Donít take a chance with credit card perks
Dear Dave: Iím a senior in college, and my roommate just got a credit card that features airline miles. He want me to get one, too, so we can take a trip together at the end of the year. What do you think about this idea? — Tim
Dear Tim: This is a bad idea on so many different levels. First, youíre close to graduation and beginning your real life. You donít want to start out with a bunch of credit card debt hanging over your head.
Second, have you seen the restrictions on airline miles lately? Jupiter has to align with Mars while youíre standing on one leg to cash in on those things. Itís ridiculous! Plus, statistics from Consumer Reports show that 78 percent of all airline miles are never redeemed. What does this mean? It means in most cases people end up with no cool trip and a bunch of debt.
Iím not against going nice places and having fun, and you probably deserve to celebrate a little after finishing college. But going into debt for it is a really bad idea.
Just save up and pay cash for a trip, Tim. Today, many debit cards have airline miles associated with them. So thereís no reason to take a chance with credit cards. — Dave
Dear Dave: My husband is 31 years old and has been offered long-term disability insurance through his employer. It only costs $25 a month, but weíre trying hard to live on a budget and get out of debt. Is this coverage worth it? — Rebecca
Dear Rebecca: Yes!
Long-term disability insurance is a fantastic buy. Itís inexpensive, and in return it will pay you about 60 to 70 percent of his salary if something bad happens and he becomes disabled. Thatís not a bad deal for just $300 a year.
Statistics show that a man in his early 30s is 12 times more likely to become disabled than to die before age 65. Everyone needs to have long-term — not short-term — disability insurance.
Hopefully, youíll never find yourselves in a situation where you have to use this type of policy. But in the event that something awful does happen it can help save you from financial ruin! — Dave
Dear Dave: My father-in-law is telling us we should apply for an interest-only loan when we buy a house and then pay extra on the principal What do you think about this idea? — Nick
Dear Nick: Interest-only mortgages are horrible. Stay away from them!
Lots of folks get into these traps by promising themselves theyíll pay extra on the principal. But according to FDIC statistics, 97 percent donít pre-pay on their loans.
Some lenders will also try to use a flashy or ďsophisticatedĒ analysis to convince you this is a great way to get into a great house. But the funny thing about most of these sales pitches is that thereís no mention of the fact that youíve exponentially increased risk. And risk can be mathematically entered into the equation, making your supposed gains disappear.
The best thing you can do — short of saving up and paying cash for a home — is make a huge down payment on a conventional 15-year, fixed-rate mortgage. Then, pay it off as quickly as possible.
When you have an interest-only loan, you end up paying only on the interest. And thatís a great way to find yourself in debt for the rest of your life! — Dave
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