Every few weeks, I make a point of answering reader questions here in my column. I love hearing from you and researching the quandaries that are on your mind. This week, we're actually going to cover two questions and a comment. The comment is a fellow reader's idea for how the rest of us can save big bucks. Thank you! I'm trying to keep the dialogue going about saving bigger instead of smaller, smarter instead of harder.
Paying an Auto Loan Off Early
Question: LOVE the book! We would like to use part of our tax refund to pay off my husband's truck loan to save big. We bought the truck for somewhere around $15,000 3 years ago. Our "payoff" is just over $8,000, but of course, that is with the interest. We will be getting back over $6,000 on our tax refund an were hoping to negotiate the payoff. How can we negotiate a better deal on the payoff? We are not in arrears on the payments, we just would like to cut out as much of the interest as we can. I know legally we are only responsible for the principal, so we were hoping we could get them to waive the interest. How do we go about that?
Answer: You need to examine your auto loan contract to determine whether it contains a prepayment penalty. If it is a simple interest loan with no prepayment penalty, you are golden. You can pay off the principal and you owe no further interest. Period.
If there is a prepayment penalty, it may still be worth paying it off early. You just need to calculate how much you are saving in interest and whether that penalty eats up all of your savings. If your auto loan is a "precomputed interest loan," that means it is structured so that you pay all of the interest over the first few years and then pay off the principal at the end. This will present problems if you want to pay the thing off early.
Technically, you have entered into a contract and the lender can hold you to it. However, I think it is always worth asking if a bank will work with you in a case like this. If you are a good and loyal customer of this bank, point that out. (Try to meet with somebody in person rather than some lackey who answers the 800 number.) If the savings you are striving for will make a huge difference in your life, describe that. Play upon the loan officer's sympathy.
And if you succeed, by all means, get a loan payoff letter -- it must be in writing -- which states that your loan was paid in full and satisfactorily. It would be awful if the bank reported the loan to the credit bureaus as an unpaid debt.
Risks, Realties of Closing Credit Card Accounts
Question: I heard in the last week that the new CARD Act will cost credit card companies billions of dollars in lost fees, so now they're dreaming up new ones to hit us with. Figures. One of the new fees I heard about was one for not using your credit card for a long time -- a "dormancy" fee, I think they called it. So here's my question: I've heard canceling credit cards can hurt your credit score, but I definitely don't want to have to pay fees for old credit cards I stopped using a long time ago. What to do?
Answer: This is one of those "it depends" answers. The reason closing credit card accounts can hurt your credit score is because one of the factors that goes into a FICO score is the ratio of the amount of debt you have to the amount of credit you have been approved for. It's best if these two numbers are as far apart as possible. Lenders don't like to see you near your credit limits. When you close accounts, you are reducing the second number, the amount of credit available to you, so that changes this "credit utilization ratio."
If you have an excellent credit score, lots of other open credit accounts and you're not about to apply for a big loan for a home or car, go ahead and close credit cards that are threatening to charge you a dormancy fee. (If you are in the market for a mortgage or auto loan, wait to close accounts until after you have closed on the loan.)
"The damage done to your scores from closing a single account is likely to be minimal and you'll soon recover," says Liz Weston, the author of "Your Credit Score, Your Money and What's at Stake."
If, on the other hand, you are currently trying to improve your credit score, you should avoid closing accounts or giving the card companies an excuse to close them. (Many companies are going beyond charging dormancy fees and actually closing unused accounts.)
Many experts say you need to use a card at least once per quarter to avoid having it closed. That's a pain to keep track of, so Weston suggests this strategy: "Set up some kind of automatic charge on a card you want to keep, like a utility bill, and then arrange for the total to be automatically debited from your checking account each month."
Make Money By Spending Money
Comment: My wife purchased your book for me for our 5-year anniversary. This is one of the best and most up-to-date resources I have seen. I had learned a lot on my own. I wish I would have had it sooner. I have another possible way to save big that was not mentioned. I saved big -- $1,300 -- last year through credit card rebates. The net from the card company actually paid my Christmas gifts!!! I researched that the average family spending according to the 2007 consumer expenditure survey would lend to a minimum of $500 in credit card rebates.
Answer: Yes! Cash back credit cards are a fantastic way to "save" money, in this case by making money. I had actually written an entire chapter on this strategy for my book, SAVE BIG, but we cut it out of the final manuscript since it wasn't a strict example of "saving." This "deleted scene" is available for free on my Web site for those who are curious. But here are the main points.
If you're fortunate enough not to carry a balance on your credit cards, it's time to get the richest rewards card you can find. The type depends on your lifestyle. For example, if you travel a lot by plane, a frequent flyer mile card is good for you, and typically mileage rewards are more generous than cash back offers.
If on the other hand, you are unlikely to redeem airline miles or other trinkets some cards offer, go for cash back. I have another one of my savings makeovers coming up this week on "Good Morning America" and I recommended a cash back card to that family. I calculate they will "save" (or earn) $1,599 a year in cash back with their new card based on their current spending! It can be a real benefit that requires zero effort on your part.