Pay Off That Credit Card Debt!
Newer readers may note some serious credit card debt going on above. In short, I’m borrowing money for free and keeping it in safe investments while earning me interest. This month I put up a detailed series of posts on this 0% game. So please don’t be alarmed.
Thoughts
August was a strong month, with the stock market bouncing up a bit for whatever reason. I love watching the “experts” arguing both sides with convincing arguments. My brokerage accounts rose a bit due to me transferring some money to participate in a reverse stock split. There are some possible bumps in the road on that one, but we’ll see what happens. I remain unmotivated to trade other individual stocks for now.
We saved over 50% of our net salaries this month, as I am working while our lifestyle is designed to survive perfectly well on only my wife’s income. It feels good to see the money coming in. The vast majority will end up padding our cash savings for that looming-yet-far-away house down payment.
I did finish the paperwork to open up a Solo 401k with Fidelity, and will be funding it this month to put some more money away in tax-deferred accounts. It was relatively painless to set up, as I had hoped.
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I hope your credit card companies never exercise that universal default clause because your FICO score ticked five points. That would make it a very expensive game!
It seems that the stock markets have really given everybody’s bottom line a boost for the August. After the sell off in May and June, it was due for a bounce back.
BTW, do you really check KBB for the value of your car? I thought about including my cars in the networth calculation, but felt it’s difficult to get a precise number, and that ends up inflating the over all numbers.
Need some help… I am a novice…
I am a homeowner that reads your monthly net worth updates… where would i put my home mortgage? liability definitely, but would that be offset by a entry in assests of the current worth of the home?
TMoney
Just for clarification, for your mid-term goal of non-retirement savings, you use the formula:
Cash savings + Brokerage + Car – Liabilities
Is this correct?
Also, how do you determine how much to keep in cash? Is it just that you are trying to keep most of your non-retirement savings as safe as possible in anticipation of buying a house? We have ~$50,000 in cash at most times, since this is what I’ve determined is a good emergency reserve for us. However, I realize that it would still be very accessible in a brokerage account, I just don’t have the time to determine good choices right now in a brokerage account, and most of our other money is at moderate-high risk (we also have some in an IRA that is at low-risk, if something happened tomorrow and all we had left was the cash and the IRAs, that would be fine, that’s how I determine my risk tolerance is fine with the other money that is at higher risk).
“I hope your credit card companies never exercise that universal default clause because your FICO score ticked five points. That would make it a very expensive game!”
They can only do that if I actually miss payment (i.e. default, as suggested in the name). People’s FICO scores go up and down for a million reasons besides just applying for another card. They may be able to change some terms that aren’t fixed, but not without written notice.
sun – I check KBB every two months or so. It’s pretty easy, just type in all the details, mileage, and then I just stick the number in. Some people also put any loan balance as a corresponding liability.
T – Most people put the equity you have in the house in the assets, and the loan balance as the liability.
Susannah – Yeah, that’s correct. Most of the values are simply pulled from my most recent Yodlee update into a spreadsheet. Money in brokerage accounts can also include cash, I’m just too lazy to break it down further than that.
Your 19k is risky in a brokerage account if that’s intended to be used for downpayment. Say a recession or a market crash, then you may delay your house buying process…
Jonathan…
So is the home equity the amount of the loan i have paid off?
Or is the calculation “market price” of home minus (-) mortgage balance?
TMoney
You are actually incorrect about the universal default thing, Jonathan. Companies can, and have, exercised that because people had too many inquiries show up on their report, too high balances on other accounts, etc. Read the clauses, they can actually do it for any reason they want. Always have backup options.
Unfortunately, you don’t have to default on payment for a credit card company to raise your rate. Chase checked my credit and found that I had entered into a home equity line and no longer liked my debt ratios, so they doubled my rate. Of course, I immediately canceled the card.
Sure, they can change your rate for any reason, that’s in the fine print. But they have to let you know. You can then accept or cancel. I find it hard to believe that they can change it mid-statement unless you miss a payment.
In the case where they raised your rate due to debt ratios, did they tell you or did you just get a fat interest charge on your card? I’ve gotten plenty of notices that my rate was going to change, my choices were always to just accept it or cancel. I’ve never heard of anyone getting their promised term of 0% rate changed due to FICO changes.
Quick thoughts:
1) As a reader already pointed out, you don’t need to miss a payment to get hit with “Universal Default”. All that needs to happen is for your CC company to decide they don’t like your current credit score, balances on your cards, etc @ one of their regular credit report reviews.
2) The method mentioned earlier for factoring in your home into your net worth calculations is incorrect. The proper way to account for your home in your Net Worth calculations is to do one of the following:
1) Put the value of the home in assets and the balance of the loan in liabilities. Let’s say all you had was your home and it was worth $500k and the loan balance was $50k, your net worth would be $450k. As the gross proceeds from the sale would be $450 (Ignoring other sales costs for the moment).
Another way to go is to just record your equity in the asset column, as your equity is the difference between the value of your home and the amount owed on the loan.
Putting Equity in assets and the amount owed on the loan as a liability would result in an incorrect calculation. If the example mentioned above:
Your Equity is $450k and your liability for the home loan is $50k, you would be expressing your net worth (as far as home anyway) as $400k. When in truth, a home with a value of $500k, with a $50k home loan attached to it, gives you home equity (or net worth impact) of $450k. In other words, equity in assets vs. loan balance in liabilities artificially deflates your numbers.
Additionally, it would be smart to factor in the costs associated with selling the house from your home equity:
– Realtor’s fees
– Selling costs (Let’s say you pay the buyer’s closing costs)
– Appraisal Fees, etc.
Finally, you should subtract the following from your home equity to determine the real impact to your bottom line:
– Non-deductible portion of your interest payments
– Property taxes
– Repair Costs
– Closing costs when you purchased the home
At least, that’s what I would do. My goal is for the home to appreciate such that it covers all of my costs and delivers a return = free housing + investment return. If it doesn’t do that, than the house isn’t an investment, it’s just where I live.
-Winston
My girlfriend’s rate changed just because her FICO score changed.
A 0% interest card was maxed out during a vacation, before she got home to pay it off (per her usual habit), another firm noticed it and sent her a note stating that her interest rate was going from 0 to 23% and that they were going to reduce her credit line. I don’t recall her being given an option to accept or decline.
Either way, depending on timing – you could find yourself paying interest for at least one payment cycle, and/or getting hit with over the limit charges in case they reduce your limit. Playing the arbitrage game with 0% CCs and High-Yield savings can be dangerous.
-Winston
Urgh… that’s what I meant to write about the home value thing. Home value (however you wish to estimate) minus loan balance.
Winston, you gave a case where someone defaulted. I still haven’t heard of the 0% rate being raised just because your FICO changes and you haven’t defaulted on anything. I do the 0% CCs too and everytime I get a new card I max it out with the balance transfer and none of my other cards have canceled my 0% agreement yet (I pay using auto bill pay and I check my balances atleast twice a week).
Jonathan?
” Most people put the equity you have in the house in the assets, and the loan balance as the liability.”
I don’t think you are correct.
The market value of the house(1) should be put in ASSETS. The morgage balance (2) is a liability.
The equity is (1)-(2) is part of your networth (assets-liabilities)
If net worth is done for retirement purposes you would not include the equity of the home as an asset, as we all need a place to live and people seldom downsize in retirement.
A car is also not an asset on a personal net worth statement as it is “consumed”. Any leftover value is just put into a replacement car.
You would still include the mortgage as a liability.
Jonathon,
Love your interest in finance and enthusiasm…. But the “0% Game” is not worth the risk….period. You are young, eventually you will find out that when you play with snakes you will eventually receive a bite.
CC companie’s policies are not worth the 80 or 90 bucks a month interest you are making on your “loan” from the CC.
I am new here, sorry if I am beating a dead horse from a previous month’s subject matter.
Jonathon,
about the 0% game. once the 0% offer is done, you got to pay the money back in full. After you pay ur card in full , is it ok to cancel the card and apply for another compay that offers 0% for the next year?. how does it affect your score, and how long do you think you can do this.
Marcus – why do you believe the “0% game is not worth the risk?.period”?
Like everything else, it involves careful management – making all payments on time, monitoring overall credit usage (ideally, keep under 50%) and individual card usage (always under 90%).
My fico is currently 670 (from 790) and I will net approximately $5500 this year on the BT game (includes signup bonus and interest)
Again, you need to be disciplied and responsible, but its a great side income if you can do it.