Get yourself out of debt
Jan. 3, 2007
By JOSEPH M. DELEON News-Post Staff
jdeleon@fredericknewspost.com
FREDERICK— When Peter Canonico decided to take a cash advance on his credit card to help pay off another debt, he knew exactly how to avoid paying too much in interest rates; the greeting card, book store and sandwich shop boss is also a financial adviser.
Mr. Canonico, the owner of Hallmark Book Center at Frederick Shopping Center, is one of many advisers who will help Frederick residents make 2007 a year of financial change. Financial planners in the county agree getting a handle on debt will help, but say that isn't enough if you're already in a hole.
And for the roughly 46 percent of American families that have a credit card balance each month, that hole has been getting deeper. In 2004, the most recent year for which statistics are available, the average credit card balance was $5,100, according to the U.S. Federal Reserve's 2004 survey of consumer finances. That's an increase of about 16 percent from 2001, the last time the survey was conducted.
Many credit card companies offer cash advances at lower interest rates to lure customers into borrowing money, he said. Payments made on the credit card apply only to the advance, while charges on the card continue to accrue interest at the higher rate until the advance is paid off.
“That's the way they operate,” Mr. Canonico said. “The clue is, if you're going to use cash advances on a credit card, don't use that card for any purchases until the advance is paid off.”
Whenever his credit card offers a cash advance at 2 percent, he borrows money to help pay down other, higher-interest loans.
While he has taken advantage of low interest credit card cash advances, Mr. Canonico warns against an increasingly common way to get money: the self-issued low interest loan.
The offer often comes in the mail in the form of a blank check, he said. Borrowers write their own loan and are offered between 3 and 4 percent interest over six months, as an example.
“The problem is, if you're late one day, that interest automatically goes up to 25 or over 30 percent,” he said. “These companies are hoping that some of them will fall into the trap and all of a sudden, they will be borrowing at 32 percent interest.”
Pay off debt
Chris Murray of Murray Financial Group in Frederick said many people worry about their finances at the beginning of a new year. He recommends paying off unnecessary debt as soon as possible.
Mr. Murray believes people have good debt and bad debt. Mortgages and college tuition are examples of necessary expenses that often offer a financial gain in the long run. Credit cards are an example of bad debt because they continue to cost more the longer card holders take to pay.
“Many people should focus on the credit card department, because you shopped too much and you bought your family too may goodies for Christmas,” he said. “You need to retire those debts as soon as possible.”
Along with paying off credit cards, he recommends putting as much money as possible into retirement plans. Workers should maximize the amount of money an employer is willing to contribute to a 401(k) and put money into a savings account.
“We always suggest to our clients to pay themselves first, have a sound strategy for what they are wanting to do for themselves and their family, not just for 2007, but for the years that follow,” he said. “Lay out a timeframe and attack it.”
Too late for taxes
While it may be too late to make adjustments that will affect the 2006 tax season, Mr. Canonico has a few tips that could help his customers at tax time. Several tax breaks have been extended to 2006, including a deduction for classroom expenses and credit for college tuition, he said.
“It's too late after the closing of the year to make any changes,” Mr. Canonico said. “The best thing to do now is to get your records together and find out what changes have been enacted.”
Many people might be able to take advantage of a new phone tax rebate and an energy credit, he said.
Sometimes Mr. Canonico recommends his clients look at their financial holdings to determine what action to take before tax time.
“In terms of people improving their situation, what we normally look at is people who have resources,” he said. “For instance, selling stocks; you want to do that before the end of the year.”
Emergencies and investments
The first thing Mr. Canonico suggests is to start a long-term plan. That often starts with a measure of what a client owes, information available in a credit report.
“To improve your financial situation, you need to know what your liabilities are,” Mr. Canonico said. “A credit report is a good way of getting a summary of those liabilities.”
Since fall 2005, consumers have been able to request a free copy of their credit report every year. Mr. Canonico advises his clients to make sure everything is correct.
“I do that every year; it's free and it's a good start,” he said. “If you go out for loans, it's helpful to know the record banks will look at is accurate.”
One of the most critical parts of a financial plan is setting up an emergency fund in case of a layoff, he said. The fund should be equal to between three and six months of monthly expenses and be available as cash in fewer than 10 days.
Beyond immediate money needs, Mr. Canonico suggests looking at the amount of time someone is willing to take to see a return on an investment.
If you're willing to wait:
two years or fewer, put away for a certificate of deposit, a type of money market investment with a set date of maturity and interest rate. These typically incur an early-withdrawal penalty. Clients may also invest in a negotiable CD, which can be sold for more or less than the original amount, depending on the market.
three to five years, invest in government bonds, a kind of mutual fund where the government borrows money from the public for a specific time and agrees to pay interest and the amount borrowed.
five years or more, buy stocks, common ownership of a business when a corporation sells shares to raise money to invest in new company projects. The shares represent the corporation's earnings and assets.