Life is a series of lessons learned; then, there are those lessons we learn and then forget just as quickly. When it comes to our finances, credit histories and our ability to manage debt, there’s one thing that’s for sure: we can never know too much.
As many of us are gearing up to define our New Year’s resolutions, here are a few money and credit lessons that really should travel into the new year with you.
Don’t Make Decisions When You’re Stressed or Afraid
Most psychologists tell this to their patients who are experiencing difficulties about their lives in general; however, this is also a great financial lesson that bears understanding.
One common mistake is the decision for many tap into their retirement funds to pay credit card debt. It seems like a viable option, but in reality, it’s really not. It’s been a tough year, no doubt, but there are better ways of covering those financial bases without compromising your future. We discussed this earlier this year in another post, but here are the highlights:
While it surely feels like a traditional savings account, the truth is, the dynamics behind a 401(k) are anything but an easily accessed savings account or rainy day fund. There are many red flags associated with taking out a loan against your retirement funds, including the possibility that if you are fired or laid off from your job, you will likely be required to pay that money immediately or face stiff fines and penalties, which of course, is the last thing you need on top of realizing you’ve just lost your source of income. For those who are already trying to juggle several credit cards, this new problem not only doesn’t fix your old ones, but it adds to the already too-heavy burden you’re feeling.
Then, of course, there are the limitations, too. These are sometimes rules your employer has made, but more often, it’s federal compliance laws that are putting these restrictions into place.
Not only are you no longer earning interest on the money you’ve borrowed, but some employers have stipulations in the program that prevent you from making contributions to your retirement until the loan is paid back. That means you’re going to be paying back, but your fund in the meantime is sitting idly, not earning on several levels. And this nonsense about paying yourself interest? Don’t fall into that trap that includes believing it will all balance out in the long run – it never does. Do the math and see for yourself.
Know Your Options
Especially if you’re new to the credit game, you’re only serving your best interests if you truly understand the dynamics behind bank accounts and credit cards. Some common questions you’re likely asking yourself include, How is interest calculated? What happens if I miss a credit card payment? What’s the difference in a secured credit card offer and a prepaid card?
Be sure you know the answers to these questions before applying for a new credit card. There are many resources available for those who are beginning their credit histories. Do yourself a favor and seek them out. Ask your parents, ask your banker, search for credible information online: whatever it is, make sure that foundation is in place before you’ve made a costly mistake.
Tip: Looking for a secured credit card offer? The Applied Bank Visa is an ideal solution for many consumers. There are no set fees and no annual fee associated with this offer. Your APR is fixed at 9.99% and you determine your credit limit based on your matching deposit. Keep in mind, though, there is a $200 minimum to open the account. It too reports to all three credit bureaus, which allows you to build a stronger history – which, of course, equates to better offers and lower interest rates. Offers like these are designed for the new consumer who’s just getting started with his credit history or those who are looking to rebuild.
Finally, keep in mind that ignorance is not always bliss. Understand your responsibilities and your rights as a borrower. Never enter into a credit card contract (or any other contract, for that matter) without carefully considering the terms and conditions associated with that offer.
Sticking to your resolutions is easy – once you understand what you’re up against. A bit of legwork is your first best bet for a financially successful 2012.