Let’s Ask: UE’s Finance Guru

So far, Sara Hamling has done a wonderful job of effectively enlightening the financially frazzled. But some of us are just a bit more money-muddled than the others, so fellow UE contributor Michael Cox instigated a intense investigation into our investments.

Michael: Hi Sara, thanks for helping us out again! I like the way that you laid out some ideas for what is and what is not okay to spend money on from short-term and long-term spending accounts. Do you have similar advice for credit purchases when the ol’ short-term spending account isn’t up to snuff for (perhaps pet- or car-related) emergencies?

Sara: So your short-term savings account isn’t as full as you need it to be, and you’re facing a true emergency: you lose your job, your car needs new brakes so that you can get to work, you have a medical emergency. In those cases, it’s okay to use your credit card even if you can’t pay it off in full the next month. Pay at least the minimum every month (try to pay a little over) and most importantly, make a plan for how you are going to pay that money off as soon as possible.

That sounds like a good practice to follow. When the hits keep coming, what’s the risk?

Any time you are carrying a balance on your card from month to month you’re taking a risk—credit card companies can change almost any rate or term with little notice. Plus carrying a balance will not help your credit score. But, if you’re facing a true emergency, using your credit card can give you time to get back on your feet without ruining your credit (compared to, for instance, neglecting payments on a home or auto loan).

I’m trying to focus on not getting hurt by interest (too much) and not damaging my credit score. Thanks to some help from mint.com and Google Calendar, I’m pretty on top of paying everything on time, so as long as I’m not at risk of forgetting to make a payment it shouldn’t hurt, right?

Exactly!  What I did was setup auto-pay on my credit card accounts and, a week before it’s due, I can double-check that my auto-payment went through and my balance for that month is paid off.

My fiancée and I have a shared credit card that we use for our joint purchases (like the new bathroom towels, Saturday’s “Let’s have amazing food!” dinner, and any Sharks game we can make) so that we can easily divide our expenditures later (and not have to juggle credit cards at the counter in the moment). Assuming we pay it off every month (or very close) to avoid interest, is there a better way to do this? Is doing this actually hurting our credit?

Assuming you pay the card off every month, you should be fine. There’s nothing wrong with having and using a couple credit cards as long as you have the money to pay them off.

Like the seasoning in a recipe for financial success: “Use in moderation,” right? What else?

One other thing to look at is what percent of your credit limit are you using at any given time. Owing more than 30% of your available credit will actually affect your credit score negatively. So, if your card has a $3,000 credit limit and you regularly have more than $1,000 on the card—that will negatively affect your credit. You want to have low balances, pay bills on time, and pay more than the minimum if you’re going to be regularly using your credit cards.

That said, going over that $1,000 is absolutely okay in emergencies, especially if you can pay that balance off right away (and perhaps pay it back before it’s even due, if you can to get it back under 30% of available credit).

You had some great recommendations for online savings accounts in your previous article. Do you have similar recommendations for credit cards?

If you have carried a balance in the past or think you might carry a balance in the future, look into credit cards that have the lowest APRs. The APR is the annual percentage rate you will pay on the money you don’t pay off in full every month. Typically, this is between 10-25%.

It certainly makes sense to just pay off the remaining balance each month.

If you have consistently paid off your balance every month, focus more on rewards. Most cards give you 1 “point” for every dollar you spend. This is typically equal to 1% back on a purchase ($1 back on $100 purchase). So, look for a cards that will give you more than that amount for certain purchases.

I like the sound of that! But from that word, “certain,” it sounds like there’s a catch?

Let’s say you wanted to get a couple credit cards with different rewards. You could get a Bank America Cash Rewards Card which gives you 2% back on groceries and 3% back on gas purchases. If you eat out a lot, you could get the Chase Sapphire Card which gives you 2% back on dining. Or you could look into the Chase Freedom Card which gives you 5% back on different types of purchases every three months (i.e. movie theatres & gas stations, or Amazon & department stores). Just make sure you know which cards give you what rewards and use them accordingly. (Note: All the above credit cards will give you the standard 1% back on other non-category purchases.)

So, we could use a different card for every kind of purchase, or…

Or, if you don’t want to have to remember what cards give you what rewards, you could get a card that gives you 1.5% back on all your purchases like the Quicksilver Cash Rewards Card.

Regardless of what you’re looking for, use credit card comparison sites to figure out which offers you will use most.

That sounds great but… Should holding multiple credit cards be avoided? It seems like a delicate balance between “You have enough credit history to get a mortgage” and “Your credit isn’t quite good enough for a livable mortgage.”

There’s nothing wrong with holding multiple credit cards so long as you’re not abusing them. I wouldn’t get more than about four, but two or three is totally fine especially if they give you points for different types of purchases.

That sounds like a good rule of thumb. So what’s the recipe for success?

The ideal situation for your credit cards is that you have a few, you keep low balances on them, and you pay them off in full every month. Now—that’s not always possible. But that’s what’s going to get you the best credit score if that’s what you’re looking for.

As a gamer, I always want the best score. I’m curious though. You said “low balances,” not “no balances.” Is not using your credit cards bad, too?

It’s not great to never use your cards. But… it’s probably better to not use your card for a short amount of time than to close the account. It’s awful for your credit if you open and close credit cards any more than you absolutely need to. Say you’ve opened too many credit card accounts, and you realize you really don’t need them all: don’t close them (unless you have a tendency to abuse credit) and don’t stop using them entirely. Just charge one small thing a month to them and then pay that off in full every month.

I feel like this should be taught in school; do you have any homework for me?

Sure! Here’s a good article on how balances affect your credit score.

Now, for those 20-somethings who are lucky enough to be investing and not just borrowing: when the world looks messy (I’m looking at you, Russia) or the market looks testy (well, this isn’t the ’90s, so maybe this isn’t so terrible a threat), is it ever the right decision to pull your stock market funds?

I’m already following your advice on using passive investment strategies in Mutual Funds/Index Funds/ETFs because, seriously, who has time to micromanage this?

It depends on what kind of account your stocks are in.

If your money is in a retirement account where your money is in Mutual Funds/Index Funds/ETFs—don’t move your money. Do not move it. Maybe you think you can time the market and avoid a dip, but even the best brokers fail to do this regularly. Money for retirement has a long time to grow if you’re putting it in before age 30, and even before age 40. It’s much better to ride out the market’s highs and lows if you have the time and your money is invested diversely.

Don’t touch the retirement. Got it! What about all the other types of investments?

If you have a separate brokerage account though that is not for retirement but is, instead, say…. money for that wedding, money for a house, money for a big trip… money that you are planning on needing in a couple years—then, you may possibly want to pull your stock market funds. If you know you will need that money and you don’t have confidence in the market (or you just don’t want to take the chance because you know you will need it soon), it’s okay to take the money out and put it in something less risky (hello, high-yield savings accounts or CDs!). Or, take half your money out and keep half in—another way to be slightly more risk-averse.

Okay, so keep your ultimate money goals in mind when deciding where and when investments should be managed. I feel more fiscally fit already! Thanks, Sara!

Michael Cox is a contributing writer. He is also a really tall computer engineer, app developer, musician, computer gamer, and San Jose Sharks fan. Twitter: @TehMiikay.

Sara Hamling is a contributing writer. Graphic Designer, Foodie and Baseball Enthusiast living in San Francisco and exploring the rest of California. Follow me @shamlingdesign

Photo by Rob Adams
Photo by Rob Adams
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