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Millennials: Rethink credit vs. debit

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NEW YORK (9/16/14)--There is a generational divide when it comes to shopping: A CreditCards.com survey indicates that boomers and millennials both choose plastic, but for the older cohort the word is "credit" and for the younger, it is "debit" (MarketWatch.com Sept. 2).
 
Both systems work well but boomers might point out to their juniors that using debit to the exclusion of credit has its handicaps. Millennials prefer debit over credit by a ratio of nearly 3 to 1, according to the survey, even though debit cards offer fewer protections and rewards and don't help young people build credit.
 
Matt Schulz, senior industry analyst at CreditCards.com, suggests that psychology may be a factor in the decision; consumers may be trying to limit spending to the money they have by using a debit card, which pulls money directly from a checking account. But if a scammer gets hold of a debit card, the consumer could be liable for unauthorized charges of $500 or more. Credit card holders are only responsible for up to $50 and can report a bogus purchase as fraud.
 
"If your debit card information gets stolen, somebody can take real money out of your account that you won't be able to use to make a car payment or a doctor's bill," Schulz says. "That money may be gone for a week or two."
 
Credit Union National Association Center for Personal Finance editors point out that, by choosing "debit" and entering a personal identification number, your transaction is treated as an ATM transaction.
 
The editors advise, "Instead, when you're making retail purchases with your debit/ATM card, choose 'credit.' You'll bypass any potential fees--and the funds still come out of your share draft/checking account."
 
Another good reason: Credit transactions require a signature, which helps guard against fraud.

For related information, read "Gotta Have It? Check Impulse Spending" and "What Will EMV (Chip) Credit and Debit Cards Mean for You?" in the Home & Family Finance Resource Center.

Suss out features of college-payment strategies

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WASHINGTON (9/9/14)--College students who borrow to attend college graduate with a debt load equivalent to a new-car purchase or a down payment on a house, averaging $25,000. Some borrowing might be inevitable, but also explore the features of other college payment strategies (Kiplinger Aug. 26).
 
529 savings plans
  • Pros: Your savings grow tax-free and earnings escape federal tax if you use withdrawals for qualified college expenses. Your state might give you a tax break for contributions; you may invest in other states' 529 plans.
  • Cons: If you use the money for non-college expenses you'll have to pay taxes and a penalty on earnings. A state-appointed firm manages the account you so lose direct control.
Prepaid tuition plans
  • Pros: You can lock in tuition at in-state public colleges years in advance. The tax benefits are the same as for a 529 savings plan. If your student goes to an out-of-state or private school instead, you can transfer the value of the account or get a refund.
  • Cons: Not all states participate. If you use the money for non-college expenses you'll have to pay taxes and a penalty on earnings.
Coverdell education savings accounts
  • Pros: The tax benefits are the same as for a 529 savings plan, and Coverdells expand the definition of "qualified" to include tuition at private elementary schools and high schools.
  • Cons: Your contributions can't exceed $2,000 a year and the beneficiary must be younger than 18; contributions are limited by your modified adjusted gross income.
Roth IRAs
  • Pros: The money in a Roth grows tax-free. Withdrawals are not limited to qualified education expenses. You can avoid taxes on withdrawals as long as they don't exceed your contributions; you can avoid a 10% early withdrawal penalty on earnings if you use the money for educational expenses.
  • Cons: If you are younger than age 59 1/2, you will owe tax on any earnings you withdraw. If you are 59 1/2 or older you must have held the account for five years to avoid taxes on earnings you withdraw. The ability to contribute to a Roth IRA is governed by modified adjusted gross income limits.
Custodial accounts
  • Pros: You manage the account until the child reaches 18 or 21, depending on your state. After that your adult child owns the account (this could be a con). There are no limits on how the money can be used. There's no limit on how much a parent can put into a custodial account. Full-time students younger than age 24 pay no tax on the first $950 of unearned income and pay the child's rate on the next $950. Earnings above $1,900 are taxed at the parents' marginal rate. Investment choices aren't restricted.
  • Cons: If your contributions surpass $13,000 a year you'll have to pay a gift tax. Large balances in a custodial account can hurt chances for financial aid.
Private scholarships
  • Pros: The money is free, and many scholarships are awarded to students based on need or special interests.
  • Cons: Schools might reduce aid if scholarships and aid combined are more than a student's calculated need.
With soaring tuitions, borrowing is often necessary even after accounting for savings and scholarship money. Investigate government-sponsored loans, federal work-study programs, state programs, and institutional aid with the Free Application for Federal Student Aid form. Consider federal PLUS loans as well as a private loan from your credit union. Private student loans come into play after all other resources are exhausted.
 
For related information, read "Parental Income Dings a Student's Financial Aid" and "Parents: Borrow for Kids' College, Jeopardize Retirement" in the Home & Family Finance Resource Center.

Savings gains start with spending scrutiny

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McLEAN, Va. (9/3/14)--If you want to boost savings, create a smart spending plan--and stick to it. It sounds easy, but, according to a recent survey by the National Foundation for Credit Counseling, Washington D.C., about 71% of people have financial worries, and 31% of them say not having enough savings is their biggest concern. Thirty-four percent say they have nothing saved for retirement (USAToday.com July 29).
 
On a brighter note, millennials are on top of their retirement savings game. A recent survey from San Francisco-based Transamerica found that 3 of 4 young adults born between 1979 and 1996 already are discussing saving and investing and planning for retirement with family and friends (July 15). The survey found that 18% of millennials frequently discuss retirement savings, compared with 9% of baby boomers. Seventy percent of millennials already are saving for retirement either through an employer-sponsored plan such as a 401(k) or through anther savings vehicle such as an IRA (individual retirement account).
 
To get a handle on spending--and saving--or to amplify what you're already doing:
  • Save for retirement: Aim to save 10% to 13% of your gross pay. This includes your employer match if you get one. If you're already saving enough in your employer's retirement plan to get the company match, consider opening a traditional or Roth IRA at your credit union as well.
  • Review housing costs: If you own a home or are thinking about buying one, principal, interest, taxes, insurance, and homeowners association dues shouldn't exceed 28%-36% of your gross pay. And don't forget about home repairs and lawn maintenance costs, even though these expenses aren't included in the housing debt percentage.
     
  • Save for major expenses: Expenses might include, but aren't limited to, a down payment for a house, children's college education, a different car, home remodeling project and emergency fund savings in case you lose your job or become ill. According to a recent study by the Federal Reserve Board, 39% of respondents reported having a rainy day fund that could cover three months of expenses.
     
  • Control living expenses: Check with TV, Internet and phone providers to make sure you're getting the lowest rates. Find out if bundling services can help you save. Compare insurance policies and check the National Association of Insurance Commissioners website for price comparisons and the Insurance Information Institute for advice about picking reputable companies. Cut back on going out to eat and picking up take-out meals.
For related information, read "Everybody's Money Matters: Deciding How Much to Save" in the Home & Family Finance Resource Center.

Creative uses for your tax-advantaged accounts

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NEW YORK (8/26/14)--Just as with finding unconventional uses for common items--did you know crushed aspirin is great at removing sweat stains?--there are multiple ways to use your tax-advantaged accounts. 
 
A report released this month from the Employee Benefit Research Institute, Washington D.C., found that the average person contributing the maximum allowed to a health savings account (HSA) could save up $360,000 in 40 years assuming a 2.5% rate of return. That amount jumps to $600,000 after 40 years at a 5% rate of return (The New York Times Aug. 19).
 
HSAs were created a decade ago to help people with high-deductible insurance plans pay for health-care expenses. The reason financial planners are beginning to recommend them as a potential vehicle for retirement savings is that they're triple tax-advantaged: contributions reduce your taxable income, grow tax free, and can be withdrawn tax-free for eligible expenses. 
 
And although the max you can contribute annually to an HSA now is $3,300 for an individual and $6,550 for a family, the balance can be rolled over from year to year and invested. 
 
You can only contribute to an HSA if you're enrolled in a high-deductible health insurance plan, and it only makes sense to use it as a long-term investment if you have enough money to cover your out-of-pocket healthcare expenses.
 
Here are some other outside-the-box uses for conventional tax-advantaged accounts (Forbes Aug. 14):
  • Make your Roth IRA an emergency fund. Ideally, you'd have an emergency fund equal to three to six months of expenses. What could help get you there more quickly is using your Roth IRA (individual retirement account) as an emergency fund. You can withdraw any money except earned interest, tax-free, from a Roth IRA at any time.
     
  • Tap your 401(k) for a down payment on a house or for education expenses. You can withdraw up to $10,000 from your retirement account without paying the 10% penalty if it's used to buy a new home--to qualify you cannot have owned a home in the last 3 years--or for education expenses. Both a degree and paid-off home can be huge assets later in life, but make sure you're still on track for retirement without that money.
     
  • Use your Roth IRA for health insurance in retirement. If you retire before you're eligible for Medicare at 65, you may be eligible for subsidies that significantly lower the cost of buying a plan through a healthcare exchange. Because Roth IRA withdrawals are tax-free, you can use that money to pay for the health plan without affecting your eligibility for subsidies.
For related information, read "Interest Deferred: Beware Zero-Percent Medical Credit Cards" and "Self-Directed IRAs: With Flexibility Comes Risk" in the Home & Family Finance Resource Center.

Retirees: GAO finds managed account fees offset gains

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NEW YORK (8/19/14)--Any retiree wants the best return on retirement accounts. But trying to achieve strong returns by using managed investment accounts could backfire, according to a new Government Accountability Office (GAO) report (Marketwatch Aug. 5).
 
Managed accounts involve professionals making decisions about what vehicles the products invest in, versus passive investing that tracks common indices such as the Dow or a market sector such as small cap funds. That hands-on management requires investors to pay higher fees, which may offset some or all of the gains. The GAO report looked at eight managed account providers accounting for 95% of the market.
 
Since regulatory changes in 2007 gave employers the OK to automatically enroll 401(k) participants into managed accounts, these kinds of investments have become more popular, offered in 36% of plans in 2012, up from 25% in 2005. Many observers think the plans will only become more popular as baby boomers approach retirement, a time when many workers turn to the more tailored advice managed accounts offer.
 
The GAO observed that fees for managed accounts--fees in addition to the expense ratios participants already pay to invest in mutual funds--range widely, from nothing to as much as 1% of the account balance each year. As a result of the added fees, the GAO found that "401(k) participants who do not [consistently] receive higher investment returns from the managed account services risk losing money over time."
 
Some managed account providers claim the funds earn a bonus of as much as three percentage points a year. But the GAO study, citing Vanguard data, reported that "published returns for managed account participants" were "generally less than or equal to returns" of other popular 401(k) investments, including target date funds or balanced funds invested in a mix of stocks and bonds.
 
In addition, the GAO study noted a lack of standards allowing consumers to compare managed account performance with that of other 401(k) investments, leaving investors with no way to accurately size up an investment. The GAO report also noted that the Labor Department, the 401(k) plan regulator, does not mandate disclosure of performance benchmarking for managed accounts, although it does for other 401(k) investments.
 
The report also cited a possible conflict of interest for managed account providers, who may have a financial incentive in recommending that retirees stay in the former employer's 401(k) plan and continue to pay managed account fees. It might be a better choice for retirees to transfer assets to an annuity or individual retirement accounts, the GAO report noted.
 
The report noted, too, that some managed account providers might not serve as fiduciaries; a fiduciary must make decisions based on what's financially best for you and also has to disclose any possible conflict of interest. The Credit Union National Association's Home & Family Finance Resource Center has reported that, "Three-fourths of investors incorrectly believe that financial advisers are fiduciaries and two-thirds wrongly believe stockbrokers are fiduciaries ... That ignorance can be costly."
 
The Labor Department requires a managed account provider to act as a fiduciary, and assume liability for flawed advice, when participants are enrolled automatically in these accounts. But if participants opt in to managed accounts, the rules do not "have a similar explicit requirement," according to the GAO report. "[S]ome providers may actively choose to structure their services to limit their fiduciary liability," the report noted.
 
For related information, read "Making Dollars and Sense of Financial Planner Designations" and "Your 401(k) Manager Not Always Best Adviser" in the Home & Family Finance Resource Center.

Give college-bound students crash course in fin. ed.

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WASHINGTON (8/12/14)--Young adults might be smart enough to get into college but often are ignorant about even the most basic financial skills. This is not surprise--in the United States less than half of the states mandate a course in personal finance as a requirement for high school graduation (GTN News Aug. 4). 
 
Further, a 2014 financial literacy survey by the National Foundation for Credit Counseling (NFCC) reveals that the majority of adults say they learned the most about personal finance from their parents. This is true whether mom and dad possess good or bad financial habits. 
 
Does your young-adult student need a crash course in personal finance? The NFCC provides a checklist of basic knowledge that will benefit everyone managing his or her own money:
  • Budgeting. Be clear with yourself and with your student about how much money is available for expenses. Help him create a workable monthly budget that balances income, loans, and gifts with anticipated expenses. This discipline is a skill that will pay benefits for a lifetime.
     
  • Recording financial transactions. Show your student the importance of recording all transactions in a check register or monitoring online, tallying the running balance daily, and balancing financial statements every month. Tracking expenses might reveal some surprises (60% of your income is spent on dining out?) and provide opportunities to change direction.
     
  • Using credit.  Tell your student why it's important to commit to paying each credit card bill in full and on time each month. By using credit wisely, she will be learning how to live within her means while creating a positive credit file that could help when buying a car, renting an apartment, obtaining insurance, and even landing a job.
     
  • Getting financially organized. Help your student commit to keeping all financial records, bills, and bank statements in one location. This will help ensure that he will pay bills on time, avoid late fees, and keep an unblemished credit score.
     
  • Recognizing the dangers of identity theft. Discuss forms of identity theft, the kinds of personal information that need to be protected, and how to protect them--even, and especially, from friends and roommates. Discuss the pitfalls of careless, unprotected use of social media.
The NFCC recommends that parents and their young adult leaving the nest make an appointment with a certified financial counselor at an NFCC member agency location. Hearing financial advice from a professional may have a stronger impact than hearing it from mom and dad. To find one near you, call 800-388-2227 or use NFCC's DebtAdvice.org. The staff members at your credit union are also valuable resources.
 
For related information, read "Money 101: School Your College-Bound Child" and "The College Affordability and Transparency Website: Tools to Make Informed Choices" in the Home & Family Finance Resource Center.

Dealing with debt? Contact your credit union

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McLEAN, Va. (08/05/14)--More than a third of the U.S. is having trouble paying debt on time. Thirty-five percent of Americans have debt in collections--a bill overdue by 180 days--according to a new study from the Urban Institute, Washington, D.C. Payments this late have been reported to a credit bureau and can affect your credit score (USAToday.com July 29).
 
On average, each of the 77 million Americans with debt in collections owes $5,200, which includes debt from credit cards, medical bills, utility bills, child support, membership fees, and even parking tickets. If you're in this situation here are steps you can take:
  • Contact your credit union. If your debt includes credit union accounts, contact a credit union representative to discuss the possibility of modifying your loan or credit card terms to make payments more affordable. Credit unions have options that will keep you from resorting to nontraditional lenders, such as payday lenders, who prey upon borrowers who believe they have no other options. Credit union credit cards, mortgages, home equity lines of credit, and other products generally have lower interest rates and better repayment terms than you can find elsewhere. For non-credit union debt, contact those creditors as well and explain your situation. They also may be willing to work with you.
  • Reduce expenses. There usually is wiggle room in spending categories such as dining out or getting take-out, transportation, and entertainment. Don't stop there, though; scrutinize every expense.
  • Increase your income. Find an additional job or pick up overtime hours if you can. Start a side business offering a skill you're good at such as babysitting, making repairs, or helping the elderly. If you have an extra room, consider renting it out. Consider selling assets such as jewelry, an RV, a second car or collectibles.
  • Contact a reputable credit counselor. A credit union representative can refer you to a credit counselor within the credit union or to a reputable nonprofit credit counseling agency such as an affiliate of the National Foundation for Credit Counseling. A counselor will look at your financial picture and help you develop an action plan.
For related information, read the Turning Point "Understand All Your Options for Dealing with Debt" in the Home & Family Finance Resource Center.