Dear Liz: I’m not sure whether I should be aggressively paying off the balance of my student loans or saving that money for a down payment for an apartment. I graduated from law school with $150,000 in federal and private loans. Over the last few years I’ve paid off most of that, but I still have about $50,000 in federal loans with a rate fixed at 3.75%. I fully fund my 401(k) each year, have an emergency fund of five months’ bare-bones living expenses and another $35,000 in fairly conservative, mostly liquid investments. I plan to change jobs in the next six to nine months and will likely take somewhat of a pay cut. I am torn right now as to whether I should continue aggressively paying off my loans, since that is a guaranteed 3.75% return on that money, or put the surplus into my investment account, which may earn a better return but also has some risk of losing principal. This would be my down payment money; I live in New York, so I have another five years or so before I could consider buying, and I’m currently single, so changes in my relationship status could change this goal. It would be wonderful to be debt-free, but it would also be comforting to have a bigger balance in my bank account.
Answer: You’ve already done well by fully funding your retirement, paying off those private student loans and building an emergency fund. At this point, you can’t make a truly wrong decision about what to do with your money. What comes next depends on your comfort level.
Many financial planners would advise against paying off that low-rate student debt. If inflation returns, the rate you’re paying could seem incredibly cheap. Also, paying off student debt doesn’t really increase your financial flexibility. It’s not like a line of credit that you can pay down and tap again later. The money you send off to your student lender is gone for good.
On the other hand, you’re not likely to earn a whopping return on money that’s earmarked for a goal within the next five years. If you need money within 10 years, it shouldn’t be in the stock market; if your goal is five years out, most of it should be in shorter-term bonds and cash, such as an FDIC-insured savings account or certificates of deposit with varying maturities. You could decide the guaranteed 3.75% return of paying off the debt is better than the alternative.
Like so much of adult life, the choice is yours. Unlike so much of adult life, you really can’t go wrong whichever path you take.
Qualifying for credit card may be tough without FICO scores
Dear Liz: My brother is 63, living on Social Security only and needs to obtain a credit card. He is old school and pays cash for virtually everything, but realizes he needs a credit card for some basics (renting a car, for example). If he has only $17,000 income a year, would that be enough to qualify him for a basic credit card from any provider? If not, do you have any suggestions for emergencies where a credit card would normally be required?
Answer: Some people use debit cards or prepaid cards in situations where credit cards are typically accepted. But gas stations, hotels and some other merchants can put a “block” or hold on an account for more than the amount being charged. That can limit the user’s access to the rest of the money in their checking account or on their prepaid card for several hours or even days. Also, debit and prepaid cards have fewer consumer protections than credit cards.
The biggest problem your brother faces in getting a regular credit card is his habit of paying with cash. He may not have enough of a credit history to generate a credit score, and most card issuers rely heavily on scores in evaluating applications. He should consider visiting MyFico.com and see if he can buy one of his FICO scores for $20. If he doesn’t have FICOs, he may want to consider a secured credit card.
A secured card gives him a credit line equal to a deposit he makes at the issuing bank. NerdWallet, an online financial site that evaluates credit cards, recommends the U.S. Bank Secured Visa Card, which has a low $35 annual fee and security deposits ranging from $300 to a respectable $5,000. Another option is the Capital One Secured Card, which has a lower annual fee of $25 but a credit limit of just $200.
Using a secured card lightly but regularly, and paying off the balance in full every month, can help your brother build credit scores that eventually will be high enough to qualify for a regular card.
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