Personal Baking E-Newsletter - October 2012

College Students and Credit Cards

For many young people, going off to college is not only your first time living on your own, it's your first time managing your own finances. Many students use this opportunity to start building up their credit history with their first car loans and credit cards. If you, or your child, are venturing into the world of paying with plastic for the first time, here are a few questions to ask yourself as you get started:

What will I buy with credit versus cash? Plan in advance what expenses you'll use your new credit card to cover. This road map for spending will allow you to accurately calculate what your credit limit needs to be and avoid paying fees for exceeding it.

What's my credit limit? Generally, consumers with the highest credit scores spend between 10 and 25 percent of their available credit. So, if you have a credit limit of $1,000 you should only spend between $100 and $250 before paying off the balance. Your credit history and income are two factors which will determine the limit placed on your card. If you feel it's too low, ask if the limit can be raised after a period of time. Many card companies will periodically raise the credit limits of cardholders in good standing.

How will I monitor my card balance? Keeping track of how much you're spending each month is essential to preventing sticker shock when your credit card bill comes each month. Many cards allow you to check your statements online at any time, or will send you an email when you approach a certain dollar amount. Take advantage of these tools or maintain a spreadsheet or balance book for each card.

Can I pay off the balance every month? The most cost-effective way to use a credit card is to pay off the full balance each month. This strategy allows you to establish a good credit history while avoiding paying interest. If you don't plan to pay off your balance each month, look for cards with a low annual percentage rate (APR).

Does the card have an annual fee? When choosing a credit card, weigh the benefits (such as cash back or rewards points) with the drawbacks (high interest rates or annual fees). Keep in mind that cards with no annual fee often lack the bells and whistles of rewards cards, but can be the better option for your first credit card.

A final piece of advice to help you avoid credit card pitfalls: when in doubt, go without (or pay with cash). If you're not sure you need to buy something, wait until you know you need it. You'll avoid buyer's remorse and an unnecessarily hefty credit card bill. If you have any questions about which card is best for you, ask you banker!

Source: WBA Consumer Column 9.10.12

How Many Credit Cards Is Too Many?

Are you too plastic for your own financial good? Although there is no magic number of credit cards that should be in your wallet, some key questions can help you determine whether you're charging around town with more plastic than you need.

According to recent data from Experian, the average U.S. consumer has three open and active credit cards. Whether that is too many, too few or just enough for you is really a question of how you use and manage your accounts.

If you have the tendency to spend more than you earn, you might need fewer than three credit cards -- and maybe none at all, says Harrison Lazarus, a financial consultant and founder of Harrison Lazarus Advisors. On the other hand, if you spend well within your means, more credit cards could be good for you. "You will be able to access money when you need it, obtain fringe benefits like rebates and mileage, and improve your credit score," Lazarus says.

If you are unsure (or in denial) about your spending habits and general attitude toward credit, here are some warning signs you have more credit cards than you can handle:

1. You pull your annual credit report and find open credit cards you had forgotten about. Do you open a store credit card every time you hear the words, "save an additional 10% if you open an account today"? Do you mail back credit card applications in exchange for offers of bonus miles? If so, chances are you have credit cards lying around that you have not used since the day you signed up.

Rod Griffin, the director of public education at Experian, says open accounts that you have neglected could increase your risk of identity theft. Cards that are left idle could be stolen and used to make charges long before you notice that they're gone.

If you have unused credit cards that you don't want to close just yet (more on that in a moment), Griffin says it's best to lock them away or keep in a safe deposit box in your bank.

2. You are not paying your credit card bills on time. You know you have too many credit cards when you start having bill payment issues. If you carry 10 credit cards, for example, and you use all of them, you have 10 monthly statements to deal with each month. "Having too many credit cards can lead to the lack of time and focus to ensure proper credit card management," says Kimberly Howard, a certified financial planner and owner of KJH Financial Services.

Every credit card requires a payment date, and each one could be different. Payment juggling could lead to missed or late payments, Howard says, which could ding your credit scores. Even just one credit card might already be too many for you. "The total balance on all cards compared to the total credit limit on those cards is called the utilization rate," Griffin says. "A high utilization rate, whether you have one card or many, is a strong indicator of credit risk and will significantly impact credit scores."

3. Your credit scores have been dropping steadily. Several factors influence your credit scores, including your previous payment performance, your total outstanding debt and how long your credit accounts have been open.

Inquiries and new accounts can also adversely affect your scores. Every time you apply for a credit card, an inquiry is added to your report. This pushes down your credit scores a little. "An inquiry is viewed unfavorably because it means you are shopping for credit," Lazarus says.

To find out if the number of credit cards you own is a reason for your low credit scores, pull your credit report and look at the risk factors. If "too many revolving accounts" is listed, it might be a good idea to forgo future card offers and think about closing some already-open accounts.

4. You are having a difficult time getting a loan. Having too many credit cards could be among the reasons if you are denied a mortgage or car loan. Howard says loan officers nowadays frown on borrowers carrying more than five credit cards.

Even if you maintain zero balances on a handful of open cards, you can be considered a credit risk. "The loan officer realizes that you could use all of your credit cards after the loan is approved, and that will affect your ability to repay the loan," Howard says.

High credit scores alone should help prove you are worthy of loan approval, but Howard says that's not the case now. Since 2008, loan officers have been far more careful in approving loans, she says. "They are favoring mostly those with a limited number of credit cards, in addition to having a high credit score."

5. You are saving less than 10% of your gross income. If you look at your savings and you're not comfortable with what you see, it could be that you are spending (and charging) more than you can afford. Ideally, Lazarus says, you should be saving 10% or more of your gross income.

For example, if you earn $3,000 every two weeks (taking home $2,300 after taxes and other deductions), you should be able to save at least $300 every two weeks.

If that goal is too hard to achieve, fewer credit cards or none at all might be the way to go. "Less or no credit is better, because you will avoid overspending, underpaying, incurring excessive interest and reducing your credit score," Lazarus says.

Next steps: If, after reading this, you are convinced you have too many credit cards, should you immediately start closing accounts? And how do you know which cards to keep?

If you are looking to cut the number of credit cards you own, Howard says the first ones to go should be store credit cards, specifically those not carrying a MasterCard, Visa or American Express logo.

"Store credit cards are easily given to individuals with low creditworthiness," Howard says. "Once you have MasterCard, Visa or American Express, you need to start thinking about closing those store cards, because they will only hurt you during a loan application process."

Don't close all your cards at the same time, though. Every time you close a credit card account, your credit scores take a small hit. Howard's advice is to close them at six-month intervals, so your credit scores have time to recover before you cancel the next card.

Lazarus suggests hanging onto credit cards that have no annual fees and no overseas transaction fees and that offer rebates or cash-back rewards. He says the Chase Ultimate Cash Award MasterCard, CapitalOne Visa and American Express Blue cards are worth considering. "If you're going to use credit, you might as well make the most from it. In today's world, credit card issuers want your business and are willing to reward you for it."

If you find that the number of credit cards you have isn't causing you any problems, Experian's Griffin says you should be focusing on other financial issues that could be having a greater effect on your creditworthiness.


When Financial Crisis Strikes the Bank of Mom and Dad

It's every parent's dream to give their children the world. Unfortunately, now that Junior and his sister are adults, the toys they want are expensive and their needs are endless. A new house, a second car, a family vacation and braces for the kids are just a few of the items on their long list of things they want but can't afford unless you help pay for them. The problem is, if you keep the cash flow coming, your retirement is going to be in jeopardy.

It's an increasingly common dilemma that was decades in the making. Often, it starts when the kids are young. Remember when your son was a little boy, and you always made sure he had money in his pocket? When he wanted a car, you bought it. When he went to college, you paid for it. The same rules applied to your daughter. When she wanted a new dress, you pulled out a charge card. When she wanted that vacation with her friends, you gave her the money. Now that the kids are all grown up, they remember the lesson that you taught them: put your hand out when you need money, because mom and dad will fill it up with cash.

Just Say "No"
What can you do? The simple answer is that, until you learn to say "No", your kids are never going to learn how to handle money responsibly. Of course, stopping the handouts and starting to teach financial responsibility is sometimes easier said than done.

If you've been generous about giving handouts to your kids, they have probably gotten used to the comfortable lifestyle that you and your spouse worked so hard to achieve, but they didn't see, or were too young to remember, the days when you didn't have money. Now that they are old enough to understand, it's a good time to talk to them about how you struggled to get by on small salaries earlier in your life. For example, it's time to let them know that the house you live in took three decades to pay off, or that your parents (their grandparents) are still living and are approaching an age where you may need to provide them with financial assistance.

Kids Flying The Coop…
If you are one of the lucky 50% of the population with adult children ages 18 to 24 that have actually left the nest and are living on their own, cutting off the cash flow is a bit easier. Start the process by having a frank conversation about all of the issues covered in the previous paragraph. From there, ask the kids to put some serious thought into their lives. Where do they want to live? What do they want to drive? How often do they want to go on vacation? What are they going to do to earn that lifestyle?

…Or Refusing to Empty the Nest
If your adult children are still living at home (often referred to now as boomerangs or KIPPERS), it's time to start charging rent. Sooner or later, the kids need to learn that there are no free rides in life. From there, it's time to talk about financial self-sufficiency. Have the kids explain what they are going to do in order to support themselves. How do they plan to fund their golden years? What will they do if their kids expect a lifetime of financial support? How will they handle it if their children's financial handouts make it impossible for them to achieve their post-work dreams?

Financial Lessons 101
Regardless of where the kids live, talk to them about their lifestyle choices. Explain the importance to live within (or even below) their means. Teach them that anything they can't buy with their own salaries is an item they can't afford. Talk to them about the responsible use of credit cards. If you work with a financial services professional, set up a meeting so that your children can begin to learn about managing their money too.

For holidays and birthdays, how about giving your child the gift of financial security with books about finances or subscriptions to the financial publications that you read?

Last but not least, cut off the cash flow.

The Bank of Mom and Dad
Stop funding discretionary purchases. If the kids don't need the money to avoid eviction or starvation, don't give it to them. If they do need it to avoid such an emergency, make it clear that you expect to be repaid, and either make a payment plan or set a date for the repayment. Ask them to explain how they intend to change their lifestyles to avoid the need for another loan. Share a copy of this article with them so they can understand how their greed is hurting their parents.

While this economic lesson may be emotionally tough medicine to administer, it will give your children the knowledge they need to survive long after you aren't there or able to pay the bills. If your kids are ungrateful in the short term, they will learn to appreciate the lessons in the long term - after all, you probably had to learn the hard way too.


5 Signs That You’re Living Beyond Your Means

Many people in America live beyond their means. Between 1993 and 2008, personal savings rates in the U.S. declined, hitting the lowest levels since the Great Depression in 2006 by falling into negative territory, according to the U.S. Bureau of Economic Analysis. However, by May of 2009, household savings rate had shot back up to 6.9% - the highest level since 1993. Why the change? A recession that came on the heels of a major borrowing binge, which left consumers with the highest amount of consumer debt ever. It took a credit crisis and near-global economic disaster to get Americans to close their wallets and stop spending. Unfortunately, many people did not stop spending soon enough - according to the National Bankruptcy Research center, bankruptcy filings had nearly doubled by the end of 2008.

If you are concerned that your finances could be in danger, read on for five key indicators to help you determine whether you're living beyond your means.

Sign No.1 - Your Credit Score is Below 600
Credit bureaus keep track of your payment history, outstanding loan balances and legal judgments against you. They then use this information to compile a credit score that reflects your credit worthiness. The numerical rankings go from a low of 300 to high of 850. The higher the better. It's this score that lenders use to determine whether they'll grant a loan. In general, any credit score below 600 means that you are probably in over your head.

If you aren't sure what your credit score is, contact any of the major credit bureaus (TransUnion, Equifax, Experian) and have them send you a copy of your credit report. This document will tell you what the bureaus - and ultimately lenders and financial institutions - think of your finances.

Sign No.2 - You are Saving Less Than 5%
In 2006, the average rate of personal savings was an astonishing -0.5%, according to the U.S. Bureau of Economic Analysis. That means that not only were we spending all of our income, but also that a good number of us were also dipping into personal savings. This was the worst savings rate that Americans have recorded since 1933 when it was -0.7% during the Great Depression. The rate bounced back into positive territory in 2008, and climbed further in 2009. If you haven't jumped on the saving bandwagon, now's the time to do it.

Those who want financial security during their retirement years must make sure that they aren't among those who are spending more than they make. If you are saving less than 5% of your gross income you are likely in over your head.

A savings rate below 5% means you could be in real danger of financial ruin if someone in your family were to have a medical emergency, or your family home were to burn to the ground. With savings this low, it likely means you wouldn't even have the money to pay the necessary insurance deductibles.

Ideally, everyone should try to save as much as they can, but in terms of targets, the rule most financial advisors suggest is 10% of your gross income. Beginning at age 30, if you were to save 10% of your $100,000 annual income in your 401(k), or $10,000 every year, and earn a rate of return of 5%, that money would grow to more than $900,000 by age 65. (Standard wisdom is 10% but there are options if this is impossible.)

Sign No.3 - Your Credit Card Balances are Rising
If you are one of those people who pays only the minimum due on their credit card balance each month, or if you send in only a small contribution toward the principal balance, then you are most likely in over your head.

Ideally, you should only charge what you can pay off at the end of each month. When you can't afford to pay off the balance in its entirety, you should try to make at least some contribution toward the outstanding principal.

The importance of paying down credit card balances as soon as possible cannot be overstated. A person with $5,000 in credit card debt that makes the minimum payment of just $200 per month will end up spending more than $8,000 and take almost 13 years to pay off that debt.

Sign No.4 - More Than 28% of Income Goes To Your House
Calculate what percentage of your monthly income goes toward your mortgage, property taxes and insurance. If it's more than 28% of your gross income, then you are likely in over your head.

Why is 28% the magic number? Historically, conservative lenders have used the 28% threshold because their experience has told them that this is the rate at which the average person can get by, make their mortgage payments and still enjoy a reasonable standard of living. Certainly, some homeowners can get by spending a higher percentage on their homes, particularly if they cut back elsewhere, but it's a dangerous line to walk.

Note that if you are currently spending in excess of 28% of your gross income on housing, it may be because many lenders have loosened their requirements over the last decade, and allowed some to borrow as much as 35% of their income. However, since the collapse of the subprime mortgage market, many lenders are becoming more cautious and are once again returning to the 28% threshold.

Sign No. 5 - Your Bills are Spiraling Out of Control
Buying on credit and paying by installment has become a national pastime. It's much easier to buy a new flat screen TV when the salesman breaks down the price in monthly installments. What's an extra $50 per month, right? The problem is that all of these bills start to add up, and you end up nickel and diming yourself into bankruptcy. If your monthly income is being sliced and diced to pay for dozens of unnecessary installment purchases and services, you are likely in over your head.

Lay out all of your monthly bills on your kitchen table, and go through them one by one. Do you have a cell phone bill, a PDA bill, an internet bill, a premium cable TV package, a satellite radio bill, and all of those other gadgets that generate countless monthly bills? Ask yourself whether each product or service is really necessary. For example, do you really need a 500-channel premium cable TV package, or would you really notice the difference if you had fewer channels (and paid less)?

Some of the best places to find savings include your telephone bills (cell and land line), your utility bills (turn off the lights, and don't run the air conditioning if nobody is home) and your entertainment expenses (you could stand to dine out less and to pack a lunch for work).

Bottom Line
As a nation, we have a long way to go before we reach any sort of collective financial responsibility. To avoid becoming part of the gloomy bankruptcy and foreclosure statistics, it's important to measure your financial health regularly. The five signs presented here are not a death sentence; instead, they should be seen as symptoms that allow you to diagnose a problem before it gets worse.


6 Must-Do Fall Maintenance Tasks

Fall is here. That means beautiful trees, pumpkins, and that unmistakable smell that signals the end of summer and the soon-to-be winter months. Fall also means getting your home and car ready for the onslaught of winter. For people in most states, winter means snow and freezing, and that can cause expensive problems if people don't take the time and effort to get prepared during the fall months. Here are a few basic tasks to complete before the first snowfall.

Once the leaves fall, do a final cleaning of your gutters and downspouts. Clogged gutters makes runoff from snow freeze within the gutters. This is especially true for older gutter systems, and it may lead to the gutters separating from your roof. This not only causes damage to your gutters, but also to the underlying structure of the roof that holds the gutter. If you don't like cleaning out your gutters, invest in gutter guards.

Energy Audit
Do you know where your heat and air conditioning is escaping? An energy audit is the way to find out. Although you can pay private contractors to perform the audit, your gas or electric company might send somebody to your home free of charge. Depending on the age of your home, sealing areas where the heat or air conditioning is escaping can result in substantial savings over time. Even the smallest leaks add up over time. You can also do this yourself by examining for cracks in doors and windows and looking for any areas where you can see daylight coming through. The audit will check other areas like electrical and cable outlets on outside walls.

Your Trees
Have your trees trimmed every few years to assure that accumulated ice doesn't cause a dead branch to fall on to your roof. Once the leaves fall and you can see the branches of your trees, look for any larger-sized branches that appear dead and would fall onto yours or your neighbor's roof. If you knew the limb was dead and it damaged a neighbor's home, your homeowners insurance may not cover the damages.

Your Car
Winter is the last time of the year you'd want to be stranded by your car, which is why it's so important that you prepare your vehicle for the demanding weather. Later in the fall, replace your windshield wiper blades, use washer fluid designed for winter use and have a bottle of de-icer in your car to avoid having to scrape. Also check your tires to make sure they have enough tread. If you notice any weird engine sounds, have those fixed before the cold weather hits. Often small problems become bigger once the winter months arrive.

Your Generator
If you live in an area with extreme weather or have medical or other essential devices that require electricity, investing in a generator might be wise. If you have one, test it, along with your snow blower. Also check extension cords for signs of wear. Repair or replace them if required.

The Yard
Aside from raking the leaves, check the foundation of your home. It should be built up so water flows away from your home. Also, disconnect hoses and store them in the garage. Replace any outside light bulbs that are burnt out.

The Bottom Line
Very few people enjoy the maintenance that comes with owning a home or car, but even less enjoyable is the bill that comes with repairing something because regular maintenance wasn't performed. If you start early, many of these jobs can be spaced out over the next couple of months.


Is a Rollover Right for You?

If you've recently changed jobs -- or maybe changed jobs a few times over the years -- you may be juggling multiple retirement plan accounts. While it's certainly acceptable to leave your money in your former employer's plan (as long as your balance is over $5,000, your old employer can't cash you out), in many instances it might be a better idea to consolidate your assets.

Consolidation can help make administering and allocating your assets much simpler.1 Having your entire retirement portfolio summarized on one statement makes it easier to track performance and make changes.

But before you initiate a rollover, be sure to compare the investment options and their associated fees in your old plan with those in your new plan.

  • Were you able to properly diversify your assets in your old plan?1 If your investment choices were limited, you probably want to move your old account into your new account.
  • Are the investment fees higher or lower than those in your current plan? If you were paying more at your old plan, it's a good reason to move your assets to a plan with lower investment fees.
  • Are you satisfied with the investment choices and fees charged in your current plan? If you're not happy with your current plan -- and weren't crazy about your old plan -- you can always roll over your old plan assets into an IRA.

Initiating a roll over isn't difficult. First, check your current plan rules to confirm that rollovers are permissible (the vast majority of plans accommodate this feature). Then contact the administrator of your old plan (you can find their information on your quarterly statement) to get the ball rolling. Some plan providers have a simple online request process, while others require completion of a paper-based rollover form. Your current plan provider or IRA provider may even furnish a rollover service for you.

It's also important to know the difference between a rollover and a distribution. A rollover allows you to transfer your money from one qualified retirement account to another without incurring any tax consequences. A "qualified" account can be either your new employer's plan or a rollover IRA.

A distribution is essentially a withdrawal from your account. If you request a distribution, the account administrator is required by law to withhold 20% of your account balance to pay federal taxes. State taxes, if applicable, are also due. If you are under age 59 1/2, you will probably be hit with an additional 10% federal early withdrawal penalty.

If you have specific questions about your retirement plan distribution options, contact your employer's benefits coordinator or a qualified financial consultant.



1Asset allocation and diversification do not ensure a profit or protect against a loss in a declining market.

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