Health Insurance: Something is Better than Nothing

The largest group of uninsured adults in America continues to be young people. Some are underemployed and get no benefits from their employer; more and more are jobless as the economy becomes increasingly unwelcoming to newly minted graduates. These are tough times. But why are the poor paying higher prices for healthcare than anyone else?

It's a perfect storm, really. The uninsured are more likely to be poor and unemployed, and no third party pays for even a portion of their medical bills. But the sickest part is that they actually pay much higher prices for care.

Hospitals and doctors often have astronomical sticker prices, yet those with insurance—of any kind—automatically receive a pre-negotiated discount before their benefits even kick in. Not true for the uninsured who walk in off the street. According to a study published in Health Affairs, nearly half of personal bankruptcies were the result of medical bills.

It's probably true that the health care many of us get from our employer would be difficult to afford on our own. But there are alternatives.

First, avoid listening to the drumbeat that insurance is always out of reach. Some insurance is still affordable, especially for young people. Residents of many states can get high-deductible insurance for as low as $50 per month. Sure, you’re responsible for the first several thousand dollars in care, but subscribers benefit from the massive discounts from pre-negotiated rates and therefore, these plans reduce the likelihood of financial collapse.

Congress tried to encourage these plans by creating Health Savings Accounts in 2004. Unfortunately, these accounts have disproportionately helped upper income people find a tax shelter and have done little to expand access, according to the GAO.

Until we make some hard choices on health care reform, we can’t let our bankruptcy laws serve as a cover for our archaic insurance system. Encourage those facing a tough situation to check out ehealthinsurance.com or other comparison sites to find an affordable plan. Let’s not let each other face more risk of ruin as we weather an already violent storm.

Fixed vs. Adjustable Rate Mortgages

There's been a lot of movement in the housing market, with prices falling in many metro areas around the country. Those of you thinking about jumping in the real estate market and buying a home, you might be able to get a good deal these days. But when figuring out what you can afford, you'll need to understand the basic difference between a fixed rate mortgage and an adjustable rate mortgage.

A fixed rate is exactly what is sounds like -- you lock in an interest rate for the duration of the loan, usually 30 years. The only way you can change the rate is if you refinance, which essentially means to get a new mortgage that will pay off your old mortgage.

An adjustable rate mortgage (ARM) will change to a different rate after a certain time period. You'll often find rates quoted for different types of ARMs, like 3/1 or 5/1. The critical piece is the first number: this is the number of years your rate is fixed before it adjusts to a new rate.

So which is better? Here's some key factors to consider:

• Length of stay: people who are very confident they plan to sell after two or three years may want to consider ARMs. Generally speaking, ARMs have lower rates, because lenders want to lure people into these products in the hope that rates might increase and the borrower accepts the new rate.
• Risk: Your risk tolerance is important to understand. There is a bit more risk to an ARM, even though the initial rate might be lower. What if you can't afford the new payment? What is you can't sell your home?
• Fees: You'll want to compare the closing fees on different mortgages in order to try and understand the true cost of the loan.
• Caps: ARMs sometimes have a cap on how much rates can adjust upward. This will give you a worst-case scenario of how much your monthly payment will be.

My personal recommendation for young borrowers: if it makes a lot of sense to buy a home, get a fixed rate mortgage unless you are sure you're going to move in 2-3 years, where an ARM might make more sense.

The mortgage market has been volatile recently, monitor mortgage rates at Bankrate and other independent sites to check the latest rates.

What's this 'credit crisis' about?

A number of you have e-mailed about the credit crisis, subprime mortgages, and other related topics asking what it all means.

A critical concept to understand that the media doesn't often talk about is the trend toward "securitization" of mortgages. In the old days, people would normally go to a local retail bank and meet with a loan officer to get a mortgage. This bank would then collect interest payments over the life of the loan. The loan officer would, in theory, carefully assess the risk of the loan in order to come up with an interest rate, because if the borrower defaulted, the bank would lose money.

That doesn't happen so much anymore. A whole new cadre of mortgage lenders (many of them now defunct) would loan money to prospective home buyers. But instead of keeping these loans on their books, they would group together these loans in a package and sell them. The borrower would make interest payments that would eventually go to the new owner of the loan.

When these lenders sold the loans, they no longer had any risk if the borrower defaulted. Perhaps this was one reason they aggressively marketed new mortgage products, that offered features like rates that would adjust after a few years or that required no downpayment. Riskier borrowers ("subprime" borrowers) were given loans, and for some reason, other financial institutions were buying these loans.

In the news, you may have heard of "write-downs" by many big banks. What this means is that the value of those loans they bought are not actually worth what they expected, since those riskier borrowers are defaulting.

The markets have been spooked by this. So what does this all mean for young borrowers? More to come in upcoming posts...

Need More Time to Do Your Taxes?

If you keep delaying the inevitable and haven't done your taxes yet, there is a backup option. For no penalty, you can file for an automatic extension using Form 4868 to get six extra months. A few caveats:

1) If you think you might owe money, pay it when you file this form. You are not getting an extension to pay, just to file. If you don't pay what you owe, you'll pay a penalty. You are better off paying a little bit in case you owe money and getting it refunded when you file.

2) You do not get an extension to contribute to your Roth IRA, so don't forget that before the 15th.

3) You won't get your stimulus package check from the government until you file this year. Most taxpayers will be getting $300, but you need to file a return to get your check.

See more information on filing extensions on the IRS website.

You're Getting a Tax Refund? You Messed Up.

Hopefully, many of you have already done your taxes by now and know whether or not you are getting a refund or not.

While it may seem that getting a refund is great, it actually means you overpaid during the year. You gave the government a free loan, and now they are paying you back. Wouldn't it have been better if you never gave them a loan at all?

If you are getting a substantial refund, it may be because you have some deductions, lowering your tax bill. If this is the case, you'll want to lower the amount your employer withholds from your paycheck. Talk to your HR administrator and ask to revise your W-4.

You'll want to increase your exemptions in order to reduce the amount of withholding from your paycheck. You'll end up getting bigger paychecks and earning money in your bank account rather than giving out a free loan.

Make Your 2007 Roth IRA Contribution

April 15th is the deadline for contributing to your Roth IRA for 2007. If you made less than $99,000 last year, those of us under 50 can contribute $4,000 of after-tax income. (If you made less than $114,000, you can still contribute, just not the full amount.)

Remember, your contributions to your Roth IRA can always be withdrawn. But you should try to avoid touching the money, since any interest or earnings are tax-free! They can be withdrawn when you retire, need a home down payment, along with some other special situations.

If you are a recent college graduate, you can expect your $4,000 to be worth about $70,000 when you retire -- all tax free. That means more money you can spend during your adult life, rather than having to save for the future.

If you don't have a Roth IRA, consider opening one through a mutual fund company, like Vanguard or Fidelity. If you don't know which fund to put your money in, contribute to a money market fund, balanced fund, or S&P 500 index fund. When you have time to make a more strategic decision, it will be easy to move the money.

You have two weeks to make this happen, so don't forget! Remember, you can always tap the money later if you absolutely need it, since your contributions can always be withdrawn.

If you're interested, check Investopedia or Wikipedia for more details on the specifics of a Roth IRA.

Yet Another Reason to Stop Using Your Debit Card

Banks have once again raised fees for overdrafts (writing a check for more than the balance of your bank account). These fees are becoming a critical part of how banks make money, so you'll need to show extra caution now.

So what does this have to do with your debit card? A debit card is just another way to use an electronic check. The industry is currently engaging in what many believe to be an unethical practice: letting your check clear which gives you a negative balance AND assesses you an overdraft fee.

For example, let's take this bank statement with a $12.46 starting balance:

01/15/2008 Beginning Balance $12.46
01/17/2008 Debit Card Use $14.00
01/17/2008 Overdraft Fee $35.00
01/17/2008 Debit Card Use $4.60
01/17/2008 Overdraft Fee $35.00
01/17/2008 Debit Card Use $5.75
01/17/2008 Overdraft Fee $35.00

Ending Balance: -$116.89

For just a few small purchases on your debit card, the bank was seeing each one as a check and sticking you with more than $100 in fees in one day!

How to avoid this:

1) Use credit cards
If you pay off your balance every month, use a credit card. Since a debit card often gets accepted, your credit card will get declined if something is wrong (over the limit, etc).

2) Get overdraft protection
Banks sometimes offer this protection for free -- it is simply a line of credit that gets tapped if you overdraw. The interest you pay on this is likely to be much lower than the overdraft fee.

3) Don't use banks that allow debit card purchases to clear when you have a negative balance
Drop them so that this unethical industry practice can end.

Saving: Roth IRA's vs. 401(k)'s

I have this friend who is so proud of herself these days. Beth told a group of us that she opened up an ING online savings account and put all her savings there which will earn more than triple what her checking account earns. After the oooh's and ahhh's subsided, the bubble-burster in me went in for the kill.

"So this is money you saved on top of your Roth IRA contribution?" Her clueless facial expression showed that she had no idea what I was talking about. She clearly had an old-fashioned conception of what it means to save.

After all, saving isn't any good unless you're saving money in a smart, savvy way.

A lot of the strategies for smart saving involve ways to lighten your tax burden. For many young people working today, their employer offers some sort of retirement savings plan -- for most of us, it's a 401(k). But the government has essentially created a huge tax loophole for people making less than $114,000: the Roth IRA.

Again, I'll refer you to my original post about the person figuring out how to pay of debt and save for a potential first home purchase. While his intention to open a money market savings account to accumulate money for a downpayment is good, he's not necessarily using the right mechanism.

After making sure you have a bit of emergency cash (for a natural disaster, Apocalypse, etc.), you should enroll in your employer's 410(k) program, especially if your employer "matches" your contributions. These matching programs reduce your tax burden AND give you extra compensation from your employer. Money that you put into your 401(k) will go in "pre-tax."

The disadvantage of a 401(k) is you won't be able to touch the money for a long time, and there are substantial penalties for doing so. When you withdraw, you'll also have to pay income tax on the proceeds.

A Roth IRA works a bit differently. Most of you will be able to contribute $4,000 this year. Your contributions come after taxes, and usually Roth IRA's have nothing to do with your employer. The beauty of the Roth is that all earnings are tax-free, and there a lot of circumstances that allow penalty-free early withdrawals (for example, you are always allowed to withdraw your contributions with no penalty.)

Other circumstances for penalty-free withdrawals from a Roth IRA include a first-home purchase, health expenses, and tuition.

For the vast majority of you, here's a quick list of how to allocate your savings:

1) Get the most out of your employer.
First, max out on your 401(k) contribution to the point where your employer "matches"

2) Take advantage of a Roth IRA.
After contributing enough to get the full employer matching funds, max out on your Roth IRA contribution for the year.

3) Save in taxes.
Contribute more to your 401(k) until you reach the employer or legal limit. Remember, you won't be able to touch most of this money for a while. If you're not willing to put it aside, you should be prepared to pay taxes on this amount and put it to good use.

In future posts, I'll offer some more details on how and when to start a Roth IRA.

Travel Tip: Exchanging Money Abroad

The US Dollar is worth a lot less than it used to be in most foreign countries. Here are some common mistakes many travelers make:

Buying travelers cheques
Travelers cheques do have one big advantage -- if you lose them, they can be fairly easily replaced. But you can often get gouged when changing them to local currency. If you want to bring travelers cheques, get them issued here in the US in the local currency if you can get it commission free (usually available to American Express cardholders). You can then change them at any local bank with your passport for no charge.

Changing your dollars in the airport or at your hotel
You should actually never do this. Ever. You should only do this at the airport if you need a little bit of cash for transportation.

Instead, here are some better options to stretch your dollars.

Use a credit card with a low foreign exchange fee.
There's been an antitrust settlement against the credit card companies for cheating consumers on these fees, which charge you for using your credit card abroad. If you travel abroad or buy in foreign currencies frequently, consider getting a card with a very low fee (some are as low as 0%). Take a look at this compiled list of frequently updated information on foreign exchange fees for credit cards.

For cash, always withdraw from an ATM machine.
ATM machines will withdraw from your bank account without a ridiculous commission. Airports almost always have reputable bank ATM's for you to make your withdrawal. Be sure to check if your bank has a international ATM fee -- many brick-and-mortar banks have them, while many internet banks are fee-free. Here is some more info on what banks are charging.

Be sure to notify your credit card issuer if you are going to be visiting lots of different places, since they might start declining charges out of fear you've had your card stolen.

Taking little steps like these could save you hundreds of dollars that you didn't even know you were spending. Use that money to enjoy your travels, rather than giving it away to bank commissions.

Buying Health Insurance

Matching

A. No Health Insurance
B. Comprehensive Traditional Policy
C. High-Deductible Catastrophic

1. Probably Getting Ripped Off
2. Independently Wealthy or Delusional
3. Savvy

Answers
A-2, B-1, C-3

Choosing health insurance is annoying and something that most young adults don't pay close attention to. Many young people fall in one of these categories:

No Health Insurance at All

It's important for everyone to realize that this is completely irresponsible. Unless you have substantial wealth, you could ruin your financial future and potentially drain your parents or family of their retirement savings if you have an accident. Even if your employer doesn't offer it, you should still get insurance.

'Over'insured

Many young people have a comprehensive policy provided by their employee, even though they are healthy and rarely need any care. (This is more your employer's problem than yours)

How to Choose a Plan

For those of you who are self-employed, a student, or don't have an employer-provided plan, the first question to ask yourself is whether or not you are healthy. Do you need to see a doctor for any conditions? Are you on medication? If you only expect to see a doctor for a routine check-up, you'll want to get some catastrophic insurance to protect you in case of an accident or an unexpected major illness.

You can often subscribe to these plans for about $50 a month. Generally speaking, you won't receive any benefits, since these plans have a high deductible (often $2,500 to $5,000). You'll be responsible for this amount, and your benefits will kick in after you've incurred these expenses.

Generally speaking, the lower the deductible, the higher the premium. You'll also want to check to make sure that local doctors and hospitals accept the insurance plan.

This can be a serious savings from a student health plan through a university or a comprehensive traditional policy. Some of these plans have monthly premiums triple the amount of a catastrophic plan.

Check availability at sites like www.ehealthinsurance.com, where you can compare different plans.

More info on catastrophic plans: Pros and Cons of Catastrophic Health Insurance

Should You Be Borrowing More?

Yes, borrowing more. More people than you might think are racking up the wrong kind of debt, when they don't need to be. Take a look at these debt situations:



The total amount of debt is the same, with drastically different amounts of interest. Don't forget that student debt has deferred payments and is often tax deductible, making it even better than credit card debt.

Students and recent grads often develop terrible financial situations simply because they aren't taking out enough funds through their student loans. Recent grads are often paying back too much, since they feel their student debt is a burden.

If you think about it, it's totally silly if you have credit card debt, but thousands do it. The interest rate is probably much higher and will be more burdensome in the long-run with a credit card, and student loan interest is often tax-deductible and doesn't impair your credit score.

Hundred of thousands of students often borrow money only to cover tuition expenses. Instead of taking out more money for living, food, and other school expenses, they just rack up credit card debt.

The same goes with recent graduates who have agreed to an accelerated loan repayment schedule, which doesn't give them enough money to get by on.

As the new year and new semester is coming around, take a look at your spending over the last several months and see if you need to be borrowing more from your student or home loan. If you're a student, contact your financial aid office to increase your loan amounts and have the funds transferred to your bank account (if you have the self-control to use it wisely) -- you might even be able to get enough to pay off your credit card debt. If you're in the repayment process, call your lender to see if your monthly payments can be reduced, so you don't have to depend on your credit card.

Remember, no matter what the so-called pundits say, getting rid of credit card doesn't have to be solved by cutting spending dramatically. Managing your loans and lowering your interest rates is often much more effective.

Choosing a Credit Card: Cashback, Miles, and Points

I’m sure all of us have gone out to dinner with a big group and sometimes have that awkward feeling when the check comes. Is that annoying girl who only ordered salad but drank more wine than everyone gonna try and protest splitting the bill? We all hate that. But then there is that other girl, who always wants to pay with a credit card. Sometimes, she even takes other people’s cash and puts their portion on her card.

Sketchy? A little. Savvy? Yes.

After all, if you were going to pay cash, you shouldn’t really care if she puts your part on her card. But, what exactly is she up to?

She’s probably earning cashback, points, or miles (or Mommy and Daddy are paying the bill and she just wants the cash). For those of you with a credit card or planning to get a card, what should you be looking for when signing up for a card?

Getting rewarded for credit card use is only for people who plan to pay off their entire balance each month. (If you don’t plan to pay of your balance each month, then don’t apply for a new credit card.)

Rewards cards come in a few major types:

Cashback

Cashback cards traditionally return to you a standard percentage of your charges, usually in chunks of $50 or $100. For example, the Citibank Dividend card gives you 1% back on all purchases – this is fairly standard among cashback cards. This card also gives you 5% cashback on groceries, gas, and pharmacy purchases.

Some cards will give you additional cashback for purchases at a specific store or other category (like purchases at the post office, restaurants, travel, etc.)

Cashback cards are a great option for those who don’t like dealing with points and other non-monetary forms of currency. They are especially great if you only use them for the bonus cashback categories. Many people will use the Citibank Dividend card, for example, only at supermarkets and gas stations.

Frequent Flyer Miles and Hotel Points

Almost every airline and hotel chain in the world now has an airline branded credit card that offers miles for purchases, usually one mile per dollar spent. Many airlines even offer bonus miles just for signing up. The Delta Skymiles American Express offers 15,000 miles when making the first purchase.

A caveat about mileage cards: frequent flyer miles are depreciating currency. Airlines are becoming stingier when it comes to redemption, allocating fewer award seats than ever before. A mileage card is probably best for those who fly frequently and really understand how the airline program works or for someone who needs the bonus miles for signing up to redeem a ticket soon.

Many mileage cards charge an annual fee, though some do not. Check the terms of the card carefully so you know how mileage accrues, when it expires, and all of the other small print. Hotel point cards usually don’t have a fee, but be sure you have something in mind about what you would use the points for.

Charity

Many charitable organizations, universities, and advocacy groups offer a branded credit card now. A percentage of your contributions is given to the organization.

It feels awful to write this, but charity-branded cards are actually not a good idea. You are better off getting a cashback card and sending those proceeds to the charity of your choice. Not only can you get a tax deduction this way, but you may also have more choice about the specific program within the organization or university you wish to support.

Other Points and Rewards

There are a whole other range of rewards cards. If you are an avid shopper at a specific store, they might offer a card where spending leads to gift certificates. Sports team-branded cards might get you invitations to special events. Whatever the card, see if the rewards are something you actually value and would use. If the terms are right, then go for it.

If you are getting points or miles or other rewards, you should try and get a card that gives you about 1.5 cents per dollar you spend in rewards. If you plan to spend $10,000 this coming year, make sure that you value the rewards from a potential card at about $150 or more.

Beware of annual fees. Be sure to subtract out any annual fee from the rewards you expect.

Check the amount you need to spend to get the rewards. If the cashback card offers you 2% back, but the minimum reward is $500, figure out if you really plan to spend $25,000 on the card. This is especially true for point cards.

Finally, do not get a rewards card if you don’t plan to pay off the balance in full each month. These cards usually have higher interest rates and fees for late payments and going over your limit.

If you are looking to sign up for a card, search the web for offers. Check the airline, hotel, and stores you use most to see if they offer a branded card. Carefully look at the terms and conditions, and see if you actually value the rewards before you sign up.

Even if you don't have a rewards credit card, making charges and paying them off helps to build a good credit history. So next time you're out with a group of friends for dinner, if someone is being annoying by using a credit card, throw yours in too.

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Choosing a Bank: 'Brick and Mortar' or Virtual?

I recently gave a check to a friend for several hundred dollars. While most would expect to hear a "thank you," his response was, "What the hell is Umbrellabank?"

I explained to him that it was a virtual bank which solely operated online. He asked a lot of questions, including:
"How do you know they are real?"
"Where do they keep the money?"
"Aren't you afraid about keeping your money on a website?"

All of these questions are actually the wrong questions, since they seem to indicate a general misunderstanding about how banking works. There isn't a big vault where you can swim in gold coins like Scrooge McDuck could do. Virtual banks are all FDIC-insured, so there isn't a worry about losing all of your money if the bank shuts down.

Though virtual banking offers a lot of advantages, it is definitely not for everyone. Here are some factors you should consider when deciding between a checking account at a virtual bank or at a traditional brick and mortar bank.

Do you deposit a lot of checks or cash?
While most people usually have direct deposit for their paycheck, those who need to deposit cash and checks often may want to keep a brick and mortar bank account. Virtual banks usually process deposits via mail and ATM. A lost envelope or an ATM error could lead to a major delay in accessing your funds.

If you live paycheck to paycheck and you don't have direct deposit, there will be a small delay between your deposit by mail and the processing of that deposit, which will not allow you to have access to your funds immediately.

Do you plan to move in the short term?
For people who move often, sticking with a virtual bank can save a lot of hassle. No matter where you live, you'll have the same access to your bank.

Do you frequently use ATMs?
Those who travel or use ATMs often will probably benefit from virtual banks who generally automatically reimburse you for any fees you incur.

Do you like to yell at bank tellers?
Some people like the peace of mind of being able to talk to someone in person when they are having problems with their bank account. Brick-and-mortar banks are good for these people. (Though, virtual banks don't have the same reputation of randomly asessing exhorbitant fees, leading to fewer confrontations)

Do you need to keep a low minimum balance?
Many virtual banks have no or low minimum balances but still offer competitive interest rates. If you have plenty of cash but don't think the interest rate is worth it, stick with your brick and mortar.

Do you like to pay bills online?
Most virtual banks offer free bill-paying services, where they will electronically or physically send a check to anyone you choose. Brick and mortar banks often charge for this service.

For young people who are more mobile and tech-savvy, virtual banking is usually a better fit. For the past six years, my bank has provided me with free checks, bill paying, ATM reimbursements, no foreign exchange fees, no minimum balance, free transfers to money market accounts, and very competitive interest rates. I'm honestly not sure how to rate the customer service, because I haven't really had any difficulties.

Brick and mortar banks have a lot of overhead, so they tend to pass on those costs to customers in the form of fees and inconvenience. But for some people, sticking with a traditional bank might make sense. However, there is no evidence that traditional banks are any more safe from identity theft or fraud than virtual banking.

If you're thinking of switching to a virtual bank, browse Bankrate.com's checking and savings account current rates. In addition to Umbrellabank, there are many unfamiliar names in this market, like NetBank and iGObanking, but also some of the more recognized companies, like Citibank and HSBC. Be sure the terms fit your needs, and make the switch.

The real benefit to virtual banking is connecting your checking account to a high-yield money market or savings account, which will be discussed in a future post.
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Don't Cut Up Your Credit Card! But Your Debit Card...Maybe

Why do people think they've made some sort of major accomplishment by cutting up a credit card? They still owe the debt that they probably accumulated on it. The account is still active. They can still use the number.

This "cutting up your credit card" nonsense is the exact kind of advice that the so-called experts give to young people. In their usual condescending way, they think that young people just don't have the ability to resist the temptation of maxing out their credit cards buying drinks for strangers at a bar. For the millions of you who actually do know how to control your spending, you should consider never using your debit card.

Many people think that using a debit card is much more responsible than using a credit card. I think they're wrong.

For people who have no credit card debt, you should almost never use a debit card. First and foremost, you are much more likely to avoid a nightmare with a credit card if there is any fraudulent activity.

Fraudulent debit card use can wipe out your entire bank account. While the legal limit for fraudulent use for most cards is $50, your bank might take up to 10 days to investigate the fraudulent use before returning the money into your account. By that time, you might have written rent, utility, and other checks that you are now bouncing, leading you to excessive late fees and overdraft charges. The bank might also decide to further investigate, leaving you without any money for quite a bit of time.

While you might not think this could happen to you, identity theft and debit card fraud happen more often than you might think. With fraudulent credit card use, you will discover the fraud before a penny is taken out of your bank account. When you dispute the charge to the credit card company, it is immediately taken off your bill until the investigation is complete. The burden of proof lies with the credit card issuer, not you.

But safety aside, there are some of the many other advantages of using a credit card over a debit card:

1) Earn rewards.

Whether it's frequent flier miles or cashback or money for charity, credit card issuers routinely offer a rewards program for using a credit card.

2) Build a credit history.

Using credit cards and paying your bills allows you to increase your credit score, allowing you to get lower interest rates for student loans, auto loans, mortgages, and more. (Debit cards can't really help you with this.)

3) Protect yourself from scams or defective products.

If you buy something that was not defective and the merchant accept your return, tell your credit card issuer, and they will investigate. If you're found to be right, they will withhold payment to the merchant and you won't be liable for the charge. This is especially important when purchasing something online.

4) It's a free loan.

Charging your purchases on a credit card allows you to earn interest on your checking account balance, since you get an interest-free grace period between the closing of your statement and your payment due date. Debit cards, on the other hand, take money out of your account immediately.

While debit cards might have a little less paperwork to deal with, most of us -- especially people who pay off their balance every month -- are far better off swiping a credit card.

Coffee is Not the Problem, Interest Is

Why do people seem to think their financial troubles are solely due to their Starbucks habit? Personal finance gurus love to talk about how making coffee at home will somehow allow you to retire 10 years earlier. Some coffee quitters are so proud of themselves that they want to spread their gospel -- one of these students was so proud of their genius that they made a coffee calculator.

The media likes to blame young people for their financial struggle, as if we are so self-involved and irresponsbile for accumulating debt that we forget to pay our rent because we're addicted to coffee.

When talking about one young person in debt, one journalist writes:

Serves her right, you think? Many twenty- and thirtysomethings raised on MTV and InStyle magazine have tried to mimic the glamorous lives of the rich and famous through the use of credit cards. (MSNBC, February 8, 2006)

But the truth of the matter is that tuition, housing, and life in general is far more expensive than it used to be, and most of us never really learned how to deal with it.

This culture of self-loathing for buying a pair of jeans or a sandwich for lunch is only making matters worse. I've seen people move in with creepy strangers to save on rent or become hermits in order to spend less. But for plenty of young people, you can take control of your debt without really changing your lifestyle.

As of 2001, the average credit card debt of an American aged 25-34 was $12,000. This number is sad, but not because people are spending too much. The problem is getting trapped by credit card interest and finding it impossible to dig yourself out of the hole. Thousands, maybe millions, of Americans are accruing more debt in interest than from new spending.

So if you have credit card debt, spending might not be the problem. In my first post, I talked about someone with credit card debt and student loan payments. One of his many mistakes is making extra student loan payments instead of focusing on the credit card debt.

Here are a few tips on getting rid of credit card debt:

1) Take advantage of a 0% Balance Transfer Offer
A fairly easy to obtain way to buy some time to keep yourself afloat is to transfer your credit card balance that is accruing a lot of interest to a card that will charge no interest for 12 or more months. This is a great way to attack the debt, and if you aren't finished within 12 months, you can transfer the debt to another 0% card!

If you don't qualify for a balance transfer, you can probably move your debt to a card with a low introductory APR to reduce the burden of interest piling up.

2) Focus on the right kind of debt
When attacking debt, prioritize your payments first on the highest interest rates. Don't make advance payments on your student loan payment or mortgage payment if you have credit card debt. Interest rates on these loans are lower and the interest paid is tax-deductible. Pay the minimum on these loans until you can erase your credit card debt.

3) Never miss a payment
Missing a payment can have really negative consequences on your credit history, and it automatically tacks on fees and high interest rates for most credit cards. If you are a forgetful person, consider a credit card that automatically deducts a certain amount of money from your bank account.

While giving up bad habits is always good, don't deprive yourself of things you enjoy when you might be able to manage your debt by transferring your balances and minimizing the impact of high interest rates.

Here is a list of cards that offer 0% Balance Transfers for 12 months.

Now stop thinking about moving to a sketchy place on craigslist and find a new credit card that will let you conquer your credit card debt. Do the math, you might just be able to afford an overpriced latte more often.

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