This & That: Now You Know Edition
L wrote: I’ve received several calls this year from companies selling cancer insurance for women that pays out if you are diagnosed with breast, cervical, or ovarian cancer. At first, I was horrified… The insensitivity of the telemarketers pushing this product was shocking, and I was still reeling from my mom’s painfully recent (successful!) battle with breast cancer. To be honest, I burst into tears on the phone and had to hang up mid-sales pitch. Now that I’ve had a few months’ worth of perspective, I’m starting to wonder if I said no too quickly. If my mom’s type of breast cancer turns out to be hereditary, my risk factor goes up. Everything about these cancer policies feels like a scam to me on a gut emotional level – but do they actually make financial sense?
Gail says: While the marketing may be aggressive, what you’re probably looking at is critical illness insurance, and they aren’t a scam. However, if you are interested in critical illness insurance you should not be “sold” one, you should “buy” one… by which I mean you should do your research, comparison shop and make sure you’re not only getting a good product, but the best price you can. You should not, in my opinion, buy a single disease policy. And you should make sure that your family history doesn’t mean you won’t qualify (you usually have to declare family history.)
K wrote: I want to improve my credit rating so that someday I can afford a house. My rating is ok right now, but I want it to be at its best. I have been told by friends that having that $7,000 of available credit on my credit card and $11,000 of available credit on my line of credit is hurting my credit rating, because banks see that as credit that I could technically ‘rack up tomorrow’. They say I should call and have these limits reduced so that I present a lower risk to the bank. However, I have also heard that banks like to see a ratio of credit to limit, that they want to see you have no more than 1/3 of your total available limit used. Therefore I should not reduce my available credit because it will appear as if I am ‘maxed out’ again in the bank’s eyes. Which theory is correct, Gail? Should I keep these high limits or should I reduce them? Which is better as far as improving my credit rating is concerned? I have heard that there are some strange factors that hurt your credit rating that we think should help, like closing out an old account = hurt. Moving a balance from a high interest rate card to a low interest rate card =hurt. Can you please help clear up these ‘urban credit myths’?
Gail says: You’re right on both counts. Strange, eh? The reason there’s this discrepancy in the system is that the credit score is being used to do a job for which it was never intended. So, what to do? Make sure you’re paying your credit off in full every month… so no carrying a balance. Figure out how much credit you use in a month and multiply that by 3. So if you usually charge about $500 a month, you’d need to have a credit limit of about $1500. Based on your current available credit, you’d need to be charging about $6000 to justify having that high a credit limit. Once you’ve figured out how much you credit you use, cut back on your limits: write or call the credit companies and ask them to reduce the limits to the figures you request.
As for closing a credit card account, it only hurts your score if it’s been actively used. Since you lose that credit record when you close the account, keeping it open for a few months without using it and then closing it means you’re losing nothing much at all. And as for the high-interest rate to low-interest rate thing, I haven’t heard that one, but I wouldn’t be at all surprised. Since the point of the credit score is to identify the most profitable customers — those that pay the most interest — anything you do that’s good for you as a person is bad for your credit card company and the credit score penalizes you. This is why I think the credit score is being miss-used.
Be a sensible girl and do what’s right for YOU.
W wrote: Are store credit cards i.e. the Walmart Mastercard, better or worse than credit cards from your bank i.e. CIBC Visa? The Walmart Mastercard has no annual fees and allows you to earn points to put towards your Walmart purchases. I am wondering if when you get a credit rating if a store credit card is looked down upon? I also have a CIBC student Visa with a $500 limit. I have graduated and am working full time. I don’t know if I should order a new Visa card from the bank with a higher limit or if I should get the Walmart Mastercard. And if I get a new credit card should I cancel my student Visa? How will that effect my credit rating?
Gail says: Once upon a time, department stores had their own finance departments and offered their own credit cards to their customers. These cards often came with ridiculously high interest rates — 28% or higher — and people were unconscious about how much more their charges were costing them on a department store card than on another form of credit. But the lines have blurred over time. Stores have gotten out of the business of using their own cards and chosen to brand traditional credit cards like Visa and MasterCard instead. Costco has an alliance with American Express. The Walmart Mastercard is no different.
The impact on your credit rating is exactly the same whether you use a bank branded MasterCard or a store branded MasterCard. Since the Walmart card has no fees, it is a good choice providing you pay your balance off in full every month. Very often the cards that come with the best bells and whistles — points, no fees, extra benefits — also come with the highest interest rates. That’s of no concern providing you NEVER CARRY A BALANCE. If you’re buying stuff on credit that you can’t afford to pay off in full then you’re a dumb bunny and deserve whatever penalty you get.
As for applying for a new card and cancelling your old one, slow down. First, it’s always good to have a second card. Second, you don’t want to cancel a card with a credit history attached before you’ve built up a credit history on the new card. So using the new card for at least six months before cancelling the old card makes more sense. If it were my decision, I would get the new card and keep track of my spending religiously, always paying the balance off in full about 4 days before the due date. I would tuck the older card away somewhere safe, keeping it as a backup, as long as there are no costs involved.
B wrote: Our local Home and School association uses Fundscrip to raise money for school activities. Companies sell their gift cards to Fundscrip at a discount. Fundscrip sells the gift cards to me at full cost. The school gets a commission and Fundscrip gets a small commission as well. I’m currently buying gift cards for groceries and car fuel; expenses I would routinely spend. Lots of stores are participating, but none of them are in my small town, so it’s easy to control my spending. However, I worry about the bigger picture; the commissions must be increasing prices. I’d appreciate your comments on using Fundscrip. Is it a good way to control spending and support my school? Or is it a recipe for over-spending and escalating prices?
Gail says: If you are buying and redeeming the cards at their full face value there is no additional cost to you in using the cards. The profit for your local H&S association comes from the fact that Fundscrip buys millions of dollars worth of these cards and so can purchase them at a discount. Fundscrip splits the discount with the charities it works with. So it may give your H&S 3% and keep 2% for itself. If your school uses $10,000 worth of cards, your H&S will make $300. Funscrip will make $200 for its trouble in procuring the cards at a discount and managing the process. Everyone seems to win. If you were paying a premium for the cards (paying $1.01 for each card worth $1) I’d tell you to skip it. But if you’re even, and your school can make some money, as long as you’re only buying what you’d be buying anyway (like gas and groceries) and you’re sticking to your budget, you’re fine.
P wrote: I am 21 years old. I’m working full time making a yearly income of $30,000(taxes not deducted). I have no debt however, I am finding it impossible to save money for my school tuition as I am planning on going back in September 2011. I have approx. 9 months to save around $10,000. So far, I’ve transferred $200 dollars from each pay to my savings, but end up using most of it. I do enjoy shopping but I can remain focused in times of crisis. I just need some help on how to save my money! Please help.
Gail says: If you want to have $10,000 saved in 9 months, you need to be putting away (10,000 ÷ 9 =) $1111 a month. You’re nowhere close. If you want to meet your goal, you need to find a way to make more money if you’re not making enough now to save just over $1,100 a month. Saving isn’t magic; it’s simply a matter of making some money, and not spending it so you’ll have it for school. You’re the only one who can decide how important that is to you.