Differences between debit card and credit card

This was originally published on Monday, August 14, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

Credit cards can be a great tool to build credit, but they can also be financially dangerous. A credit card is nothing but a tool. Depending on the skills, knowledge, and self-control of the user, it can be helpful or harmful. Understanding your credit card and its terms is vital to using it properly.

Your credit and debit cards may look very similar, but they work very differently. Credit cards are a revolving line of credit, credit that is automatically renewed as debts are paid off. Your debit card is electronically linked to your checking account. Here are some other differences:

  • Spending limit. Your credit card limit is set based on your credit score — the better your score, the higher your credit limit is. Your debit card is limited to the funds you have in your checking account. Both can be assessed an over-the-limit fee if you go over available funds.
  • Interest rates. If you pay your credit card’s full balance off each month, you won’t have to pay interest. If you make a monthly payment, you will be charged an interest fee based on your balance. A debit card has no interest changed. If you keep funds in your account, you may be paid some interest.
  • Payments. You can pay your credit card balance based on how much money you have. You can pay the minimum required monthly payment up to the full balance of your credit card. With a debit card, your account is debited almost immediately when you make a purchase.
  • Fees. Most credit cards charge an annual fee, late payment fees and over-the-limit fees. If you try to make a purchase using a debit card and don’t have enough money to cover the charge in your account, you may incur an insufficient fund fee.
  • Receiving cash. You can use your credit card to get money from an ATM, called a cash advance. Most credit cards charge a different, higher interest rate for cash advances. If you use your an ATM of your debit card’s financial institution, or a point-of-sales machine at a store, you may not have to pay a fee. For both credit and debit cards, there are usually fees associated with using a different financial institution’s ATM.
  • Effect on your credit. Your credit card affects your credit history. To build a positive credit history, you should use your card regularly, pay off your monthly balance in full, make your payments on time, and not close your account unless you absolutely have to. Your debit card may affect your credit history if you constantly go over your account balance and are charged overdraft fees.

Secured vs. unsecured

There are two types of credit cards, secured and unsecured. A secured credit card limit is determined by the amount of cash deposited before being able to make a purchase. The cash deposited acts as collateral, something provided to a lender as a promise of payment/reimbursement.

Secured credit cards are a great opportunity to establish a good credit history. Unlike a prepaid credit card, your cash deposit doesn’t run out. You continue to make payments and will incur interest if you don’t pay off your balance in full. If you cancel your secured credit card or transition into an unsecured credit card, you will receive your deposit back if your balance is paid off.

Unsecured credit cards don’t require collateral, so issuers take more of a risk. Because of this risk, issuers rely heavily on your income level and credit history.

Most first-time credit card users don’t have a long enough credit history for issuers to approve a large amount of credit. Many times, a co-signer is needed.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Find right credit card for you

This was originally published on Monday, August 7, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: I have never had a credit card and have always used cash. I am considering getting one to use in case of emergencies and for the trip I am planning next summer. I have considered several types but honestly, I find it all a bit confusing. Do you have any tips that could help me decide which credit card is a fit for a first-time owner?

Answer: There are many types of credit cards and looking for the right one can be perplexing and overwhelming. Taking the time to find one that fits your lifestyle and budget is essential.

When used responsibly, a credit card can help you build a good credit history. Good credit history can help you get loans with reasonable interest rates, insurance, cell phone plans and, in some cases, secure a good job.

Some cards reward you for using their cards and others can help you protect your purchases in case of theft or damage. In your case, you may need a credit card to secure your travel plans such as rental cars and hotels.

Before you decide, ask yourself three questions: Do you really need a credit card? How much of my budget can you commit to paying the credit card loan (because that is what a credit card is, a loan)? Can you save to purchase the item instead of using a credit card?

Answer these questions honestly. Knowing the answers to these questions will help you determine which card meets your needs. There are other aspects that you should understand before making a decision.

Short-term loan

A credit card is basically a short-term loan. Depending on the amount you pay monthly, you may or may not accrue interest. If you pay your entire credit card balance at the end of the billing cycle, you will not accrue interest. However, if you pay a partial amount of your balance, you will accrue interest on your average daily balance. The interest is a charge for borrowing the money.

 If you pay just the minimum balance each month, you could find yourself in a long-term cycle of debt. By law your credit card statement must show you the difference of paying off the minimum balance versus making a larger payment.

A normal billing cycle is usually 30 days. Most billing cycles will have a few days grace to pay on your loan. If you miss the cutoff date, a late fee will be assessed.

Credit cards use revolving credit that is automatically renewed as the balance is paid off and can be kept open indefinitely. Your credit limit, or line of credit, is the maximum amount you can borrow. If you have reached that limit, you must pay down the balance before you can borrow more. Some credit cards will assess charges that are beyond your limit and will charge you “over the limit” fees which can be a monthly or daily fee.

Why get a credit card?

There may be many personal reasons why you may need one, but from a financial point of view, a credit card is a method of building good credit. Your credit score is factored by your payment history, the amount you owe on your accounts, how long you have had the credit and the type of credit you use.

Another reason for owning a credit card may be the perks. Some cards offer cash, points or other bonuses. For example, if you travel a lot, consider getting a card that rewards you with airline miles or points for hotel stays. Some cards offer discounts at certain partnering stores or gas stations.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

 

After death, who pays for student loans?

This was originally published on Monday, July 31 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

When a loved one passes, it is a very emotional and trying time. Having to deal with your loved one’s affairs after they pass can be a long and drawn out process.

If they have a student loan that isn’t fully paid off, the loan can be passed on to someone else, depending on the type of loan.

  • Federal loan. If your loved one had a federal student loan, it won’t be passed on to anyone; the loan ceases. The survivors will have to present an official death certificate to the loan provider.
  • Parent PLUS loan. A federal Direct Parent PLUS Loan is a credit-based loan that the parent or parents of a dependent, undergraduate student may borrow to help pay for educational expenses. Since it is a federal loan, it can be discharged when either the parent or the student dies. The estate and the heirs won’t be responsible to pay the loan.  Unfortunately, there are tax consequences associated with the death discharge of a Parent PLUS loan due to the student’s death. Parents will receive a 1099-C form from the Internal Revenue Service after the debt is canceled. The remaining debt canceled is treated as taxable income. Parents in this situation could be hit with a large tax bill.
  • Private student loan. Some private student loan lenders do offer a death discharge, but not all of them. This loan is more like a traditional personal loan. Private lenders may request the estate to pay off the loan. However, if the deceased is the sole signer the heirs or other relatives aren’t generally considered liable.  If there is a co-signer, the co-signer is legally responsible for the debt. In some cases, the death can cause the loan to go into default and accelerate the debt repayment. In other words, the lender can demand the entire loan is due immediately.  The co-signer may request a co-signer release. To obtain the release, the lender will require the co-signer to make on-time payments for a specified period of time, to illustrate they are financially capable of handling payments on their own.  If the deceased is married, depending on local laws, the spouse may be liable for the loan. If the loan was obtained before the marriage, the loan may be forgiven.

Be prepared

To ensure your loved ones are not responsible for your debts, the best thing you can do is to make sure you and your family are protected by understanding your lender’s policy regarding death discharge and reviewing it in depth. A life insurance policy can help with any outstanding debts and protect your family from aggressive loan providers.

Preparing now can save your family from financial trouble in the future.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

A deceased loved one’s debt: Who pays what?

This was originally published on Monday, July 24, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: My sister passed away unexpectedly. She left behind a few loans, including a mortgage, a new car loan and a student loan. Some of the loans she took out were done by her, but a few were co-signed by family members. She passed with good credit and was up to date on her loan payments. Our family would like to get a better understanding of what we are responsible for and what happens to the loans she had acquired by herself.

Answer: Condolences to you and your family. Losing a family member is certainly emotional. Once the ceremony of the funeral and burial are done, the stress of finalizing your loved one’s estate can be overwhelming.

Generally, creditors get paid first from the estate and assets left behind; the beneficiaries receive whatever remains. The person who is legally appointed to be the executor will use the assets to pay off the debt. This can be done by using money left in a bank account or even selling off property or stocks.

If there are not enough assets to pay off the debt, creditors may get part of what is left and the family members may not be responsible to pay off the debt.

Sometimes it is not that straightforward. The type of debt may also play a factor as to who is responsible for paying off the debt.

  • Mortgage. If the mortgage has a joint homeowner, he or she will inherit the house and the mortgage. Federal law prohibits lenders from forcing a joint homeowner to pay off the mortgage immediately after the death of the co-owner. If the mortgage doesn’t have a joint homeowner the executor can continue to pay the mortgage from the estate. If the estate doesn’t have enough money, the person(s) who inherit the house can take over the mortgage payments.
  • Home equity loan. If someone inherits the house, they will also inherit the loan. A lender can request the inheritor to repay the home equity loan immediately. If the inheritor doesn’t have the money, the lender may require selling the house. Lenders do have the option to work with the inheritor to take over payments.
  • Credit cards. If the credit card has a joint account holder, he or she will be responsible for the unpaid bills. Authorized users listed on the account are not responsible to pay off the remaining balance. If the estate doesn’t have enough to pay off the credit card balance, the credit card companies absorb the debt. Credit card debt, unlike a car loan or mortgage, is considered an unsecured loan because the loan is issued on the borrower’s creditworthiness.
  • Car loan. If the car loan has a co-signer, the co-signer is responsible for continuing the payments or paying off the loan. If the deceased is the sole owner of the loan, the executor can pay the loan from the estate. If the payments stop, the lender can repossess the car. If the estate can’t pay off the loan, the inheritor of the car can continue making payments.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

A lot of costs beyond price of your home

This was originally published on Monday, July 17, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

Once you decide to purchase your home, there’s more to consider than just the purchase price or your monthly mortgage payments. It’s easy to let emotions get in the way of reality, especially if it is something we want.

There may be some things you need to consider before signing for that dream home. Some of concerns may be financial, while others require a little investigating on your own.

Down payment. The amount you contribute to your home will determine how much your total mortgage loan will cost. Depending on the type of loan you get, you can pay anywhere up to 20 percent of the home’s sale price.

Private mortgage insurance. Depending on how much of a down payment you make, you may be required to purchase private mortgage insurance. In most cases, it will be rolled into your monthly mortgage payment. Your loan provider usually requires you to have private mortgage insurance to protect lenders against loss if a borrower defaults.

Homeowner’s insurance. Many banks require a homeowner’s insurance policy be purchased before closing on the home. The policy covers personal liability and hazard insurance to cover the home and the contents within it. It may also cover special conditions to which your house may be exposed, such as flood or earthquakes. Ensure you read your policy carefully and understand exactly what it covers.

Title insurance. On Guam, it’s common for property to be passed down from generation to generation without being recorded or going through the proper legal channels. Title insurance ensures the property you are buying is free and clear of any claims, taxes or property disputes.

Appraisal fees. Lenders will require a potential buyer to hire an appraiser to determine the value of the home. They take into account similar properties in the area, market trends, house amenities, square footage, defects and structural concerns. The fee is usually paid by the buyer prior to the sale being finalized.

The appraised value could greatly impact your down payment, loan terms, monthly payments and, in some cases, even your ability to buy that particular house.

Home inspection fee. Although not common on Guam, you may decide to hire a home inspector to look at electrical wiring, plumbing and cooling systems to determine if there are any defects. As a buyer, you can request the price be lowered or that the seller fix the defect before you purchase the home.

Escrow fees. An escrow is a third-party that will hold the money while the buyer and seller finalize the contract. Generally you’ll have a portion of the monthly mortgage payment held in escrow to pay for property taxes and insurance.

Credit report fees. Some loan institutions will charge a fee to check your credit worthiness.

Survey fee. A survey is a drawing or map showing the precise legal boundaries of a property and other details. If an existing survey of the land can’t be obtained, a new survey will have to be conducted. Your lender may require you to have the land surveyed to ensure the boundaries are where they are supposed to be and there are no legal issues.

Loan origination fee. This fee covers the lender’s administrative costs of preparing the required documents for the loan and the closing paperwork. Average cost of the fee is usually 1 percent to 2 percent of the loan amount.

Recording charges. The state and local governments charge this fee to record your deed, mortgage and loan documents regarding the sale.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

The benefits of buying your own home

This was originally published on Monday, July 10, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

Purchasing a home is one of the biggest financial decisions you will make in your life. It’s important to consider how buying a home will affect your finances and lifestyle before making the purchase.

When you think about purchasing a home, think about the following:

  • Do I really need to buy a home?
  • Is my income going to grow?
  • Will I stay in a home long enough to benefit from the purchase?
  • Do I have enough money saved?
  • Am I ready for the responsibility?

Homeownership can be a one of the greatest financial rewards. Here are some of the advantages:

  • Predictable monthly payments. Depending on the type of mortgage, you could have the same monthly payment for the length of your mortgage. Landlords can raise your rent at the end of a lease. If you are locked into a fixed mortgage your payments will not fluctuate.
  • Equity. Home equity is typically a homeowner’s most valuable asset. That asset can be used later in life. To calculate equity, subtract any outstanding loan balances from the property’s market value. Home equity can increase over time if the property value increases or the loan balance is paid down. When you rent, you won’t have an asset when your lease expires.  The equity in your house can be used for emergencies, funding home renovations and even help with your nest egg. If you own your house for a long time, the value probably increased. As you get older, you may want to downsize. Selling your larger home to move into a condo or an apartment will free up some money to enjoy retirement.
  • Tax advantages. Owning a home might qualify you for some tax advantages or credits. As a homeowner, you may be able to deduct all interest paid on your mortgage. In January, after the end of the tax year, your lender will send your IRS Form 1098, detailing the amount of interest you paid in the previous year. The money you pay in property taxes may be deductible too. If you pay for your taxes through a lender escrow account, you’ll find the amount on your 1098 form.
  • Freedom. You may have some restrictions if you are a part of a homeowner’s association, but for the most part, how you decorate your home or landscape your property is pretty much your decision. You may also be able to add a wall to give you more privacy. Home ownership allows you to set down some roots, and there is a certain security in living in a home that you own.
  • Sense of belonging. Research has shown people feel a sense of worth and are more involved in their community when they purchase a home. It allows you to have a voice in community matters and boost your self-confidence.
  • Security. When you rent, your landlord can give you notice of breach of contract and terminate or not renew your contract. With your home, as long as you make your mortgage payments, you have a place to live. It is comforting knowing that you have a roof over your head.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

 

The advantages of renting a home

This was originally published on Monday, July 3, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: I am considering purchasing my first home. I have been saving up and ensuring my credit score is good enough to be given a low interest rate. This is a big financial step and I want to make sure that I am making the right decision. Do you have any pointers to help me make a sound decision?

You are correct; buying a home is a huge financial undertaking. Homeownership is not for everyone and you have to be certain that you are ready for the long-term responsibility. There are always two sides to the coin — the pros and cons — which need to be taken into consideration before making the decision to be a homeowner. Before we get into buying a home, let’s first discuss a few advantages of renting a home:

Flexibility: In today’s economy, many people struggle to make ends meet. We are never sure where life will take us next.If you fall on hard times it is easier to pack up and move without the stress of breaking free of an expensive house. Renters have the option to downgrade into a more affordable living space at the end of their lease.

Repair and maintenance costs: One of the largest advantages of renting vs homeownership is there are no maintenance costs or repair bills. If your air conditioner stops working or your roof starts to leak, you do not have the financial responsibility for the repairs. You don’t have to spend your weekends fixing clogged pipes. As a homeowner, you are completely responsible for your repairs and maintenance – which can be quite costly.

Special amenities: If you rent an apartment or condo, and even some homes, you likely live in an area that is landscaped. As a renter you may have access to amenities such as a swimming pool, fitness center or playground. If a homeowner wants to match these amenities they can expect to pay thousands of dollars in installation and maintenance costs. Similarly, condo owners may need to pay monthly fees to pay for access to these amenities.

More cash on hand: Renters do not have to pay additional costs such as taxes, homeowners insurance, repairs and maintenance expenses.If a renter obtains renter’s insurance, it is much more inexpensive than homeowner’s insurance. Depending on the size of your rental unit, and the agreement you have with your landlord, your utility costs may be covered with your rent. Apartments and condos are smaller than homes and are usually less expensive to cool.

When purchasing a house with a mortgage, you may be required to have a sizable down payment. Renters however, do not have to have to save up a lot of money to move into a rental property. While the exact amount varies, the total amount is significantly less than you would need to buy a house.

Safety from market fluctuations: Property values go up and down. When the country went through the latest recession, many homeowners were left owing more than the value of their homes. Numerous experts believe that the market has recovered but the number of foreclosures still seems to be quite high.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.