Public Service Loan Forgiveness Program

Graham McCaulley, Extension Associate, MU Personal Financial Planning Extension

For many students this time of year marks graduation, and for some, graduation prompts thinking about student loans. Those graduating high school may be anticipating the disbursements of their first student loans in a few months to cover new tuition expenses. Alternatively, those graduating college may be expecting the end of student loan deferment and the beginning of repayment in the coming months. No matter where one is on the continuum of student loan debt, it is always important to think about the long term realities of student loans, including repayment options. This tip will outline one possible option for students who may go into careers in public service jobs.

What’s a public service job?

The definition of what is considered a public service job is fairly broad. Any employment with a federal, state, or local government agency, entity, or organization or a non-profit organization that has been designated as tax-exempt by the Internal Revenue Service (IRS) under Section 501(c)(3) of the Internal Revenue Code (IRC). The type or nature of employment with the organization does not matter for PSLF purposes. Additionally, the type of services that these public service organizations provide does not matter for PSLF purposes. Some private, non-profit employers that are not tax exempt (i.e., 501(c)(3) status) can even be considered qualifying employment for the PSLF program, provided the employer provides certain public services (e.g., public health, safety, etc).

What types of loans are eligible?

Loans are either:

·         Federal- Made and/or regulated by the government, including Direct Loans, Federal Family Education Loans (FFEL), and Federal Perkins Loans; or

·         Private- Made by a bank/private lender and generally carry higher fees and interest rates than federal loans. For more information about avoiding deceptive private loans, visit http://missourifamilies.org/features/financearticles/cfe63.htm)

Private loans are not eligible for loan forgiveness programs, and not all federal loans are either. For a list of debt cancellation/forgiveness programs and which types of federal loan types are eligible for each program, visit http://studentaid.ed.gov/repay-loans/forgiveness-cancellation. Regarding the Public Service Loan Forgiveness Program (PSLF), only direct loans are eligible (i.e., loans you received under the William D. Ford Federal Direct Loan Program). Federal Family Education loans and Perkins loans are not eligible, however, they do become eligible if you consolidate them into a direct consolidation loan (more on this at http://www.loanconsolidation.ed.gov/).

What do I have to do to get my debt forgiven?

·         Work full-time: At least an annual average of 30 hours per week. For purposes of the full-time requirement, your qualifying employment at a not-for-profit organization does not include time spent participating in religious instruction, worship services, or any form of proselytizing. If you are a teacher, or other employee of a public service organization, under contract for at least eight out of 12 months, you meet the full-time standard if you work an average of at least 30 hours per week during the contractual period and receive credit by your employer for a full year's worth of employment. If you have multiple eligible jobs, you must work a combined average of at least 30 hours per week.

 

·         Make 120 on time, full, monthly loan payments: Basically, you have to put in 10 years of full, on time payments before you can be eligible for the remainder of your loans to be forgiven. On-time payments are those that are received by your Direct Loan servicer no later than 15 days after the scheduled payment due date. Full payments are payments on your Direct Loan in an amount that equals or exceeds the amount you are required to pay each month under your Direct Loan repayment schedule.

 

·         Be paying back your loan through a qualifying repayment plan. You cannot necessarily choose a repayment plan that will greatly lengthen your repayment period so that you are eligible for most of your loans to be forgiven. For example, 30-year extended repayment plans are not eligible for the PSLF program. However, the income-based repayment (IBR) plan (http://studentaid.ed.gov/repay-loans/understand/plans/income-based) and the income-contingent repayment (ICR) plan (http://studentaid.ed.gov/repay-loans/understand/plans/income-contingent) are eligible. The 10-year Standard Repayment Plan is also eligible, however, after meeting the PSLF requirement of 120 consecutive payments, there would be no debt left to forgive!

Deciding whether or not the PSLF program is right for you depends on many factors, mainly how much student loan debt you have and how much money you will make during the first 10 years of your public service career. The more debt you have and the less you will make, the more attractive an option the PSLF may be for you (as payments tied to your income will be less when you make less money). Alternatively, if you make a high income you may very well have paid off, or be close to paying off, your student loans by the time you get to the end of the 10 year requirement under the PSLF.

There are many repayment options for student loans. A good first step would be to visit the Federal Student Aid repayment calculator at https://studentloans.gov/myDirectLoan/repaymentEstimatorLoginRedirect.action to see what all your options may be. You can also look at past financial tips (achieved at http://mufinancialtip.blogspot.com/, especially the September and October 2011 tips) or visit the Managing Student Finances and Debt area of our website: http://pfp.missouri.edu/financial/studentfinances.html. Again, whether you are just starting to take out loans or have been paying them back for years, it is always good to consider your repayment options and realities. Even though the PSLF program may help some (and does encourage public service jobs), you will still end up paying back a substantial amount of the debt you take out, so never take out more loans than you need.

Older Family Members and Finances

by Lucy Schrader

I expect to help our kids learn about money and finances.  I know we need to guide them, but not make all of their decisions.  We need to set up situations for them to succeed to become independent.  Yet when it comes to my parents, I hold some different beliefs—they are grown adults; they should take care of their own finances; who am I to tell them how to live and spend their money?  Yet with changes in aging, I may need to shift my thinking. There are more and more elderly adults who are not able to take care of their finances anymore or who need extra help.

So how can a person assist when parents or relatives need more help with their finances? This process takes time and for many families, this is not an easy thing to talk about.  Finances often have many emotions attached, including fear and anger.  And when someone loses control over financial decisions, they often loose independence (in where they live, how they live and what they can do or buy).

As you start discussions, be sure to:

·         Acknowledge feelings

·         Find a low-stress time to talk

·         Find natural times to talk about the issues or to ask questions (for example, use a news feature or an article to start the conversation)

·         Be aware of possible reactions (from relief to anger) from everyone involved, including yourself

·         Respect the person

Having financial conversations can be very hard to do.  Let the person know you want to help them in the way she wants to be helped and that you have her best interest at heart.  You might ask some questions, to encourage the person to put her wishes together and to have a place for all of these items (safe deposit box, fire-water proof file box, etc) so that if you need them in a medical emergency, then you can get to them. 

 

These questions (from Caring.com) can be useful as you help your relative plan for the future.  The person many not want to give you answers to all of these for privacy or other reasons.  Again, you can share the information and continue the conversation another time.

1.      Do they have a durable power of attorney?

The durable power of attorney (DPOA) is considered one of the most important personal legal documents for any older adult to have. Along with a healthcare proxy, it will give whomever your parent designates—whether it be you, one of your siblings, or someone else –the power to make financial and legal decisions (or, in the case of a healthcare proxy, to make medical decisions) if your parent is incapacitated. Without a durable power of attorney in place, you'll have to go to court to get appointed as your parent's guardian.

2.      Where do they keep their financial records?

3.      What are their monthly expenses?

4.      How can I pay their bills if necessary?

5.      Do they have any kind of medical insurance?

6.      What's their income and where does it come from?

7.      Have your parents done any estate planning?

8.      If they can no longer live on their own, what can they afford in terms of housing?

9.      What financial planning have they done?

10.  Do they have an advance health directive?

Helping someone with finances may not be an all or nothing approach. If you feel the person does need help, when at all possible, choose the least intrusive financial tool to keep your relative as financially independent as possible (Helping Older Family Members Make Financial Decisions guide).  For example, maybe your mother gets behind in paying her utility bills, so you set up automatic bill payments for her. She can, however, still manage some cash for grocery shopping, so you set up a system for her to get a cash amount every week to give her some independence.

Also in the guide Helping Older Family Members Make Financial Decisions, the authors look at different tools based on if the relative is or is not able to make financial decisions. (Please note, the following explanations are very brief.  You will need to seek legal and professional help in setting up several of these options.)

 

When the relative can make sound financial decisions, these tools can help:

·         Automatic bill payments

·         Joint bank accounts

·         Power of attorney
The person designates someone to make financial and legal decisions for him when he is not able (when he is incapacitated).

·         Living trusts

A trust is a three-party arrangement, where assets are transferred from one person (the grantor) to another (the trustee).  The trustee holds and manages these assets for the benefit of a third person (the beneficiary).

 

When your relative can’t make sound financial decisions, these strategies can help:

·         Representative payee

If a person cannot manage his checks from Social Security, veteran’s pension, railroad retirement or public benefit programs, a representative payee can be appointed.  Checks are written to the payee on behalf of the beneficiary.  The representative payee cannot get access to the person’s savings accounts or other assets.

 

·         Conservatorship (or guardianship of the estate or guardianship of the property)

Only a court can create a conservatorship.  A person asks the court for the right to manage another person’s financial affairs after that person cannot do so (and if a durable power of attorney or a living trust is not in operation).

 

Families should be aware of their motives for seeking a conservatorship (or any of these tools)—do they have inheritance concerns or concerns about protecting an older person’s money for his or her own needs and wants.  Also, are there differences in values?  Sometimes the older person spends money on different wants and needs, but he is not endangering himself.

 

On an emotional level, none of these may be easy to do.  Role reversals, change of care and change of life habits can be difficult to come to terms with. Be aware of your family member’s and your reactions and reasons and reassess the situation regularly. The goal is to help the person stay as financially independent as possible.

 

References and Resources

5 Most Important Financial Questions to Ask Your Parent. Retrieved May 9, 2013 http://www.caring.com/checklists/financial-questions-for-parents

10 Things You Should Know About Your Parents' Finances. Retrieved May 9, 2013 http://www.caring.com/checklists/elderly-parents-finances

Parker, K. & Patter, E. (2013.) The Sandwich Generation: Rising financial burdens for middle-aged Americans. Pew Research Center. http://www.pewsocialtrends.org/2013/01/30/the-sandwich-generation/#overview

Schmall, V., Nay, T., & Bowman, S. (2005.) Helping older family members handle finances. Oregon State University. Retrieved May 9, 2013 http://extension.oregonstate.edu/catalog/pdf/pnw/pnw344.pdf

 

 

Lucy Schrader
HES Associate State Specialist and
Building Strong Families Program Coordinator
University of Missouri Extension
162 Stanley Hall
Columbia, MO  65211
573-882-4071 or SchraderL@missouri.edu

http://extension.missouri.edu/bsf

 

Strong Families for Strong Communities

 

 

Top Ten Financial Tips for a New College Grad

            Often we are asked to work with a promising undergraduate on a project allowing them to receive Honors credit for a course they take in our department.  A common course where this occurs is our Introductory Personal and Family Finance course. Ms. Paige Wheeler wrote her paper on the ten most important financial tips for a new college graduate, after reading The Only Guide You’ll Ever Need for the Right Financial Plan, by Larry Swedroe. This financial tip will enumerate her highlights for her peers and, hopefully, you.

 

1.      Stay within your means.  While it is normal to graduate with debt, proper debt management is crucial.  Don’t get over extended.  Shop for the best rates from quality companies.  Pay off your loans as quickly as possible.

2.      Appropriate insurance is vital to financial success.  People buy insurance to protect their property, their income, and their wealth by transferring risks they do not want to keep to an insurance company.  Shopping for insurance is the same as shopping around for loans – you need to search for the best rates from high quality companies

3.      Having a well prepared and detailed investment plan is a necessary condition for financial success.  A good investment plan helps eliminate fear and emotion when making investment decisions, as you will be more disciplined. You cannot predict the market but you can stick to your plan, including paying yourself first, dollar cost averaging, and diversification.

4.      Understand the difference between risk and uncertainty.  In finance, risk is calculated using historical data but the returns on your investments depend on the uncertain returns of the future.  This uncertainty demands a diversified portfolio.

5.      Related to the above, financial success requires one to make financial decisions with your head and not your stomach, as “stomachs rarely make good decisions”. Yes, one can spend a lot of time doing research and making calculations, but making informed choices is key for success. Gut feelings are not a good basis for decision making.  Use the information available to make an educated decision and decide which risks are worth taking and which aren’t.

6.      You have to be smart about which risks you do take.  Importantly, never invest more than you can afford to lose.  Sure, if you are worth 1 billion dollars, risking 1 million dollars with the hopes of making 2 million may not be that big of a deal.  If you are worth 1 million dollars, however, and are consider risking all of it with the hopes of it doubling, it is a huge deal.  If you are wrong, you are financially devastated.

7.      A well-diversified investment portfolio is paramount to financial success.  It must have appropriate asset allocations to fit your risk tolerance and time horizon.  As a young person, you should try to can take on more investment risk, but do so in a highly diversified set of equities.  In addition to equity investments, it is important to have proper asset allocations among stocks, real estate, bonds, etc.  A related point is the need to periodically rebalance the portfolio to make sure it reflects your investment plan.

8.      It bears repeating that a younger investor should be more heavily weighted in equities.  Equities (common stocks and stock mutual funds) are one of the few asset classes that consistently keep pace with inflation over the long run.  Inflation diminishes purchasing power but equities will help preserve wealth, in spite of inflation.

9.      Find the right investment management strategy, either active or passive.  Having actively managed funds means you try to stay ahead of the market with the hopes of performing above expectations.  On the other hand, passively managed funds, only require the investor to invest across each asset class and to rebalance.  Many are the advocates for passive investing, as you can earn market rates of return with low expenses and high tax efficiency.

10.  The final tip for a new college graduate is a key to long-run success.  Begin saving for your retirement.  Take advantage of the opportunities employers provide to enable you to lead a comfortable retirement life.  If your employer has a 401(k) program in which they match funds, make sure you set aside at least enough to get the full employer match.  Be sure to maintain a well diversified investment plan.  Understand the pros and cons of a Traditional IRA versus a Roth IRA.  (More information on IRAs is contained in an earlier Financial Tip (click here).)

 

Having a solid financial plan and sticking to it is crucial for financial success.  To assure the desired result; plan ahead, spend wisely, and understand your insurance and investment portfolio.  Stay on top of your financial life, so as to not be crushed by your financial mistakes. Along the way, never forget that the right decision depends on your definition of financial success - as it will set your path toward your financial success.  It will likely differ from your friends’. 

 

 

Paige Wheeler, Undergraduate student, MU School of Journalism

Robert O. Weagley, Ph.D. CFP^®

The Importance of Personal Financial Planning for College Graduates

by Ryan H. Law

Over the past 5 weeks we have had more than 350 graduating seniors come through our doors to receive student loan exit counseling. By the time the semester is over we will have visited with more than 500 of them.

Seeing all these seniors come through our doors has caused me to reflect on my own graduation and some things I did well as well as some things I wish I had known or done upon graduation.

Today’s tip will focus on some specific steps that I think all graduating seniors should take (but don’t worry – it’s good advice for everyone – even if you haven’t graduated yet or graduated years ago).

Become financially literate

Financial literacy in the United States is, unfortunately, not widespread. Most high school students fail a personal finance exam (less than 50% of questions answered correctly) and college students score just 62%^[1]. One of the best things you can do for your future is to become financially literate. If you can take a college course in personal finance I highly recommend it. In a 3-credit personal finance class you will learn about everything on this list and you will be more financially literate by the end of the course than most people in America. If you don’t have the option to take one on campus look into one of the many excellent Open Courseware classes – you won’t get any college credit for it, but you can’t beat the price tag – free!^[2]

As a part of becoming financially literate I recommend you learn the fundamentals of how the U.S. economy works. Learn about the business cycle, unemployment rates, inflation and interest rates. All of these things affect your personal finances, so a basic understanding of them is helpful.

Don’t get your financial advice from amateurs

Financial advice can be found almost anywhere – it is prolific on the internet and on the bookshelves at libraries and bookstores. However, I would caution you to be careful that you are not getting your financial advice from amateurs. For example, a few years back there was a taxi driver who “figured out the system to wealth” day-trading stocks. A lot of people lost a lot of money following his advice. Be careful of advice received from friends or family about the latest “hot tip” on a stock. This tip, like all the others, will take you back to the first recommended suggestion – a good solid class will teach you much about how to win at personal finance.

Establish financial goals and take action to achieve them

You need to start thinking about some short and long-term financial goals. How soon do you want to pay off your consumer debt? How much money do you need at retirement? Do you plan to buy a home eventually? Do you plan to have children and send them to college? What are your plans for increasing your earning potential? I recommend you take some time to sit down and make some decisions about where you are financially, where you want to be, and how you plan to get there.

Learn to budget

No company would go one day without a good, solid budget. They understand how much is coming in, how much is going out and exactly where those dollars are going. You should likewise have a budget. A budget is not a record of where your money went (though that is important as well); it is a plan for where you want your money to go. Learn the process for budgeting then discipline yourself to take action and stick to your budget^[3]. A key component of your budget should be to spend less than you earn and to pay yourself first. As part of your budget you should work diligently to build up a 3-6 month emergency fund.

Develop a net worth statement and update it annually

A net worth statement is a snapshot of a particular moment in time. It should list all of your assets (everything you own that is worth money) and all of your liabilities (debts). Minus your liabilities from your assets and you will come up with your net worth. You should update this annually to see how you are doing. Over time this number should increase.

Care about your credit

You should know what your credit report contains^[4], what your credit score is and what steps you can take to improve that score^[5]. Your credit score determines what interest rate you pay on loans, what your auto insurance will cost, if you can rent certain apartments, and in some cases if you can even get a particular job.

Pay off consumer debt as quickly as possible

Carrying consumer debt, especially credit card debt, is toxic to your financial goals. Pay it off as quickly as possible by paying more than the minimum and refusing to take on additional unnecessary debt^[6].

Start saving now for retirement and take advantage of employer-sponsored retirement plans such as a 401(k) or 403(b)

If your employer offers a tax-advantaged retirement savings plan, such as a 401(k) or 403(b), take advantage of it! You will save on taxes now and can often get free money through a company “match” of your savings.

Time is your best friend when it comes to saving for retirement. If a 23-year old saves $3000 a year at 8% interest until he or she is age 65 they will have about $912,000 in the bank. If a 33-year old does the same thing they will have about $402,000. That is the power of compound interest!

Understand taxes, insurance and basic estate planning

Even if you pay someone else to prepare your tax return for you, you need to understand your own taxes. You should know your average tax rate, your marginal tax rate, and some steps you can take to reduce your tax burden. You should understand the difference between taking the standard deduction and itemizing deductions.

You also need to understand your insurance products. We spend a lot of money on disability insurance, life insurance, auto insurance, renter’s or homeowner’s insurance and other types of insurance. You should understand what your policy covers, what it doesn’t cover and how much you are paying for each one. You should occasionally check around to see if you can get lower cost insurance.

Everyone needs to do some basic estate planning. Even if you are single with no dependents you at least need a basic will, healthcare directives and a power of attorney. As your situation changes you should review these documents and update them and add other important estate planning documents as necessary.

Start an uncomplicated financial record-keeping system

You and your loved ones should know where important financial documents are and what each one is for. For example, if I were to pass away today I would want my wife to know exactly where my life insurance policies are and how to begin the process of collecting that money. The system I use is a fireproof file box with the HomeFile Organizer system^[7]. With this low-cost system I can file and find auto titles, insurance policies, medical records, warranties and any other financial documents.

Give yourself an annual financial checkup

I recommend that you set aside a day each year to give yourself a financial checkup. Review your goals, your budget, your net worth, your insurance and estate policies, your savings and your debt level and determine some steps you can take to improve in each area. As part of the review I recommend you choose a new personal finance book to read over the next year. Take this opportunity to reassess where you are and determine a plan for how to get to the next level.

Conclusion

Hopefully you got some good ideas about improving your financial situation from this list. I recommend you choose just one or two things from this list that you can take action on today. As that becomes a habit you can incorporate another item until you have implemented all of them that fit your situation.

 

Ryan H. Law, M.S., CFP®, AFC®

 

Personal Financial Planning Department

Office for Financial Success Director

University of Missouri Center on Economic Education Director

 

162 Stanley Hall

University of Missouri

Columbia, MO 65211

 

573.882.9211 (office)

573.884.8389 (fax)

 

---

[1] http://jumpstart.org/survey.html

[2] If you are looking for an excellent course I recommend Alena Johnson’s Family Finance course from Utah State Open Courseware: http://ocw.usu.edu/Family__Consumer____Human_Development/Family_Finance/index.html. This is the course I took that convinced me to change my major and helped determine my life’s work.

[3] www.Mint.com is a great, free resource for budgeting. The software I personally use can be found at www.YNAB.com. It isn’t free, but I highly recommend it.

[4] www.AnnualCreditReport.com is the only place to get a free copy of all three of your credit reports annually

[5] www.MyFico.com has a great explanation of credit scores and is the most reliable place to purchase your score.

[6] www.PowerPay.org is a great free resource to figure out how you can pay your debt off quickly

[7] http://www.homefileorganizer.com/

Is There a Taxing Reason for the Marriage Season?

I divorced in 2012 and for the 2012 tax year, I was surprised by a federal tax refund and a state tax bill of similar amounts.  I thought I would owe more to both.  This led me to think about the vagaries of our tax system and, in particular, one that is spoken of often, the marriage tax penalty.  Does it really exist?

 

First, we’ll use 2013 tax law, where it is true that the standard deduction for married couples ($12,200) is twice the standard deduction for single taxpayers and married couples filing separately ($6,100).  Also, the 10% and 15% marginal tax brackets for married couples are twice the size of those for single taxpayers.  Taken together, there would appear to be a desire to have no marriage tax penalty in the tax code.  That is, however, where the story begins, rather than ends.

 

Let’s dig a little deeper, while using the table below created from the 2013 Tax Rate Schedule (the tax tables used are in Forbes ).  We hold taxable incomes constant, below, in order to compare the differences in taxes.  (We have purposely ignored all phase outs.)

Taxable Income	Single	Married Filing Jointly	Single Tax/Married Tax
$50,000	$8,428	$6,607	1.28
$100,000	$21,293	$16,857	1.26
$200,000	$50,130	$43,465	1.15
$390,000	$112,830	$105,013	1.07
$450,000	$135,964	$125,846	1.08

 

The ratio of single tax/married tax in the fourth column indicates that the single tax is greater for single people and that the difference is not constant.  This comes from a multitude of factors, including a different number of exemptions, changes in tax brackets, and cultural biases.  For example, if you are single and have $450,000 in taxable income, you could marry someone with no income and no deductions, reducing your taxable income by the amount of the exemption ($3,900) to $446,100.  This results in a tax owed of $124,481 for a tax savings of $11,483 ($135,964-$124,481).  This is clearly a penalty for being single.

 

On the other hand, what if your spouse works?  Let’s compare two, two-person households, with each person earning $100,000 in taxable income.  If the household is made up of two single persons, they each pay $21,293 or their combined household taxes would be $42,586.  If they were married with joint taxable incomes of $200,000, they would pay $43,465 in taxes, or $879 more than the two single persons household.  Thus, a marriage tax penalty exists and it results from the fact that single taxpayers are in the 25% marginal tax bracket until taxable income reaches $87,850, while married couples leave the 25% marginal tax bracket and enter the 28% marginal tax bracket at a taxable income of $146,400 – which is less than twice $87,850 ($175,700).  The married couple pays relatively more tax, given that more of their income is subject to the 28% marginal tax bracket.

 

How can both a single and a married tax penalty exist?  The answer is relatively simple.  The tax system began during a time when families typically had one earner.  When two earners marry each other, they are pushed into higher tax brackets, as they both have income.  This is not true when one earner makes substantially less than the other. 

 

Take, for example, a couple with $200,000 in taxable income.  Let’s let one member make $176,000, while the other spouse earns $24,000.  If they were single, spouse one would pay $42,573 in federal taxes on the $176,000 in taxable income, while spouse two would pay $3,156 on the $24,000 in taxable income.  Combined, their tax bill would be $45,729 or $3,143 more than if they were single with equal taxable incomes of $100,000 and $2,264 more than if they were married with total taxable income of $200,000.  This highlights the fact that the tax benefit of being married is greater, the greater the disparity in the income of the two spouses.  This difference rewards the traditional, outdated view of the household as consisting of a primary earner with, perhaps, a secondary lower-paid earner.

What is the bottom line?  There really isn’t one.  There exist both single and married penalties in the tax code.  In fact, the tax code is full of implicit and explicit taxes and subsidies which have an effect on consumer behavior. Politicians made it that way to steer money toward beneficial (i.e., favorite) activities and away from those they perceive to not be beneficial.  These create a complex tax code which confuses taxpayers and is part of the reason why there is such criticism of the tax system.

 

With respect to marriage, one does not base their decision to marry on the tax code.  At least they shouldn’t.  If one spouse earns substantially more than the other, it might pay a little to move the wedding forward to December, from February.  On the other hand, if the couple earns substantially equal incomes, they might want to delay the wedding from December to January.  The odds are pretty good that the choice of whether they can get the room in which to hold the wedding reception will weigh more heavily on the date decision, than their potential tax bill.

 

Regardless, marriage is not about money but, for financial success, it does take some money.  If you want to marry, marry.  Do not marry for, or not for, the tax benefits.  And, don’t forget what Frank Burns, the M*A*S*H character said in 1975,”Marriage isn’t all that it’s cracked up to be.  Let me tell you, honestly.  Marriage is probably the chief cause of divorce.”  Simply put, if you don’t want to get divorced, don’t get married.  That’s like a failure once said, “I didn’t want to fail, so I didn’t try to succeed.” 

 

Choosing a credit card: Read the fine print

Graham McCaulley, Extension Associate, MU Personal Financial Planning Extension

 

A credit card lets you buy things and pay for them over time. Using a credit card is like any borrowing — you have to pay the money back. 

 

Credit card features vary from card to card and there are several types of cards to choose from. To get the best deal, compare fees, charges, interest rates and benefits. Some credit cards that look like a great deal at first may really be a bad deal when you read the terms and conditions of use and see how the fees could affect your available credit.

 

Credit card terms

 

Important terms of use must be disclosed in any credit card application or for cards that don't require an application. Here are the terms to ask about when you consider credit offers. 
 

 

Many credit cards charge membership or participation fees. These fees have a variety of names, like "annual," "activation," "acceptance," "participation" and "monthly maintenance" fees. Fees may appear monthly, periodically or as one-time charges. They can have an immediate effect on your available credit.

 

In 2010, rules from the Credit Card Accountability Responsibility and Disclosure Act (Credit Card Act), as well as additional Federal Reserve regulations, went into effect to create new credit card consumer protections and disclosure requirements. These rules were further strengthened by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Financial Reform Act). For example, these rules specify that fees, such as an annual fee or application fee, cannot total more than 25 percent of the initial credit limit.
 

 

Some credit cards add transaction fees and other charges if you use them to get a cash advance, if you make a late payment or if you go over your credit limit. The rule mentioned above regarding fees being less than 25 percent of the credit limit does not apply to these type of penalty fees.
 

 

Annual percentage rate (APR) is a measure of the cost of credit, expressed as a yearly rate. It must be disclosed before your account can be activated, and it must appear on your account statements.
 

 

The card issuer also must disclose the periodic rate. That's the rate the issuer applies to your balance to determine the finance charge for each billing period.
 

 

Some credit card plans let the issuer change the APR when interest rates or other economic indicators — called indexes — change. The rate change is linked to the index's performance and often varies. Rate changes can raise or lower the finance charge on your account. Before your account is activated, you must also be given information about any limits on how much and how often your rate may change.

 

If your card does not have a variable interest rate tied to an index, the credit card companies generally cannot raise your APR for the first 12 months after you open your account, and if the rate is going to be raised after that point, you should be given 45 days notice and the opportunity to cancel the card before the new rate takes effect.

 

A grace period, also called a "free period," lets you avoid finance charges if you pay your balance in full before the date it is due. Knowing whether a card gives you a grace period is important if you plan to pay your account in full each month.
 

 

Balance computation method is how the card issuers calculate your finance charge. If you don't have a grace period, it's important to know this. Which balance computation method is used can make a big difference in how much of a finance charge you pay — even if the APR and your buying patterns stay the same. 
 

 

Many credit card companies offer incentives for balance transfer offers — moving your debt from one credit card to another. All offers are not the same and the terms may be complicated. 
 

 

Many credit card issuers offer transfers with low introductory rates. Some issuers also charge balance transfer fees. In addition, if you pay late or fail to pay off your transferred balance before the introductory period ends, the issuer may raise the introductory rate and/or charge you interest retroactively. When you make payments, they are to be directed to highest interest balances first.

 

Balance computation methods

 

The average daily balance method credits your account from the day the issuer receives your payment. To figure the balance due, the issuer totals the beginning balance for each day in the billing period and subtracts any credits made that day. Although new purchases may or may not be added to the balance, cash advances typically are included. The resulting daily balances are added for the billing cycle. The total is divided by the number of days in the billing cycle to get the average daily balance. 
 

 

Adjusted balance is usually the most advantageous method for cardholders. The issuer determines your balance by subtracting payments or credits received during the current billing period from the balance at the end of the previous billing period. Purchases made during the billing period aren't included.
 

 

The previous balance is the amount owed at the end of the previous billing period. Payments, credits and purchases made during the current billing period are not included. Some creditors exclude unpaid finance charges. 
 

 

Credit card companies can only impose interest charges on balances in the current billing cycle (i.e., no two-cycle billing). If you don't understand how your balance is calculated, ask your card issuer. An explanation also must appear on your billing statements.

 

Other costs and features

 

Credit terms vary among issuers. When considering a credit card, think about how you plan to use it: 
 

        If you expect to pay your bills in full each month, the annual fee and other charges may be more important than the periodic rate and the APR.

        If you use the cash advance feature, pay attention to the APR and balance computation method.

        If you plan to pay for purchases over time, the APR and the balance computation method are major considerations.

 

You'll also want to consider if the credit limit is enough, how widely the card is accepted and the plan's services and features. 


 

Your credit card agreement explains what may happen if you default on your account. For example, if you are one day late with your payment, your issuer may be able to take certain actions, including raising the interest rate on your card. Some issuers' agreements even state that if you are in default on any financial account, those issuers' will consider you in default for them as well. This is known as universal default.
 

 

Some cards with low rates for on-time payments apply a very high APR if you are late a certain number of times in any specified time period. This is a type of special delinquency rate.

 

Help and information

 

Questions about a particular issuer should be sent to the agency with jurisdiction.

 

Office of the Comptroller of the Currency regulates banks with "national" in the name or "N.A." after the name:
Office of the Ombudsman
Customer Assistance Group
1301 McKinney Street,
Suite 3450
Houston, TX 77010
toll-free 800-613-6743 
www.occ.treas.gov

 

Board of Governors of the Federal Reserve System regulates state-chartered banks that are members of the Federal Reserve System, bank holding companies, and branches of foreign banks:
Federal Reserve Consumer Help
P.O. Box 1200
Minneapolis, MN 55480
toll-free 888-851-1920 
(TTY: 877-766-8533) 
ConsumerHelp@FederalReserve.gov

 

Federal Deposit Insurance Corporation regulates state-chartered banks that are not members of the Federal Reserve System:
Division of Supervision and Consumer Protection
550 17th Street, NW
Washington, DC 20429
toll-free 877-ASK-FDIC (275-3342)

www.fdic.gov

 

National Credit Union Administration regulates federally chartered credit unions:
Office of Public and Congressional Affairs
1775 Duke Street
Alexandria, VA 22314-3428
703-518-6330
www.ncua.gov

 

Office of Thrift Supervision regulates federal savings and loan associations and federal savings banks:
Consumer Programs
1700 G Street, NW
Washington, DC 20552
toll-free 800-842-6929
www.ots.treas.gov

 

Federal Trade Commission regulates non-bank lenders:
Consumer Response Center
600 Pennsylvania Avenue, NW
Washington, DC 20580
toll-free 877-FTC-HELP (382-4357)

www.ftc.gov

 

The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint or to get free information on consumer issues, visit www.ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. The FTC enters consumer complaints into a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.

 

Source: Procter, B., & McCaulley, G. (2010). Choosing a credit card: Read the fine print (Research Brief). Columbia: University of Missouri, Human Environmental Sciences Extension.

http://missourifamilies.org/features/consumerarticles/choosecreditcard.htm