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bad rap

Use Your Credit Card with Prudence

June 13, 2009

in Personal Finance

Credit cards have gotten a bit of a bad rap. With so many people drowning in credit card debt, and with penalties and fees piling up to keep them there, it’s not too hard to understand. But that doesn’t stop us from applying for cards and using them.

Credit cards themselves are not so bad. In fact, they have many good points. They make it possible for us to buy things and use them right away, and make payments later. They keep us from having to carry large amounts of cash when we plan on making big purchases. And they provide a way to build up our credit scores. When used responsibly, they can be an asset rather than a liability.

Unfortunately, many consumers fail to maintain control of their charging habits. They use their credit cards to make impulsive purchases. They pay only the minimum payment each month, resulting in greater interest charges. They keep their cards perpetually maxed out. Or they obtain multiple cards and juggle debt instead of paying it off.

To get the most out of credit cards, it’s best to start out on the right foot. Shopping around for a card with low interest and no annual fee will help minimize costs from the get-go. And if you resist the urge to go out and buy anything and everything you want, you can avoid accumulating an overwhelming amount of debt in the first place.

Here are some tips for keeping a leash on the credit card monster:

* Pretend your credit limit is about 25% of the actual amount. This is the optimal balance for keeping your credit score at its best. It also helps keep your debt much more manageable than if you utilize your entire credit limit.

* When using your card to purchase non-necessities, pay the balance in full each month. Or at the very least, make sure you can afford to pay the purchase off within a few months and avoid charging any other “wants” until you do. Charging lots of stuff we don’t need is a trap that too many cardholders fall into. By charging only what we can afford to pay back quickly, we can avoid getting in over our heads.

* Always make more than the minimum payment. If you only pay what you’re required to pay, it could take years to pay off even a small balance. Try to put as much money as you can toward your bill each month, and you could save yourself a small fortune in interest charges.

* Avoid impulse buying. When you see something you want (or feel that you need), give yourself some time to think about it. For small purchases, a week should be sufficient. For more expensive things, give it a month. By then, the urge may pass. If it doesn’t, make sure you can afford to pay off the balance in a reasonable amount of time before you take the plunge.

* Resist the urge to use your card to pay bills, unless you are paying the balance in full each month. If you can’t afford to pay your bills without the plastic, you need to re-evaluate your budget. Charging them to your credit card will only leave you with loads of unnecessary debt.

When used improperly, credit cards can be a real nightmare. But when used responsibly, they can make our lives easier. By charging with prudence from the start, you can avoid the debt trap and maintain a good credit score.

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Are Corporate Bonds a Good Investment in Today’s Market?

May 18, 2009

in Personal Finance

Ask any investment professional which type of investment is best, and he will tell you that it depends on a number of factors. The amount you have to invest, the length of time you wish to invest your money, and your tolerance for risk all have a bearing on which investments are best for you. And the state of the economy plays a role in determining the best investments, too.

Among those who are new to investing or have never invested, corporate bonds have gotten a rather bad rap. It’s true that they can be very risky, but they can also garner good returns in some cases. And if you buy when interest rates are high and sell when they are low, you can make money without having to wait until the bond matures.

How Corporate Bonds Work

Corporate bonds are securities issued by companies that need to raise money. Instead of taking out a business loan, they sell bonds to investors. This is good for the company because they have a longer term in which to repay the loan, and good for investors because they receive interest until the principal is paid in full.

Bonds are rated by Moody’s and Standard and Poor’s. The higher their rating, the lower the risk to the investor. But bonds with high ratings also have lower interest rates because of their low risk. Bonds with lower ratings are riskier, but they also carry higher interest rates.

Like the interest rates of most other investments, the interest rates of bonds fluctuate with market interest rates. But once a bond is issued, its interest rate remains constant for the entire term. So if you buy a bond with a 5% interest rate and the rate of bonds issued by the same company subsequently jumps to 8%, you still only get a 5% return. Conversely, if you buy a bond with a 10% interest rate and the rate of bonds issued by that company later falls to 6%, you still get your 10% if you keep the bond until it reaches maturity.

As you can see, the best time to buy bonds is when interest rates are high. Not only will you get a higher return than you would with a lower interest rate, you can also sell the bond and make a profit when interest rates are lower. Investors who are interested in bonds but turned off by low interest rates can buy from a bondholder with a higher interest bond to get the returns they want.

When the economy is shaky, interest rates fall. So buying bonds directly from corporations is usually not a good idea. If you’re dead set on getting into the bond market, buying from an investor with a higher interest bond will provide better returns. But your best bet is to wait until the economy improves and interest rates rise.

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