Your personal finance questions, answered.
How Soon Will My Credit Recover From Holiday Spending?
Generosity feels good, but opening your credit card statements once the gift-giving is over can feel like a weigh-in after a heavy holiday meal. The credit-score consequences of holiday shopping may not be as bad as you fear.
Here are some common credit-related regrets and how long it’s likely to take to recover.
‘It’s going to take a few months to pay this’
A high balance carried month to month can weigh down your credit score. The second-largest factor in your credit score is how much of your credit limit you’re using, which is called credit utilization. Experts advise keeping it under 30%, and less is even better.
How long it will take to recover: Your score will rebound quickly once you whittle down balances. “Debt incurred during the holidays only lasts on your credit reports as long as it takes you to pay it,” explains credit expert John Ulzheimer. “That could be a week or a decade.”
Consider creating a debt payoff plan. Whether you’re doing it yourself or enlisting the help of a nonprofit credit counselor, having a strategy can help you get your money under better control.
‘I overlooked paying a bill’
If you got a new credit card or pulled out a card you seldom use, you may miss paying it in your usual routine. Bills can wind up tucked into junk mail or misdelivered in the crush of holiday mail. Now’s the time to double-check you’re on top of payments.
If you’re late, contact the creditor and pay up quickly. A credit card issuer can charge a fee or raise your interest rate for being even one day late, but it can’t report a payment as delinquent until it’s 30 days past the due date. Pay at least the minimum due before then because a delinquent payment is devastating for your score.
How long it will take to recover: A missed payment stays on your credit reports for up to seven years, but the impact fades with time and as you add newer, positive information to your credit report.
‘I applied for a card to get a discount’
So, you wanted the 20% discount for getting a store card. You were approved at the cash register, and now you have a card you don’t really want.
How long it will take to recover: “The impact of the inquiries, if any, will last 12 months,” Ulzheimer says.
The impact on your average age of accounts will depend on how many other cards you have and how long you’ve had them — it could take years to recover. Closing unwanted accounts won’t help, because closed accounts can stay on your credit report for several years. “You might as well leave them open and at least benefit from the unused credit limits,” which help your score by lowering your overall credit utilization, Ulzheimer says.
‘I shopped with my smartphone using free Wi-Fi’
Nothing will happen to your credit score unless someone hijacked your credit card number or personal information to run up fraudulent charges. However, those risks are the very reasons identity theft experts caution against shopping with free Wi-Fi. Consumers used smartphones to order more than $10 billion worth of merchandise from Thanksgiving through Cyber Monday. It wasn’t all done on public Wi-Fi, of course, but it’s safe to assume some of it was.
If you are worried about identity theft, you can freeze your credit. You can still use your credit cards, but lenders can’t access your file to approve credit applications, which essentially blocks scammers from opening new accounts in your name.
Be vigilant about checking monthly statements for charges you don’t recognize.
With fraudulent charges, your liability is limited so long as you report it right away. But if someone has key personal information such as your Social Security number, your risk is lifelong.
Making 2020 regret-free
This year, what’s done is done. But looking to next year, Ulzheimer has a suggestion for a happier January: “Use your existing credit card for all of your purchases and then pay the balance in full before the statement closing date. That way you earn the rewards, avoid any credit reporting of the debt, and also avoid paying interest in the purchases.”
Handy money rules of thumb for a quick financial checkup
To calculate a restaurant server’s tip, double the first number on the bill. A $62.47 tab gets a $12 tip. If the bill is more than $100, double the first two digits.
That’s an example of a money rule of thumb that is imperfect but useful, which is the idea — inexact starting points for goals, conversations and calculations.
Americans apparently could use the help. Many are winging it through their financial lives without confidence in their ability to afford retirement, an emergency expense or even daily living costs, according to a survey by The Associated Press-NORC Center for Public Affairs Research.
Money-related benchmarks can help and are especially timely as we turn to a fresh decade and make money resolutions anew. Still, finances need regular monitoring for budgeting, assessing progress toward goals and evaluating debt reduction, said Paul Golden, spokesman for the National Endowment for Financial Education.
“As you condition yourself, you can build on more time [to review finances], but use a half-hour a week as a starting point.”
- Try to save 15% of income for retirement. Aim to replace about 70% of your preretirement income. And when you tap the nest egg, drain just 4% per year.
- Start an emergency fund with $500 and eventually build it to three to six months of essential living expenses.
Other rules address specific situations:
- Limit student loan borrowing to the amount you expect to earn in your first year working.
- Full-time hourly workers can double their wage rate and tack on three zeroes to approximate their annual earnings. Making $15 per hour yields about $30,000 per year.
Professional advice and online calculators will provide more accurate and detailed answers, especially for people who have unusual money situations. But here are some handy rules of thumb to get started.
- 50/30/20 budget. Figure half of your take-home pay should go toward “needs,” such as housing, food and transportation. Then 30% goes to wants, and 20% funnels to savings and debt repayment.
- Rule of 10. For big discretionary purchases, reflect on how it will make you feel in 10 days, 10 weeks and 10 years. Perspective can calm buying urges for purchases you later regret. Related: Give yourself cooling-off time equal to one day for every $100 the purchase costs.
- Term life insurance. Buy a policy worth 10 times your gross annual income only if somebody else depends on your income.
- Kid allowance. Give $3 weekly per grade level in school. A fourth-grader gets $12. The overall average is $30 per week, according to a survey by the American Institute of CPAs.
- Windfall. Do responsible things with cash infusions, like a tax return or inheritance. But set aside 2% to blow on something fun, so you don’t feel deprived.
- House payment. Your mortgage, including taxes and insurance, should not exceed 30% of your gross monthly income.
- Car payment. Limit payments to 10% of your monthly take-home pay, so you can keep your total car costs — gas, insurance, repairs and maintenance — below 20% of your income. Also, put 20% down and limit the loan term to four years.
- Repair or replace. Replace your car if a repair costs more than your car is worth — as determined by, say, Kelley Blue Book — or exceeds one year’s worth of monthly payments.
Saving and investing
- Net worth. Net worth is the number that sums up your money life. One measuring stick: All you own minus all you owe should equal your age times your gross income divided by 10, according to the book, “The Millionaire Next Door.”
- Rule of 72. Divide 72 by your expected annual rate of return to estimate how many years it will take for an initial investment to double. At 6%, the investment replicates in 12 years.
- Financial freedom. Achieved when savings are at least 25 times your annual expenses.
Credit and debt
- Total debt. All debt payments, including mortgage, should be less than 36% of monthly gross income.
- Credit card bonus. On rewards credit cards with an annual fee, look for a sign-up bonus value equal to three years or more of its annual fee unless it has especially valuable rewards or benefits.
- Card use. Keep credit card balances at 30% or less of their limits to avoid hurting your credit scores.
Talk yourself out of buying a new car
You’re looking at a $2,000 estimate to fix your car and, since it’s worth only about $2,000, it seems pretty clear it’s time to buy a new car.
Or is it?
Unfortunately, there’s no neat little mathematical formula that will tell you when to dump your old car. Instead, you’re faced with a ton of variables. Also, let’s face it: Most people would like to use a big repair bill to justify getting a new car.
So to shed light on this common fix-or-buy-new question, let’s isolate the variables to see if you need a new car or you just want one.
How much do you drive?
It’s always a good idea to start by examining your needs. Do you have a long, congested commute through the city? If so, you don’t want to be marooned in the breakdown lane waiting for a tow truck. A new car will definitely provide a higher sense of security. And a new car provides the latest technology such as blind-spot monitoring and emergency braking.
If, on the other hand, your car spends a lot of time at the curb, buying a new car would be a giant waste of money. But sometimes you need a car, you say? Here are just a few ways to get where you’re going or find wheels that are much cheaper than a car payment:
- Bicycling. Just think of the weight you’ll lose.
- Bus or mass transit. When you arrive, you’re free of parking hassles and costs.
- Uber and Lyft. Let someone else drive and just relax.
- Car-sharing services such as Zipcar. Check to find the availability in your city.
- Peer-to-peer car sharing like Turo. You can rent the car of your dreams and have it delivered.
- Rental car agencies. The competition is stiff and the mileage is unlimited.
- Family and friends. Catch up on family news while you get where you’re going.
What’s your budget?
A $2,000 repair bill is a huge hit to your budget. But buying a new car is a much bigger and longer commitment. As a friend of mine used to say, $2,000 doesn’t buy you much of a car but it can buy a whole lot of repairs.
Repairing your current car will also save:
- Sales tax and fees: Buying a new car in a state with a 10% sales tax will boost the cost by thousands of dollars.
- Trade-in lowballs. Dealers rarely give you the full value of your trade-in. And most people hate advertising their car for sale and meeting with strangers.
- Ownership costs. All the new car expenses are higher too: registration, sales tax and insurance.
- A years-long financial burden. Having a new car is really exciting — until the “new” wears off. Then you find a ball and chain attached to your budget.
- Time. Getting your car fixed is usually a lot faster than schlepping around to car lots, test driving, negotiating and buying a new car.
- Stress. Meeting a steep car payment month after month can grind you down, especially after the new car smell fades.
What’s your risk factor?
If you’re risk-averse, a new car is probably your best choice. It’s going to be more reliable, and if anything breaks, it’s covered by a bumper-to-bumper warranty. Although your monthly costs are higher, there are no surprise expenses.
However, a person who’s willing to shoulder risk is a person who will save money. That’s true when buying higher deductible insurance, waiving extended warranties and driving a used car. Sure, the repair itself seems like a risk, but it’s much less than meeting a new car payment and all the related expenses.
What’s wrong with your car?
Not all mechanical problems are created equal. Here’s when fixing the car is a good idea:
- The problem is clearly identified and the fix is guaranteed.
- You have a trusted mechanic who is confident that the repair will be successful.
- Your car is in otherwise good shape with no known additional problems.
And here are times when trading it in for a new car is an attractive option:
- You have plenty of money, like new technology and enjoy driving.
- Your car has several problems and will soon need other work, such as a brake job.
- The problem is undiagnosed, intermittent and unpredictable.
- You’ve been in and out of the shop several times and have lost confidence in your car.
Overcoming new car envy
So you weighed your options and reluctantly decided to stick with your old car. Great decision. But you find that the lure of a new car is still hard to get out of your mind. Here’s a trick to subdue the new-car craving:
Every month, instead of writing a big, fat check for a car monthly payment, write yourself a check. Think of a car you want, use a car loan calculator to see what it would cost each month, and put that money into a separate savings account.
After doing this for a few months, reconsider the issue. Chances are, you’ll like still having that money in your possession. You can use it for future car repairs, a new set of tires or a thorough detail job. Or, if the new-car desire is still strong, you now have a nice down payment for the car of your dreams.