This & That: Smart Credit Edition

K Wrote: My husband is 58 and I’m 59. We both work with a combined income of $70,000. We have $170,000 in cash and good credit ratings. No other assets and no debt at all. He will have a good pension and I will have a small one on top of CPP. Should we use the cash for a down payment on a condo and should we carry a mortgage of $230,000. (The bank says yes at 2.59% fixed).

Gail Says: Of course your bank thinks it’s a good idea; they stand to make a lot of money off the interest you end up paying. Amortized for 25 years, your monthly payment will be about $1041 and over the life of the mortgage (assume rates don’t go up… HA!) You’ll pay over $82,000 in interest. But you’ll be paying that mortgage until you’re 83 years old. Ugh. Keep in mind that when your husband turns up his toes, you will receive only a portion of his income from his pension, so having this debt — and a commitment to property taxes, insurance and maintenance — until you’re in your 80s isn’t such a hot idea. To have the property paid off by the time you’re in your 70s would mean a monthly payment of $1859.

I’m not sure why you think buying a home at 58/59 and taking on a mortgage is a good idea. Would you rather maintain the status quo and have a bunch of money in the bank to a) enjoy yourself and b) supplement your income when your mate’s pension is no long in full force?

The very fact that a bank is encouraging you to take on this kind of debt at this age is a testament to just how messed up they are and how vigilant consumers must be.

 

K Wrote: My husband and I are facing very low income versus high interest rates. The funds that we can put towards debt repayment on our credit cards unfortunately covers the interest and very little of the balance. (one card is 29.90%) We tried to talk our interest rates down and no go, especially on the 29.90% (department store card). We also have a personal line of credit that we had to use for a couple of big expenses and it’s almost maxed.

We have talked to our bank and are starting to look into a consolidation loan. Possibly roll it into our mortgage or get a Flex Equity Mortgage. My question is this….One thing we were asked is if the bank could cancel all (or at least most) of our other credit. They would cancel the line of credit (it is with them) and leave the credit card we have with them, but they want to cancel everything else. Can they insist on having our other cards cancelled?

We have one card that I would be so sorry to see go, not because of what it is, but my husband has had it since 1989. Only about 7 late (never missed) payments since then. Unfortunately our stove stopped heating and we needed to get a new one so on it went. We also each have our own business credit cards and we don’t want to lose those. (There are some I don’t mind losing).

If my lender insists on cancelling all our other cards we will have our credit rating probably screwed over. Can we say no you can’t take them all away? Can they cancel the cards themselves whether we want them gone or not?

Gail Says: I have to tell you that I think you are in very serious trouble. You’re asking a lender to consolidate your debt and all you can think about is keeping your existing credit cards. You should want those cards gone so that you can be focused on getting that consolidation paid off as fast as possible. Yes, your lender has the right to tell you to cancel cards as a condition of giving you the consolidation. And you should. Clearly, managing credit isn’t your strong suit so having cards open and ready to use does NOT work in your favour. And you’re not even aware of the damage you’ve done to yourself. “Only about 7 late (never missed) payments” is not a good thing. Each of those late payments sent a signal that you were not responsible and put a mark on your credit history.

 

J Wrote: I’m addicted to paying off debt to the extent of being told (by my wife) I’m out of balance. I’ve always been money conscious, and my wife and I (both in our 40’s) are doing just fine. We have above average salaries, live in a million dollar home, carry no commercial debt, have only a small mortgage remaining, have RESP’s, RRSP’s, pensions, TFSA, and float cash on hand. My problem is that when I get a tax return (home based business) or an extra pay (2 extra bi-weekly pays per year) I always want to pay down my mortgage. My wife would rather re-decorate our home (needs some decor, but not bad) or go on a vacation down south. Am I crazy for wanting to become debt-free before indulging in life’s frivolous pleasures like expensive vacations? How do I gain greater balance in spending when paying off debt feels so good, and spending money frivolously feels so irresponsible?

Maybe you won’t answer my question, maybe you can’t answer my question. Some insight would be greatly appreciated as I’ve been a big fan of yours for many years, and you’re one of the few financial gurus who seems to ‘get’ personal finance.

Gail Says: If it were only you, you could go all out on paying down the mortgage and being frugal. But it is not. It is you and your life partner, whom I assume you want to make happy. And so you must negotiate how good you get to feel and how good she gets to feel so you both get some good feelings. You don’t say how big your mortgage is, but as long as you are going to be mortgage free by the time you retire, you’re on track. If not, then you’re right to put every extra penny to the mortgage until that goal is achievable. Having said that, if you are on track then I think you and your wife should consider splitting the “extra” money so you each get a bit of what you want. You should also have some money in your budget for each of you to do with as you please — you’ll have to negotiate the amount — so that you are both enjoying what your money can do for you. If you want to use all your money to pay down the mortgage, so be it. She shouldn’t have to live your goal to the exclusion of her own goals.

 

C Wrote: I love your shows and watch one every morning while having my coffee. I have $10,000.00 saved up. The only loans I have are my mortgage (200 000.00 @ 2.89%) and my car (10 000 at 4%). My financial advisor says put it on my mortgage, don’t pay off my car, it will be better in the long run. I would like your advice on this please.

Gail Says: If it were my money I’d pay off the car and then use the car payment money to rebuild my savings. Each year I would take a portion of those savings and make a principal prepayment against my mortgage.

 

K Wrote: I have recently paid all my credit card debit off, thank you for the advice while watching your show. I have several credit cards with high credit limits. Since the cards have no balance am I ok to just keep them and charge something occasionally that is paid off immediately to keep them active or would my credit score increase if I cancelled them. If I do should I cancel the highest credit limit? I no longer carry any balances on my credit cards so the interest rate doesn’t really have a factor however if I had to use it in an emergency I would use the lowest interest rate card. Thank you I truly appreciate your show I have learned so much and passing it along to our youngest daughter to teach her to learn to save.

Gail Says: Keep open the lowest interest rate card and the card that has the longest positive history, cancel the others. Then use the lowest rate card consistently for things like gas and groceries, pay off the balance in full every month. In about a year, you can get rid of the other card too.

 

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Gail Vaz-Oxlade

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9 Responses to “This & That: Smart Credit Edition”

  1. Regarding credit card use: I see these cards as a tool, make them work for you. I have 3 cards and my husband has one (all no-fee); his is used for gas for the car, car repairs and small purchases that he makes for stuff around the house; this gets us a discount on gas, and gets paid off every month; he is not financially savvy and it is much easier than carrying cash around.

    Mine consist of- a grocery rewards program; we only have two grocery stores in town, so I’m limited in where to shop; each year, I use around $150 in points; a cash back bank Mastercard which I use when we are out of town, for Christmas presents, etc.; I save up the cash back and use it for Christmas shopping. If I have nothing to buy for that month, guess what, it doesn’t get used. I also have a plain vanilla Visa card in case we go somewhere that doesn’t accept Mastercard.

    Until people turn their thinking around and plan how they will spend their money, get their futures under control, it means, Gail, that you will never be out of a job.

    Re J and whether to enjoy yourselves now or later. You cannot put off life; if you don’t have at least a few good times now, you will never have them. We took 4 trips over our working lives, thinking we would take more when we were older. Unfortunately, my husband was then diagnosed with an auto-immune condition which made traveling difficult, and travel insurance very expensive. You never know what will happen in the future. I like Gail’s suggestion of doing both.

  2. I am amazed at K (1st one) for wanting to take out a mortgage in retirement. I definitely wouldn’t want to still be paying the mortgage in the 80s. My parents have been retired for 5 years now and have 2 more years left on the mortgage. To be fair, they did purchase late but were on track to pay it off in full before retirement. Then medical issues got in the way so they were unable to make extra payments so they’re paying the minimum monthly payment. The odd time, they do feel the pinch of that extra mortgage payment but they’re also handy and frugal so they’ve done a lot of house repairs where appropriate and I chip in where appropriate. They did pay for my education so it’s the least that I can do.

    For J, normally I would put the refund all on the mortgage but a balance is needed sometimes. If J had any other debt, it would definitely be put on those. As long as they have emergency funds and small mortgage balance, I would split out the refund. 1/2 for mortgage downpayment and other 1/2 for life 🙂

  3. That should be mortgage prepayment, not downpayment.

  4. K’s story about taking on a mortgage In your late 50s reminded me so much of my parents.

    My parents have a out $100k in equity in thier big house and are downsizing as they can no longer afford it or keep up with maintaining it. Plus my mom no lifer works for health reasons. They are 58 years old. They are torn as to whether they buy a much smaller place or rent. They are horrible at saving so at least by having a mortgage they would be forced to pay that down through monthly payments vs voluntary saving (which I doubt they would do) if they rented. Plus the market here is the same whether you rent or buy a property (besides the maintenance if you own that is). Ugh! I hate that their irresponsible money management has put them in this position at thier age – it’s stressful for them and my sister and I who don’t want to see them struggle but can’t afford to help them out of thier mess financially (but can help them fix up, clean, sell thier house and find a new place).

    This whole situation has more than ever taught my sister and I the importance of being smart with your money and paying off your debt and mortgage ASAP.

  5. I think J should do what he wants with his tax refund and his extra pays. It’s his money and if he wants to get the mortgage paid down faster, good for him. It benefits his wife too. She can do what she wants with her extra money.

  6. I remember my first credit card was a Sears card, I had it for so long and even though I did not use it I did not want to cancel it. I kind of felt an emotional attachment to it, like it was this card that made me an adult or something. I feel as though that is what K is taking about with her husband not wanting to cancel his card from 1989. I got over it, cancelled that 19.9% sucker!!!!! LOL

  7. To C: Like’s Gail’s response, the answer seemed a no-brainer to me. Have 10k cash, have 10k loan at higher percentage. Pay it and it’s GONE! Then save up to prepay mortgage principle. Cannot believe your financial advisor suggested otherwise. Methinks you should find a new one. Or ask him/her for the math to support otherwise.

  8. @Linda: If they are married, it is not HIS money, it is THEIR money. Financial decisions made by one partner independent of the other will result in resentment and bitterness.

  9. All of these are great examples of what people go through and I have to say you nailed your thoughtful responses to each. My bride and I had different financial attitudes and goals for many years. I wanted to pay off debt, save, and retire young. She wanted to do that but at a lower/slower effort. Too keep the marital bliss we split our budget based on each of our incomes. Needless to say I retired at age 51 and she was years from reaching her goals. It did motivate her to get serious and a couple of years later joined me as a rate race escapee.

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