credit score (immediately! One phone call!) is to ask for a credit increase. This is only appropriate for you to do if you don’t have a ton of credit cards and/or loans out, because asking for too much new credit at once can harm your credit report. (GAH! Can we never win!?!) But occasionally- maybe once a year, or if you get a raise- call up your credit card and ask for a credit increase.

Length of Credit History

This one is pretty obvious- the longer you have been using credit and paying bills on time, the safer a candidate you are. If you are a freshly minted adult, now is a good time to slowly start using credit to build up a good credit history. Additionally, if you have a credit card that you never use but you have had for a long time- don’t close that account. Keep it open (maybe put your Netflix subscription on there and automatically pay it off each month, so you don’t have to think about it).

Also- closing an account does not delete it from your credit history. Sorry, kids.

New Credit

If you have suddenly signed up for four credit cards all in the same day (did you get suckered into those 20% off offers at the mall?!?!! NOOOOOOOOOOO!!!!!) then your credit score will suffer (especially if you don’t have a long credit history). Any sudden request for multiple forms of credit may drop your score.

This is why I NEVER recommend that people sign up for those store credit cards at the mall. Saving 20% on a pair of sweet shoes may save you $20  today, but a lower credit score can impact your mortgage rates when you buy a house, which will cost you THOUSANDS OF DOLLARS. You should have two or three credit cards, but you should not have a different credit card for every store you have ever shopped in. It is better to have a few credit cards with high credit limits and rewards you like.

Types of Credit

Your score also considers the different types of credit you have. Credit cards, installment loans, retail accounts, mortgages, car loans are all different types of loans. It’s normal for young people to only have a credit card and not a mortgage, so don’t go buying a car to try to diversify your loan types. It is more important that you are responsible for the types of credit that you do have, so that when you get older and buy a house you will already have a solid credit score to negotiate with.

There you go: credit demystified. Not as scary as it seems, huh?

What to do when you win the lottery

…or get your tax refund.

Suddenly you have a ton of money! Yeah! But what do you do with it? You are my wise and clever reader, so you know it is not smart financial planning to blow it all on a sports car. But this new money isn’t in your budget, so how do you fit it into your spending and your goals?

First, you celebrate! It’s exciting, you have a little spare cash! Go buy that jacket you have been dying for. Try that new restaurant. Replace your ratty old gym clothes with something that makes you excited to exercise. Make the celebration reasonable- it should be about 10-20% of your new ca$h money. Spending $500 on a new tv when you got a $1000 tax refund might be going overboard, but maybe getting HBO might be a nice splurge.

Next- look at your debts and your savings goals.

  • Can you pay off a credit card with this cash? Won’t that feel awesome, to not pay interest anymore?
  • Is it enough to make yourself an emergency fund? Then you won’t have to worry about unexpected expenses, and the amount you were saving already towards your emergency fund can go to feed the general pot.
  • Can you invest it in your 401k or your Roth IRA? Earn some crazy compound interest on this free money to make even more free money?!!
  • Should you use it to pay off some student loan debt?

If I were you, I would do a mix of the things above with my newfound cash- but you have to be wise about it (consider your interest rates, my friend). If you can pay all of your debt off- do it! But paying just some of your debt off all in one big chunk may not actually be the best choice.

What if the cash you just received is big for you, but it is just a fraction of your overall debt?

Suppose you are the newly graduated Dr. John Doe. Medical school sure was fun, but the average cost of med school is $170,000. Your monthly payments are almost $2,000. Yikes.

But wait! An unknown- yet extremely wealthy- elderly relative just died peacefully in his sleep. He was so proud of his great-great-nephew the doctor that he left Dr. Doe $20,000.

If Dr. Doe immediately puts that $20,000 into the balance of his student loans, he will now owe $150,000. His monthly payments will be a little over $1,700. Is that much better for Dr. Doe, who may be struggling to make his rent while working those crazy shifts as a resident at his new hospital?

Depending on Dr. Doe’s income, it might be better to save the $20,000 and to use it to make the monthly payments. He can make 10 months worth of payments with the $20,000. The total interest he will pay will be slightly more than if he had paid a lump sum off at once- but not by much (an $8,000 difference). I suspect that early in his career, Dr. Doe would value 10 months of being able to pay his bills worry free more than he will value $8,000 after he is an established doctor.

 

Moral of the story: when you suddenly come into some money, think about your overall financial picture. Paying off part of your debts all at once might not make sense if you are struggling to make monthly payments- but if it lowers them enough to ease some of the burden, then go for it! Look at the parts of your budget that are difficult for you (maybe you just can’t quite squeeze enough cash into your emergency fund) and use the newfound money to help with those areas that are challenging.

Congrats on that lottery win, by the way!

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