Category: Money Management
The fee to switch to a no-interest card could wipe out your potential savings.
Consumers with credit scores of 720 and higher have been inundated with card applications and preapprovals touting 0% annual percentage rates on new purchases and balance transfers — for as long as 21 months. Credit card analysts say consumers can expect to see more of these offers as delinquency rates — already down 26% from a year ago, according to the most recent data from the Federal Reserve, continue to fall, and card issuers try to boost profits by targeting prime borrowers.
Seventy-one percent of credit-card mail features low introductory APRs on purchases, up from 53% in the year-ago period, according to the most recent data from Synovate Mail Monitor, which tracks credit-card mail. And balance transfer offers are on the rise, making up 65% of credit-card mail, compared to 54% earlier this year.
This is a dramatic turnaround from last year when these borrowers — who pay their bills on time and often maintain low-to-zero balances — were shunned by card companies, in part because their responsible borrowing habits meant smaller profits for the lenders. Many saw their credit limits cut and interest rates raised to rates as high as 30%. Now, card issuers are hoping these more credit-worthy borrowers will spend and carry a balance beyond the introductory period, says Odysseas Papadimitriou, chief executive of CardHub.com, which tracks credit-card offers.
What to Expect
Longer balance transfer promotions…
Promotional periods for 0% balance transfer offers available in October last up to 21 months, compared to the 12-month average promotional period a year ago, according to CardHub. Before 2007, it was rare to see a 0% promotional offer for as long as 15 months.
Someone paying $300 each month on a $5,000 balance at an 18% rate — a common APR right now — will incur $797.17 in interest over 20 months, an expense that could be significantly reduced with a balance transfer. Consumers with credit scores of at least 720 can choose from 12 balance transfer offers with 0% interest that last at least a year. Look for these card applications in the mail, or contact credit-card issuers or search the web to apply. The Citi Diamond Preferred and the Citi Platinum Select cards offer 21 months, the longest period; the Discover More card offers 18 months.
…but higher balance transfer fees
The downside to balance transfers is the 3% to 5% fee you’ll have to pay, which wipes out a chunk of the potential savings. Of the 18 cards offering a 0% balance transfer to high credit-score consumers, all but one have fees in this range, according to CardHub.com. (The Visa Black card is the exception, the balance transfer fee is capped at $50, but the card has an annual fee of $495.)
Many credit-card issuers have also eliminated caps for fees on balance transfers, many of which were $100 or less only a year or two ago, says Curtis Arnold, founder of CardRatings.com, which monitors credit-card trends. So now, to transfer $5,000, you’d pay up to $250. And more fee hikes are likely on future offers in the near term, says Anuj Shahani, a director at Synovate. But if you can pay off the balance in a 21-month period, you could save upwards of $500 on the 18% interest you’d have otherwise incurred.
Higher rates after the promotional period…
On average, most 0% rates will adjust to around 15% after the promotional period, a high rate for prime borrowers who, pre-credit crunch, could often secure a rate below 10%. So pay off the entire balance before the promotional period ends or you’ll be stuck with a rate that could be higher than the one you have now.
Rate changes won’t stop there. As with any credit card, the issuer can increase the APR again, and if it does so, it will notify you by mail. That new rate won’t apply to your existing balance, which was often the case before the new credit-card rules went into effect, but will apply to purchases you make as early as 14 days after you receive the notice, says Papadimitriou.
…but more forgiveness
If you miss a payment, you’ll have a longer grace period before you lose that 0% rate. Prior to the new credit-card law, if a cardholder was late with one payment, his interest rate could default to a penalty APR, usually 24% or higher. Now, the penalty rate kicks in only when a consumer is late on a payment for more than 60 days. Although it’s a better deal for, say, an absent-minded bill-payer, that penalty would likely wipe out the savings from a 0% offer.
One important thing to determine is your breakeven point — how long it’ll take to recoup your costs.
Refinancing applications represented approximately 80% of all mortgage loan applications in September 2010, according to the Mortgage Bankers Association (MBA), in part because extremely low mortgage interest rates encourage homeowners to restructure their finances. But whether or not a mortgage refinance is right for you depends more on individual circumstances than this week’s mortgage interest rates. Here are a few considerations to think about before applying for a home refinance:
1. Home Equity
The first qualification you will need in order to refinance is equity in your home. Dropping home values across the country have left many Americans “underwater”, owing more to their mortgage lender than their home’s current market value. Other homeowners have low equity. Refinancing with little or no equity is not always possible with conventional lenders, but some government programs are available. The best way to find out if you qualify for a particular program is to visit a lender and discuss your individual needs. Homeowners with at least 10-15% equity will have an easier time qualifying for a new loan.
2. Credit Score
Lenders have tightened their standards for loan approvals in recent years, so some consumers may be surprised that even with good credit they will not always qualify for the lowest interest rates. Typically, lenders want to see a credit score of at least 720 or higher in order to qualify for the lowest mortgage interest rates. Borrowers with lower scores may still obtain a new loan, but the interest rates or fees they pay may be higher.
3. Debt-to-Income Ratio
If you already have a mortgage loan, you may assume that you can easily get a new one. But lenders have not only raised the bar for credit scores, they have also become stricter with debt-to-income ratios. While some factors such as a high income, a long and stable job history or substantial savings may help you qualify for a loan, lenders usually want to keep the monthly housing payments under a maximum of 28% to 31% of your gross monthly income. Overall debt-to-income should be 36% or less, although with some additional positive factors some lenders will go above 40%. You may want to pay off some debt before refinancing in order to qualify.
4. Refinancing Costs
A home refinance usually costs between 3% and 5% of the loan amount, but borrowers can find several ways to reduce the costs or wrap them into the loan. If you have enough equity, you can roll the costs into your new loan, increasing the principal. Some lenders offer a “no-cost” refinance, which usually means that you will pay a slightly higher interest rate to cover the closing costs. Don’t forget to negotiate and shop around, since some refinancing fees can be paid by the lender or reduced.
5. Rates vs. Term
While many borrowers focus on the interest rate, it is important to establish your goals when refinancing to determine which mortgage product meets your needs. If your goal is to reduce your monthly payments as much as possible, you will want a loan with the lowest interest rate for the longest term. If you want to pay less interest over the length of the loan, look for the lowest interest rate at the shortest term. Borrowers who want to pay off their loan as fast as possible should look for a mortgage with the shortest term at payments they can afford.
When you compare various mortgage loan offers, make sure you look at both the interest rates and the points. Points, equal to 1% of the loan amount, are often paid to bring down the interest rate. Be sure to calculate how much you will pay in points with each loan, since these will be paid at the closing or wrapped into the principal of your new loan.
7. Breakeven Point
An important calculation in the decision to refinance is the breakeven point, the point at which the costs of refinancing have been covered by your monthly savings. After that point, your monthly savings are completely yours. For example, if your refinance costs you $2,000 and you are saving $100 per month over your previous loan, it will take 20 months to recoup your costs. If you intend to move or sell your home within two years, a refinance under this scenario may not make sense.
8. Private Mortgage Insurance (PMI)
Homeowners who have less than 20% equity in their home when they refinance will be required to pay PMI. If you are already paying PMI under your current loan, this will not make a big difference to you. But some homeowners who own homes that have decreased in value since the purchase date may discover that when they refinance they will need to start paying PMI for the first time. The reduced payments due to a refinance may not be low enough to offset the additional cost of PMI. A lender can quickly calculate whether you will need to pay PMI and the impact on your housing payments.
Many consumers rely on their mortgage interest deduction to reduce their federal income tax bill. If you refinance and begin paying less in interest, your tax deduction will be lower, although few people view that as a reason to avoid refinancing. Points paid during a refinance can be deducted over the life of the new mortgage loan.
Credit card rate hikes reviewed, penalty fees crimped
Most penalties credit card will be limited to $ 25 and fees for customers who do not use their cards will be eliminated under rules issued Tuesday by the Federal Reserve. The Fed also has ordered a review of all walks of credit card interest rates charged since January 2009, including most of the record increases which came in the wake of a nationwide reduction in credit.
The rules, which implement a final set of changes that Congress passed in May 2009, will take effect Aug. 22. “The guidelines of the Federal Reserve released today are good news for consumers,” said Rep. Carolyn Maloney, DN.Y., one of the authors of the laws of a credit card.
The Fed’s rules could result in lower interest rates for consumers. Banks should reconsider the reasons for these increases that began in the last 18 months. They would have to cut rates if the reasons for the increase no longer exist, and regulators to review and implement such reductions.
Consumers will be more immediately notice the new limit penalty fee of $ 25. Reduce the cost penalty is a central provision of the law of credit card, but Congress has allowed the Fed to determine how.
The Fed gives way to a penalty fee to pay more if the consumer has shown a pattern of “repeat” violations, or if a card issuer can show that higher fees reasonably compensates its own costs in processing the violation prompting the penalty.