Wednesday, March 19, 2014

Credit vs. Debit Cards: Which Do I Use?

When you reach into your wallet to pay for something, do you pause to ask yourself whether to use credit or debit? It’s an important question, and one that is often overlooked. Although the decision between a debit card and credit card is a personal one, there are times when one is more appropriate to use than the other.

Debit or Credit?
Best Uses for Credit Cards

Credit cards are more heavily advertised and visible as a financial product than debit cards. While they come with perks and solid fraud protection, it is important to be selective when and where you use the cards. Here are three such instances:
  1. For rewards Credit card companies offer some pretty attractive incentives to use their cards. You can rack up points to put toward hotels, flights, gas, groceries, cash back and more simply by opting to use a specific credit card. If you pay off your balance each month, you can really benefit from these opportunities and save a great deal of money. Otherwise, you may fall into fees more than freebies.
  2. Online purchases It’s always advisable to use a credit card when making online purchases, as these cards offer a layer of fraud protection that debit cards do not. If someone steals your credit card number, you are liable only for charges up to $50 after you report the fraud, whereas you could be on the hook for $500 for a debit card. It is also advisable to research a company prior to making an online purchase with your credit card, especially newer companies. Make sure they are reputable to save you a great deal of stress.
  3. When you can afford it While it can be tempting to use credit to purchase items now, resist the urge to spend habitually. Carrying a balance from month-to-month is a very big deal, because you must pay interest on the amount you owe. You will end up paying much more than you actually spent by accruing interest charges, leading to scenarios where you might pay for vacation expenses long after the trip. Use credit wisely to help build good credit, as paying off your bill each month shows you can manage it responsibly.
3 Best Practices for Debit Cards

Charging items to your credit card can get out of hand, and the way back on track can be your debit card. Since it dips into your checking account funds, you can better control your finances if debt is in your near future. Opt for your debit card for:
  1. Frequent/familiar purchases It is not good to rely on too much credit. When shopping in-store at major retailers or smaller stores you frequent, using your debit card is a great idea. This helps you maintain a good grasp on what funds you have available and keep your monthly credit card purchases under control.
  2. When budgeting If you are concerned about debt, ramp up your budgeting skills. When it comes to budgeting with plastic, stick to the debit card and grow healthier habits. Know your monthly spending limits and how much credit you can afford to spend. It is also much easier to resist temptation if you only have the funds in your account to spend, instead of spending to your credit limits.
  3. When in credit card debt If you find yourself in credit card debt, continuing to charge purchases to your cards will only perpetuate a downward debt cycle. Repayment needs to be a priority. Avoid credit charges at all costs. Although debit cards do not affect your credit score directly, shifting to using them will help raise a low, debt-ridden credit score.
Credit and debit cards both offer a number of advantages as payment options, but remember that certain trends can help better your situation, whether it’s debt or other unfavorable factors. Know your plastics and you will be in control of your financial fate.
Spencer Tierney, NerdWallet
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Tuesday, March 4, 2014

Avoid the Pitfalls of Predatory Lending Practices


If you are considering a loan of any type, you need to beware of certain questionable lending practices. The Federal Reserve Bank of New York has defined "predatory lending" as:

A welfare-reducing provision of credit, where lenders profit by tempting
consumers into over-borrowing and delinquency.

There are several different types of predatory lending practices.

Predatory Mortgage Lending

Predatory mortgage lending involves a wide array of abusive practices. It often wipes out a family's wealth and frequently leads to foreclosure. Estimates place the annual cost of predatory mortgage lending at over $9 billion. Here are brief descriptions of some of the most common.

  • Excessive fees: Many times lenders will include fees and points with the mortgage payment, even on standard loans. However, predatory lenders may charge fees that total more than 5% of the loan amount. A typical lender may charge around 1%.
  • Prepayment penalties: Only around 2% of prime market mortgages will charge a penalty for paying off the loan early. However, the vast majority -- about 80% -- of subprime mortgages charge an early pay-off penalty. With abusive predatory loans, the penalty may be more than six months worth of interest.
  • Kickbacks: Some predatory lenders have deals to pay kickbacks to real estate brokers who submit a loan that carries a bloated interest rate. The kickback, or “yield spread premium," is paid directly to the broker as an incentive for selling higher interest rate loans.
  • Flipping: Consumers usually pay a fee to refinance their mortgage loan. Flipping occurs when a borrower refinances a loan to generate fee income without providing any benefit to the borrower. These unnecessary fees can drain a borrower's equity and inflate their monthly payments. Flipping may even occur with debt-free homes.
  • Steering: Some borrowers are steered toward high interest loans, even if they may qualify for sub-prime loans. Research conducted by Fannie Mae shows over half of all borrowers with subprime mortgages could have qualified for loans with more appealing terms. Steering seems to occur more frequently among certain ethnic pockets. One government study revealed 51% of refinanced mortgages in predominantly African-American neighborhoods are subprime loans, compared with just 9% of refinances in predominantly white neighborhoods.
Short Term Predatory Lending
  • Payday loans: Payday loans are short-term products available to many consumers with little or no collateral. They simply must show they have a job in order to qualify for the loan, which they must repay by their next payday (hence, the term "payday loan"). Payday loans (also called "cash advance) come with excessively high interest rates, which rise rapidly when the borrower cannot repay the loan within the prescribed timeframe.
  • Car title loans: These are similar to payday loans. Car title loans come with high annual interest rates (usually over 100%) that often lead to a cycle of debt because their require repayment within one month, and the borrower is often unable to pay off the loan that quickly.

Tips 

We want all our members to be cautious. To help you avoid predatory lending practices, we have compiled the following list of tips:
  1. Ask questions. Do not just accept the representative's word as the truth. Seek out additional information on all products.
  2. Shop around. You may be in a rush to obtain the money, but it pays to take your time whenever your money is concerned.
  3. Be an educated consumer. The Internet is an excellent source of information. Seek out consumer reviews and articles on products and companies with which you may conduct business.
  4. Always read the agreement carefully before you sign. 
  5. Avoid balloon payments. 
  6. Avoid deals with prepayment penalties. 
  7. Know your rights as a consumer. 
  8. Just say, “no" if you believe the deal is not beneficial. 
  9. Build your credit. This is one of the most effective ways to ensure you will receive the most competitive rate. 
  10. Keep in mind -- low monthly payments are not always the best deal. Look at the overall cost of the loan. 
  11. Watch out for offers to refinance the loan to a better rate down the road. 
  12. Never sign a blank document or anything the lender promised to complete later. 
AltaOne offers several financial tools to help our members better understand how to manage their finances and avoid potentially under-handed lending practices. 

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