Horse Economics. Catherine E O'Brien

       SO YOU KNOW…

♦ A home equity loan usually offers a fixed rate of interest and a payment schedule that matches a simple-interest amortization schedule (see p. 105).

♦ A home equity line usually offers a variable rate of interest and is a line of credit. It is similar to a credit card, the difference being that the loan is secured by your home.

      Note: you do not have to refinance in order to obtain either a home equity loan or line. Both are separate transactions in addition to your primary mortgage.

♦ A fixed interest rate loan charges the same rate of interest on your remaining balance from month to month.

♦ A variable interest rate loan fluctuates with the prime lending rate. As interest rates go up, so do your payments.

      Refinancing may not be worth the cost for those who have recently obtained a mortgage. Discuss your options with a mortgage broker or loan officer. Items to consider when refinancing include: the interest rate you can obtain with your credit rating (see p. 35); the number of points (each point is 1 percent of the amount of the loan) the lender would charge; the mortgage fees and other costs associated with refinancing; how long you plan on keeping the house; and the tax effect.

       Home Equity Loans

A fixed-rate home equity loan^♦ is a way to consolidate your bills and lower your interest costs by paying off high-interest credit cards and car loans. The interest on the home equity loan may be tax deductible providing you have not mortgaged over 100 percent of your home’s market value. (Consult your tax advisor before obtaining a home equity loan, as other constraints may apply and the tax code changes frequently.) The major drawback to a home equity loan, or home equity line^♦, is that the debt is secured by your home, so if your payments fall behind, you could lose your house. Remember, if you pay off credit cards with your loan or line only to run up balances again, you will find yourself in financial “hot water.”

       Credit Cards

One way to reduce your interest cost on debt is to transfer credit card balances to a card with a lower, fixed interest rate^♦. But, be aware that continually switching cards to obtain low, introductory offers may not be beneficial—for several reasons. First, many cards have a variable interest rate^♦. In such cases, initial low rates “spike” after the introductory period, and you may end up stuck with debt on a card with a higher-than-normal interest rate—not the optimal situation for debt management. Second, lenders don’t look favorably on “card hoppers” who haven’t established a consistent credit history with a particular lender.

       Student Loans

      If you have qualified student loans (those used for school-related needs such as housing, books, and tuition), consider consolidating them. With consolidation, all the loans taken out each school year are wrapped into one, and you can “lock in” to a low, fixed rate of interest for the life of the loan and extend your payment term, making your monthly payments much smaller. Under most circumstances, interest on student loans is tax deductible. Consult your tax advisor on limits for the deduction concerning adjusted gross income levels and filing status.

Credit Management

       Credit Reports

      The credit reports that a lender obtains from the three major credit-reporting agencies (see Resources, p. 219, for contact information) are used to determine whether or not you qualify for a loan. For example, an insurance company may access your credit information in order to determine which risk category you fall into, and this, in turn, may affect the premiums you pay.

      The credit reports detail how much you have borrowed and how much you owe. They also reveal bad credit, such as missed and late payments, repossessions, and delinquent accounts. This information remains in your history for seven years. (Bankruptcy can remain on your credit report for ten years.) Your credit history determines your credit rating or “score”—a credit score of 600 points is average, 700 is good, and 800 is excellent. Every time a credit-reporting agency receives an inquiry from a lender—this happens when you apply for a credit card or loan—your credit score can be negatively affected because each time your report is accessed, points are deducted.

      It is of the utmost importance to your long-term financial health to maintain a good credit report. If your credit history is less than stellar, start today and make sure all your payments are on time and in accordance with the creditor’s agreement. At least once a year, you should obtain copies of your credit reports from the major credit-reporting agencies to check for inaccuracy and guard against identity theft.

       Keep Track of Accounts

      Be diligent in your record-keeping and reconcile bank statements regularly. Most banks have telephone or online banking access so you can make sure your debt payments have cleared your bank in the correct amount and in a timely fashion. Creditors, and even financial institutions, can (and do) make mistakes. Suppose, for example, your monthly minimum payment for your credit card is $50, and you write a check for $100—but the lender erroneously records only $10 on the deposit slip. The check then clears for an insufficient amount, and you are delinquent in the eyes of the creditor (even though the check you wrote more than covered the bill). A quick call to the lender will save you late charges tacked on to your account, not to mention a big hassle if the delinquency is reported to the credit agencies.

      Fraud is another motive to check accounts and statements. If someone has accessed your checking account number and printed checks, or stolen your ATM card and access identification numbers, “red flags”—such as unidentifiable purchases or withdrawals in states you haven’t visited—will show up on your bank statement. Also look over your credit card statements to be certain all charges are correct.

       Beware Automatic Default Language

      Many credit card companies have changed their “terms of agreement” to include a clause that states if you are late with a payment on a different account with them, or another credit card provider, or any other creditor, you are automatically deemed in default and your interest rate jumps to 19.99