Are Christmas Club Accounts a Good Idea?

By | Ask a Credit Expert, Featured, Revolving Debt, Save Money

A Christmas club savings account is a special account you can set up to help fund Christmas gift purchases. Many employers offer these accounts, making it easy to have the money automatically withdrawn from your paycheck, while many banks have stopped offering Christmas club accounts. It is possible that the lack of profitability in offering such an option to consumers has come into play. Why offer a way for consumers to save money to fund Christmas when you really want them to use their credit cards?

Fortunately, credit unions still believe in the Christmas club account – and so do we, especially if it means you’ll set aside cash to pay for Christmas instead of charging everything you buy.

While Christmas club accounts will not earn you a lot of interest, they do provide the discipline that most of us are lacking, because you typically cannot withdraw the money from the account before the holiday season begins. Whether you set aside $5 a week or $100 a month, putting money into a Christmas club account might be a good idea. If you have existing credit card debt, however, you’ll be further ahead in the long run if you take the money you would have set aside in a Christmas club account and pay it toward the balances on your credit cards instead.

Christmas club accounts earn little, if any, interest, so if you are paying 14 to 28 percent interest on your credit card balances, you save a lot more by paying down that debt. The question is: Can you pay down your credit card debt and still have the discipline to avoid using credit cards to fund your holiday spending?

If discipline is an issue (and don’t feel bad, it is for most of us during the holiday season!), then opening a Christmas club account might be a New Year’s Resolution you want to make. But if you choose to pay off your credit debt and can keep from maxing out your credit cards again, you may be giving yourself the best Christmas gift of all: better credit scores and less of your monthly income earmarked for making credit card payments

If you are looking for the best way to pay off your credit card debt and give yourself the gift of more available income each month, check out Ovation’s credit card payoff tools. We have tools to help you achieve your goals, whether you need to get rid of high-balance cards, cards with high interest rates, or a combination of the two.

Federal Reserve’s Role with Your Interest Rates

By | Credit Cards, Featured, Revolving Debt

Although it may seem as if creditors are cruelly manipulating your interest rates, they are not entirely responsible. The Federal Reserve plays a major role in determining how much you pay in interest, and there are several factors that are taken into consideration. Keeping a balance is critical, because the decisions they make concerning interest directly affects your pocket book.

The Federal Reserve influences the direction of interest rates in two ways. First, they can either raise or lower the discount rate, which is the interest rate banks are charged for borrowing from the Federal Reserve. This means that when banks are charged more, you get charged more as well. The discount rate is typically higher than others simply because the government would rather have banks borrowing from each other.

Second, the Federal Reserve can directly influence the direction of the federal funds rate, which is the rate at which banks borrow from each other. Due to the fact that banks have to comply with certain regulations, the consumer often catches the backlash of incurred expenses. However, this can also benefit the consumer. Banks have to meet their regulatory reserve requirement, providing an opportunity for those banks with a surplus to maximize their return. The more money banks have available, the more they are willing to loan out.

Overall, the Federal Reserve can only go in two directions. When interest rates are lowered it typically spurs economic development, which makes it less expensive for banks to lend money and allows more money to flow back into the market. However, when the Federal Reserve raises interest rates, spending slows drastically due to the consequent rise in prices.

Generally, what this information means for the consumer is that acquiring loans and other debt is less detrimental when interest rates are low, compared to when interest rates are high. Low interest rates promote spending, which is exactly the boost our economy needs in light of the recession.

Rumor has it that the Federal Reserve has pledged not to raise interest rates until approximately 2015. Although the goal is to increase household spending, this is not an excuse to start flinging plastic at the cash register. This is the time to get your finances in order, taking advantage of the low interest rates that limit the amount of extra expenses you incur. With the Federal Reserve limiting interest rates, smart spending will keep you out of the clutches of debt.

Back to College: Resist Maxing Out the Credit Card

By | Credit Cards, Credit Scores, Featured, Revolving Debt, Your Credit

It’s that time again: summer is drawing to a close, and students are gearing up for a return to college. At the beginning of each semester, students often have money from summer jobs, left over funds from financial aid, and other sources of cash (i.e., Mom and Dad).

Unfortunately, as the semester progresses, funds dwindle at lightning speed. Students strapped for cash are targeted with unrelenting credit card offers that are often too tempting to resist. Once you are buried in student loans, what’s a little bit of credit card debt, right?

The Credit Card Act of 2009 prohibits credit card companies from advertising on college campuses. Enacted to protect the susceptible wallets of college students, credit card companies have found a loophole in the form of the U.S. postal service. With promises of rewards, 0% APR for the first several months, and other incentives, these offers seem like a dream come true to those who have exhausted their money supply (or are truly desperate for a pizza). What students often fail to realize is how easy it can be to become overwhelmed by debt.

Maintaining good credit takes a lot of discipline, but college campuses are not arenas for frugal living. Rather than treat it as a tool for building credit, students often make unnecessary purchases, with the idea that they will be able to pay it off “eventually.” A few late night snacks here, a college sweatshirt there, and that new electronic device that just couldn’t wait all lead to a maxed-out credit card.

To avoid overspending, college students should understand the basic responsibilities of having a credit card. First of all, purchases should not be made if you can’t pay them off the same month. A credit card is not “free money,” and with the added interest, items will cost much more than they originally would have if you had paid cash. You should be aware of your billing cycle, knowing when the payment is due each month and how to make the payments (online, through the mail, automatic withdrawal from your checking account). Most importantly, moderation is the key to surviving credit card debt.

Although recent legislation prohibits those consumers under 21 years of age from gaining a credit card without substantial income, those without the proper resources are still finding credit cards in their hands. Student credit cards are designed to be easy for students to get their hands on, and with offers soaring in through the mail, it is hard not to accept at least one. It is important that college students are educated not only on how to use a credit card but the dangers of irresponsible use as well. Without the right spending strategies, a credit card can easily destroy a student’s credit long before graduation day.

Choosing the Best Credit Card

By | Ask a Credit Expert, Credit Cards, Featured

We spend a lot of time talking about paying off credit cards and avoiding credit debt like it was some kind of plague. That is because a large majority of consumers use credit in ways that end up costing them a lot of money, put them in a position of not being able to pay their bills each month, or otherwise having credit cards control them. The truth is: if you’re smart with your money, a credit card can be a handy tool. So how do you choose the best credit card?

There are a few simple things you should always avoid when looking for the best credit card:

  • Never apply for a credit card that requires an annual fee. It is a costly addition to the credit that you simply do not need.
  • Do not apply for a credit card just because you are pre-approved and get a fancy letter in the mail letting you know you’ve hit it big.
  • Do not apply for a credit card only because of points, cash back offers ,or miles you can earn by using the credit card.

The most important factor in choosing a credit card is the interest rate. The lower the interest rate, the less it will cost you to use the credit. There are a few cards that offer interest rates lower than 10 percent, but those are typically reserved for people with the very best credit scores. The rest of us are usually shooting for an interest rate of 12-14 percent.

Once you have narrowed your search to those cards that offer you the lowest interest rate, you can then compare the cards to determine which offers the right incentives for you. A cash back card that only gives cash back on gas and groceries might be perfect for a family of five who can make the purchases on the card and pay them off each month, but that would not be ideal for the single business person who commutes to work and flies everywhere. That person would benefit more from a credit card that offered miles or hotel points for each use.

Ultimately, the only way a credit card can be useful is when the consumer can maintain control over the credit card and not let the credit card take control. To manage your credit debt effectively, be sure to investigate the many tools we offer to help.


How to Not Get Out Of Debt

By | Ask a Credit Expert, Featured, Personal Finance

Paying bills is not something you look forward to. Signing away your hard-earned money can be downright painful, but it has to be done. You squeak by with the minimum payment each month, just enough to prevent the creditors from hounding you at your doorstep.

The good thing is, as long as you continue to make faithful payments, the credit card companies won’t say a word. The bad thing is, with a minimum payment only, you are likely to be in their treacherous grasp for several years to come. Of course the creditors aren’t going to complain. They have you right where they want you.

The minimum payment is assurance for the creditors that you have to at least give them something each month. Without it, we would always find an excuse to pay them later. Later might become never for some people, which is simply not good for business. However, credit card companies aren’t doing you any favors by accepting a low amount. A minimum payment only is our least favorite tool, and it is most damaging to your credit.

When purchasing an item such as a car, lenders will tell you that with a specific payment each month, it will take you a certain amount of time to pay it off. Creditors are not nearly as helpful. Certainly, they give you a minimum payment, but it is not related to the time it will take you to pay off your debt. In reality, it isn’t related to anything other than the fact that you owe them money. This may come as a surprise, but creditors are not in the position of helping you pay off what you owe. A minimum monthly requirement is just standard procedure.

The minimum payment may save you money month to month, but it will only hurt you in the long run. If you only make the minimum payment every month, you will accrue enough interest over time to keep you in debt. The longer you owe, the higher your interest rate will be, and the happier the credit card companies are. You can try to fool yourself into thinking that you are making a dent by making a minimum payment, but all you are doing is extending your prison sentence.

To avoid eternal debt, the minimum payment should be an indication of what not to pay. Minimum payments should be reserved for emergencies, when you are truly strapped for cash, not as a simple convenience. There are several much more helpful Ovation Tools that will aid you in repairing your credit. Choose one that works for you, and pay off your debt in a reasonable amount of time.

Maximize Your Paycheck

By | Ask a Credit Expert, Budgeting, Featured, Personal Finance

You work hard for your money, and every payday should feel rewarding. But if you feel more disappointed than celebratory because your final deposit is dwindled down by deductions and taxes, you may be missing some opportunities to maximize your paycheck. The net amount you receive every payday is not completely out of your control; there are a couple of things you can do to increase the amount of money you take home.

The first things you should investigate are cafeteria plans. Despite the name, cafeteria plans have nothing to do with cheap meals at work. This is a term used to describe medical spending or flex benefit plans. These plans are offered by some employers in addition to basic employee benefits. Cafeteria plans can be quite lucrative for employees, because the plans allow them to make contributions – using money from their pre-tax income – before the IRS takes their share. Essentially, employees making use of cafeteria plans receive an instant tax refund on money spent for qualified medical, dental and prescription expenses.

Qualified expenses within a cafeteria plan may include health care costs (those expenses not covered by basic health insurance), dependent care assistance, transportation or commuting costs, group term life insurance and possibly additional vacation days. These plans are authorized by the IRS and are a great way to maximize both your paycheck and your benefits coverage, because the plans lower your amount of taxable income, therefore lowering the amount of taxes withheld.

Similar to a cafeteria plan, some employers offer a Flexible Spending Arrangement or Flexible Spending Account (FSA). These plans also allow the employee to set aside payroll-exempt earnings, transferring them into an account designated for qualified expenses. FSAs are more restricted in terms of how that money may be used, and FSAs are generally limited to medical expenses. One advantage of the FSA is that these accounts may be accessible via a debit card, enabling employees to pay for medical costs directly from their FSA.

If you are not currently enrolled in plans such as these, talk with your supervisor or HR department representative to see if cafeteria plans or FSAs are available to you.

Another avenue to explore for maximizing your take-home pay is a retirement plan – such as a 401(k) – in which contributions are made to qualified investments before taxes are deducted. Even though your contributions are not taxed, it is important to remember that any amounts withdrawn from a 401(k) are taxed. Also, many employers offer matching funds that employees invest in their retirement plans, thus helping employees build their retirement nest even more quickly. If your employer does not offer a 401(k), a similar benefit may be obtained by investing in an Individual Retirement Account (IRA).

If you have already begun saving for your retirement but still need to increase your income, you may choose to reduce your 401(k) or retirement contributions. While this may seem drastic and unwise, it may be a successful temporary solution for those who need a short-term infusion of cash to get caught up on bills or debt. However, this should be done with extreme caution and with a commitment to resume contributions as soon as possible.

Even the smallest increases in your net income can result in big differences to your financial health, and if you have high-interest credit card debt to pay off, you’ll earn more in the long run by using some of those funds to pay down that debt.

You work hard for your money, so get more of what you earn, and make that money work for you.


When Your Marriage Ends, Your Credit Concerns Are Just Beginning

By | Ask a Credit Expert, Credit Repair, Featured, Personal Finance

It’s over. The wine has turned to vinegar; the roses are molding in the compost bin. In the words of would-be social scientist and observer of the human condition B.B. King, “The thrill is gone.”

Your marriage is coming to an end.

While you may feel like barricading yourself in the snack aisle of your local convenience store for six months and letting the world go by, right now is actually the time when you need to be especially hands-on and involved, especially when it comes to your credit.

Unless you take appropriate steps, your ex’s bad credit may also become yours, tanking your credit rating even though you’re out of each other’s life. What’s more, even if your divorce decree states that certain joint debts are your ex’s responsibility, a creditor will come at both of you with equal gusto.

To avoid the two-headed monster of bad credit after a divorce, here are some steps you can take:

Refinance or pay off all joint debts. This is really the crux of the biscuit. The point is, any joint accounts need to be closed somehow so neither party is affected by the other’s mishandling of payments. Ideally, once you’ve both determined who is responsible for what debts, any accounts held jointly can be refinanced in the name of the person responsible.

But what if one of you can’t qualify for a refinanced loan — say, a car loan or mortgage? In that case, you might consider simply selling the property in question. True, this might introduce new challenges, but at least you’d be protecting your credit, plus you may be able to use the proceeds to pay off other joint debts.

If you’re still finalizing your divorce, it would also be wise to specify in your divorce papers that all joint debts must be paid off by a certain date, so appropriate legal action can be taken in the case of noncompliance. Also, if you’re especially concerned about your ex’s follow-through abilities, take on the payoff chores yourself, or require proof of payment.

Remove yourself from other accounts. If you are an authorized user on any of your ex’s accounts, ask the creditor to remove your name from them. Sometimes only the account holder can do this, in which case you may need your ex to contact the creditor.

Monitor and maintain your credit report. This should be your post-divorce mantra for at least a year. You can get a free credit report every 12 months. Look for any faulty information — addresses or accounts of your ex’s, for instance — and dispute it with the bureaus until it’s fixed. If your ex makes payments on any joint accounts, make sure they’re being paid on time. And be vigilant about new accounts — in a worst-case scenario, an ex who can’t qualify alone on a loan may attempt to use your information in order to obtain credit.

While dealing with banks and creditors may be the last thing you want to do right now, the payoff is undeniable. File it under “an ounce of prevention.” After all, it’s time to get on with your life. Protecting your creditworthiness will allow you to do just that.

Start Saving for Christmas Now

By | Debt, Featured, Revolving Debt, Save Money

People may cringe at the idea of Christmas this early in the year, but in all reality it is the time to put a lock on that checkbook in preparation for the upcoming holiday season. In this economy, Christmas shopping often sneaks up, and being tied down with even more debt is sure to turn you into a first class Ebenezer Scrooge.

By September and October, many people are trying to clean up their debt, either to tie up loose ends by the end of the year or in preparation for the holidays. Whatever the motivation is, ridding yourself of debt is always a good idea. However, many people will open a credit card for Christmas – only to find themselves greeting the next year in an even bigger hole. Better cross your fingers that someone buys you a shovel!

There are several things that you can do to avoid debt during the holiday season. If there is a must-have item that you absolutely cannot pay for with cash, consider layaway. Many stores are reinstating the layaway policy due to the economy. Layaways allow you to make weekly or bi-weekly payments rather than paying the entire price upfront, without the hefty interest rates. Don’t treat layaway as a new form of credit card, though.

The “gotta have it right now” mentality is not a healthy one for the wallet, no matter how the payments are structured.

For those who prefer to save their money ahead of time, many banks have Christmas savings accounts, in which a small sum of money is drawn out of each paycheck and made unavailable until closer to the Christmas season. Savings accounts can work similarly, although you have to discipline yourself not to spend it and not rely on the bank to keep it out of your reach. You can even partition your direct deposit so that part of each check is deposited directly into savings.

Another easy way to save money around the holiday season is to buy gifts here and there throughout the year, rather than having to come up with a large sum of money at a single time. Christmas in July is the newest marketing effort most retailers are using, with many stores offering sales and discounts for those shopping early. Items that do not expire, such as gift cards, can be bought at any time and will hold until Christmas without a problem.

The holiday season does not have to be stressful. By purchasing gifts early, buying on layaway, and using a Christmas savings account, you can avoid high interest payments that bury you in debt throughout the next year.

Slay the Debt Dragon…or Better Yet, Make it Your Minion

By | Debt, Featured, Personal Finance, Revolving Debt, Save Money

We talk a lot about paying off debt and getting out from under large interest payments. Indeed, financial health and a good credit score make managing the financial surprises in life so much easier. It is important to remember though that debt isn’t the enemy – it is a tool.

Judicious use of debt is what allows us to live in a house where we can paint our walls and plant a garden instead of renting an apartment with loud neighbors and a nosy landlord. Utilizing a credit card for regular expenses you are going to make anyway and then paying off that card every month can actually improve a credit score (aka lower interest rates in the future) and rack up some frequent flier miles for a much-needed family vacation.

It is in using our available credit, being mindful of that magical 50% debt to limit ratio, and making timely and consistent payments that we get to fully utilize debt as a tool for bettering our lives. Having this tool available to us will help us ultimately realize our dreams of traveling through Africa, driving our own speedboat, or my favorite – Not ever having to pay an unreasonable bank fee again.

The question is: How do I get there? How do I turn debt around from evil dragon breathing down my neck to almighty sword available at my command?

The answer is:  It is hard work, it can take a long time, and there can be a frustrating feeling of sacrifice as we buy that used Subaru instead of a new Lexus. But consider this – Each and every one of those financially sound decisions is a building block toward financial security. Each time we opt to forego a third black sweater in the closet and instead make an extra $50 payment on a credit card, we place another solid block in the financial foundation of our life. When we make do with the computer we have for one more year and put a little extra away in savings, we secure a safety net for ourselves against the unknown.

These aren’t sacrifices – these are the stones we move to create a financial sanctuary where we are free to do as we like with our money. The three little pigs is more than a quaint children’s story, it is an allegory for how we can secure our future with some effort and frugal choices today.

Once we are in control of our finances, we have a full tool belt – sword and pet dragon included – for managing our future. Banks and credit cards will rally for our business. Car dealerships will compete for our attention with low interest rates and free extras. We will get to make our own decisions once again, and financial freedom is the ultimate reward.

4 Great Tips for Tackling Christmas Debt

By | Budgeting, Credit Cards, Debt, Featured, Payment, Personal Finance, Your Credit

When it comes to Christmas, people often throw their budgets out the window. Credit card companies sing carols in the halls as the debt piles up and their bonuses get bigger. People just assume they can take care of it next month or decide they’ll figure it out after the holidays because Uncle Fred really needs that food dehydrator.

Once the presents are unwrapped and reality sets in, you realize that your credit cards are bulging with debt and you need to make some decisions on how to get it paid off before next Christmas.

Pay Off as Much as Possible Right Away

Odds are most of the Christmas shopping was done recently, so the interest hasn’t been applied to it yet. Try and take care of as much of the debt as possible before that interest hits. It doesn’t matter if you make a payment every week or so, as long as you are paying down that debt. You should start with the highest interest rate cards first and work your way down. Do not pay only the minimums as this can take literally years to pay off the debt.

Make a Plan

Call each of your credit card companies and find out exactly who much you owe on each card, what their monthly interest rates are and when payments are due. If you have any credit cards that may go over the limit because of interest, then take care of them first. Make a plan to pay down and eliminate the debt each month. The last thing anyone wants is additional over the limit fees. Also, make sure you pay your bills on time and save yourself late fees.

Consolidate the Credit Debt

If you have a home equity line of credit or can get a home equity loan, then you can completely pay off the credit card companies, and instead, make a single loan payment. The interest rate on the loan is likely to be much less than the credit cards and you don’t have to worry about juggling several different payments. If you do chose this option, then try to stay away from using the credit cards until the loan is paid off. You don’t want a large monthly loan payment and credit card payments as well.

Work With A Credit Counselor or Repair Expert

If the debt is overwhelming and you don’t feel like you can take on the debt yourself, then you can work with a credit counseling or credit repair service. Credit repair services like Ovation specialize in helping people with large debts make the right decisions and will even work with credit card companies to help save on interest rates and monthly payments.

Christmas is a time of great joy and celebration, but for many it’s also a time for large debt. Don’t get stuck in the quagmire; follow these tips for getting your life back on track after the holiday season.

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