Month : November 2012

Money Management

How Do Expats Make International Payments?

A key question that has been a regular concern for most expats is being able to take care of their financial obligations even when they are away from home. After all, one can never really let go of their connections to home even if they are somewhere else growing their corporate careers. It is for this reason that expats should learn how to use an offshore bank account to facilitate their financial transactions even from afar. 

In very simple terms, an offshore bank account is a bank account hosted by a bank based in a location different from where the account owner is located. For most of us, bank accounts are opened in a local bank, one that we can visit on a regular basis to take care of our financial transactions. 

Not surprisingly, the international nature of business coupled with our increasing reliance on the interne has spawned various methods through which one can manage their bank accounts from a distance. This is something that expats can certainly take advantage of. Instead of having to talk to bank personnel face-to-face or on the phone, banking mobility tools now allow expats to finance their bank accounts, authorize payments, receive payments from others, even issue checks from a distance. Offshore bank accounts also offer the advantage of gaining access to perks and benefits like free international transfers, travel insurance for the account owner, and complete reliability in terms of transaction security and accessibility. 

Whether you want your money to be saved in euro, dollar, even pound sterling and other local currencies, as well as gain the ability to withdraw your money via debit cards in your chosen currency, as well as pay your bills in a timely manner or send money to your family back home, offshore bank accounts offer undeniable flexibility and advantage versus local accounts that may charge exorbitant amounts just to execute simple transactions over the wire. 

Expats should use an offshore bank account to take care of their international payments so they can reap the benefits of a bank account specifically geared to cover cross-border transactions. As an expat, nothing else can be more convenient. 

Mind Over Money

Managing Awkward Financial Situations

As you start taking control of your finances, you will start paying attention to every penny spent and every available dollar. This means that the little inconvenient situations that commonly arise like office gifts and lunch with friends a little more difficult. Here are some great ideas to tactfully handle a few common and awkward financial situations while still sticking to your budget.

The Group Gift

Group gifts can be difficult. You may be interested in going in on a gift and then feel astounded when you find out that the group has decided to purchase a luxury gift and needs hundreds of dollars from each contributing member. To avoid this awkward situation, first get a general idea of what you are willing to spend on the gift. When someone asks if you want to go in on a group gift, ask what gift and budget they have in mind. If a decision hasn’t been made or if the gift is out of your price range, simply mention that you had other ideas and will purchase your own gift this time. Then go out and find a gift that will work with your financial goals. You don’t have to overspend just because everyone else has decided to. There are many excellent gifts that you can purchase while still sticking to your financial goals.

Dinner with Friends

Taking control of your finances isn’t about never getting to go out or have a good time any more. Rather, you are just doing the things you love on your terms and as you can afford them. When going out to eat with friends, you can make dinner decisions that will work with your budget. Every menu has a wide range price options. If you know how much you can spend, be sure to order something that fits within that amount. You have a couple of options to avoid awkward situations when the check comes. You can either ask for your bill to be separate when you place your order, or you can speak up if the group tries to divide evenly and you have spent a lot less than everyone else. Bringing cash along, in small denominations can work great. Simply figure out what you owe (including tax) and tack on a generous tip. Then say something like, “This should cover what I owe, since I spent a lot less, I would rather that we don’t split the check straight across.”

Christmas and Other Holidays

Holiday gift giving can be especially stressful. When you open a generous gift and have only purchased a small and generic gift for the other person, it can be really awkward. Remember that what you choose to give doesn’t have to be based on what you receive. Sticking to your financial goals is important and you will have to choose gifts in your price range. If you know that you can’t spend a lot, but want to find a thoughtful and generous gift, remember that thought counts.Rather than purchasing a $5 gift card to a local fast food restaurant, purchase an inexpensive frame and include a favorite picture. Add a personal and meaningful note, to make your gift really stand out. You may also want to purchase a few inexpensive but nice holiday gifts to have on hand if needed. Remember, everyone sets the budget that works for them, and your budget is determined by what you have, not what others have.

Mastering the art of personal finance won’t be easy.  However, if you use a little creativity and dedication, you can find solutions to potentially awkward social situations.  Never apologize for sticking to your financial goals.  Be proud of the decision that you have made and stand firm, even if it requires a bit more work.

Debt Management

Will Too Many Credit Cards Mean A Bad Credit Score?

With the holidays recently passed, it’s a fair guess that you were overrun with offers to sign up for credit cards, whether you’re at the cash register or checking your mail at home. Let’s take a look at two offers that always seem to make an appearance on a regular basis.

  • Clerk: “Hi, Would you like to open a credit card with Best Buy to save 15% today?”
  • Commercial Mail Offer: “Get 30,000 American Airlines Miles by signing up for the Citi AAdvantage Credit Card!”

We’re going to discuss how to make sense of choices like those above. What effect does opening a new credit card have on your credit rating? And what does it mean for your wallet when your credit score sags?

It might come as a shock, but to our mind the most important variable for the next year is your own readiness to take on loans. Below, we’ll go into why.

What is calculated in a FICO score calculation?

FICO uses a credit scoring system, which operates on a spectrum between 300 and 850 points. The exact calculation is not available for public knowledge, but there has been some information made available. This is the set of weighted factors that determine your FICO score:

Factor Weighting
Past Payment History 35%
Credit Utilization 30%
Length of Credit History 15%
Type of Credit Used 10%
Recent Credit Inquiries 10%

FICO focuses more on the recent past than the distant past

While the table above provides the basic picture of what goes into your FICO score, it’s also important to consider that your score is weighted towards your recent history overall, rather than the more distant past. If you’ve been making on-time payments on your credit cards for the last year or so, this can help minimize damage caused by past delinquencies. In the same vein, a pile of credit card payment notices that are a year old or more will do less harm today, but just a couple in recent months can be a big problem.

What is the impact of a new credit card on your credit?

A new credit card benefits your credit utilization since it lowers your total debt in proportion to available credit lines. On the other hand, it can decrease the duration of your credit history and increase your number of new credit inquiries. While it’s not fully clear how much each aspect of this choice will impact your score, its our opinion that this generally points to a small negative effect in the short term, while its long term effects have strong positive potential. In sum, opening a new credit card won’t have too much of an effect at all if you’ve got a score of 800 or more, but if you have a more limited credit history, this could push your score from the mid-range into “poor” and make it harder to obtain credit in the future.

What are the benefits of opening a card account?

Exercise careful judgment in how you use your credit card applications. Each airline mile is typically worth about a penny, so getting 30,000 of them by signing up for a new credit card means about $300 in real dollars. At the same time, the Best Buy 15% discount requires some very distinct math because the 15% savings probably won’t come out to be more than $300 unless you’re spending well over a thousand dollars on electronics.

Turn down all rewards credit cards that don’t offer some kind of immediate reward. The market is flooded with cards, like the Chase Freedom, that pay $100 or more for signing up, so unless you’re going to be getting some kind of incentive it’s not worth applying.

And how about the drawbacks of a lower credit score?

While most conversations about credit center around APRs and interest rates, the loan rate that a good FICO score can make available isn’t the most important thing to consider when thinking about the benefits of good credit. Even more important is how much money you plan on borrowing in the next year or so.

That is to say, if you’re going to be seeking a $45,000 home equity loan in the near future, having a good FICO score will be a much more significant factor than if you’re going to be looking for a $5,000 loan for your car. That’s because getting stuck with a higher interest rate on a smaller loan translates to a difference in interest payments that’s small enough to be negligible.

Input 1: Your FICO score and your interest rate

When seeking out a loan, your loan officer will base your interest rate off of a combination of criteria. A shorter loan duration and putting up collateral, as with a mortgage, can lower your rate. But the factor most within your control is your FICO score.

For instance, take a look at the table below, based on information from LendingClub’s average rates for a 36-month “debt consolidation” loan (note: these are not LendingClub’s actual rates, but our own estimates for illustration purposes only).

Credit Score Fico Score Interest Rate
Awesome 780+ 5.98%
Excellent 750-779 6.36%
Really Good 714-749 9.25%
Good 679-713 12.41%
Average 660-678 16.32%

Input 2: Loan Size

In terms of actual money that you’ll be paying, the most important factor is the amount you’re seeking to borrow. In the next table, you can see how a smaller loan minimizes the overall impact your FICO score has on how much your loan will cost you.

Loan Size Fico Score Interest Payment per Year FICO Score is 30 Points Higher FICO Score is 30 Points  Lower
$5,000 730 $483 Save $155/yr Pay extra $223/yr
$10,000 730 $965 Save $654/yr Pay extra $446/yr
$25,000 730 $2,413 Save $777/yr Pay extra $1,114/yr

Go for that new card if you’re not going to be seeking out any big loans in the near-to-middle future

In our opinion, opening 1-2 credit cards each year won’t have much impact on your credit score over the forthcoming year. In fact, it may raise your long-term credit score if you don’t have a very long credit history and keep the amount of credit you use at a low level.

If your future need for loans ranges from small to nonexistent, you should give some serious thought to the merits of an airline miles card. It’s likely that signing up for this type of card will net you a 30,000 mile reward, which translates to about $300 and thus ultimately cancels out much of the cost that comes from borrowing, according to our calculations. There are many rewards cards that have comparable deals.

But, if there is going to be a larger loan in your future, you should hold off on applying for a card or any other loan for around a year previous. In the context of taking out a loan over $25,000, its quite possible that whatever rewards your potential card offers to incentivize signing up will be outweighed by the increased interest rate that can come with a lower FICO score.

This post comes from the team of personal finance bloggers and experts in helping consumers find the best low APR credit cards.

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