NATIONAL FOUNDATION FOR CREDIT COUNSELING — Halloween tricks or treats come along only once a year, but the consequences of financial decisions can last far past the spooky holiday.
On the surface some options appear to make sense. But if not handled properly, they can have really scary consequences.
To understand how seemingly sound financial moves can work against you, the National Foundation for Credit Counseling (NFCC) examines a list of choices that can become financial treats or tricks.
Discontinuing the use of credit
- Treat: Living on a cash basis means that you never overspend or pay interest on your purchases. Typically, people who pay with cash save 20 percent over those who charge their goods and services.
- Trick: At some point in their life, most people will need access to credit. Consumers will be well-served by creating a thick and positive credit file. To do so, it is necessary to have at least three open and active lines of credit. Just pay your account on time and keep your balance half or lower than your credit limit.
Automatic bill paying
- Treat: Arranging for your payments to be sent to creditors before the due date means you’ll never have a late fee or a dinged credit report.
- Trick: If you neglect to balance your check register and the automatic payment results in an overdraft, you’ve defeated the purpose. Auto bill paying is also something to watch these days in times of changing banks.
- Treat: Consumers can often enjoy a significant savings if they use the same provider for their land phone, cell phone, cable and Internet services.
- Trick: If you use the savings from the bundling of services for a larger, more expensive plan than you really need, it’s no savings at all. Watch out for come-ons from this industry.
Co-signing on a loan
- Treat: You can help another person establish credit, rebuild credit, or purchase something beyond what they could on their own credit worthiness.
- Trick: The co-signer and primary borrower are equally responsible for payment of the loan. As well-meaning as people are, things happen. Never co-sign on a loan unless you can afford to solely take over the payments.
- Treat: With a lower interest rate, you can repay the debt sooner and save the money you would have paid with the higher annual percentage rate (APR).
- Trick: Faulty thinking leads you to believe that since the interest rate on the new card is so low, it won’t hurt to charge a few things. Before you know it, the introductory period with the low rate has expired, and not only is your original balance not paid off, but it’s higher than when you began and the interest rate could cost more.
- Treat: You can earn miles, airline points, or even cash back with reward cards.
- Trick: Reward categories often change each month, resulting in fewer rewards than hoped for. Further, some people tend to spend more simply to earn the rewards. If you can’t pay the balance in full each month, a reward card is probably not for you.
Closing unused accounts
- Treat: Streamlining your finances makes them more manageable. Also, less plastic in your wallet equals fewer temptations to spend.
- Trick: Closing an account will lower your total credit line, potentially making your debt ratio worse. Do the math first.
Opting into overdraft protection
- Treat: You’ll avoid the embarrassment of having your purchase denied at checkout.
- Trick: Overdraft protection is expensive, particularly for those who routinely overdraw their checking account. This false sense of security is only putting a band-aid on the true financial problem: spending more than you make. Even if the overdrafts result from legitimate purchases such as food or medicine, it is a better option to get to the root of the continued financial distress and solve it before your meltdown your debit card.
Freezing your credit file
- Treat: A frozen credit file is a layer of protection against identity theft. With the freeze in place, no one can open a new account in your name without you first lifting the stop.
- Trick: There may be fees associated with this service, and you may have to wait days for the account to be “unfrozen,” which can be inconvenient if you want your credit file to be immediately accessible for instant credit. Others who may be denied access to your credit file include insurance companies, landlords, employers who need to obtain a background check, cell phone companies, and utilities.
Purchasing extended warranties
- Treat: An extended warranty can provide you with peace of mind.
- Trick: You are better off buying a nice bottle of wine. Some items are inexpensive or have a very good track record for not breaking down and you don’t need to pay for a warranty on them. If the item under warranty does break, you may be asked to jump through some difficult hoops to activate the warranty, or the warranty may not cover what you thought it did. Check Consumer Reports for information about warranties.
“Consumers should thoroughly research and fully understand the risks and benefits to any financial decision they make. Simply because an offer sounds appealing, doesn’t mean it is,” said Gail Cunningham, spokesperson for the NFCC.
Read: For more stories about things that go bump in the night, read: “News that really haunts home.”