Reader Mailbag: Dog Days

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. Dealing with no credit
2. Handling changing mindsets
3. Spousal disagreements over budgeting
4. Car loan payoff
5. High pay, hate my job
6. House financing question
7. Running for school board
8. Career choices
9. Starting a side business
10. The future of the penny

The dog days of summer are here. That means sun tea, getting really sweaty outside, dry grass, occasional big and noisy thunderstorms, wonderful trips to the pool and to the lake, and falling to sleep with the noise of the ceiling fan.

Q1: Dealing with no credit
Bad credit due to bankruptcy 10 years ago (gone from credit report now). I have no debt and as a result no credit. Grandfather signed for the 2006 car that I drive now. Car is worth ballpark 4k and just paid it off. Now I’m trying to establish credit. When I talked to a loan officer about financing a car last fall the lady pulled my credit history and said “where have you been?” 1 of the 3 reports didn’t even have a score for me :-) I guess that’s a good thing depending how you look at it. Anyway, I have credit cards now and that is helping my score but I’d like to get a car loan in my name. I’ve suggested to a local credit union that I purchase a $1,000 CD and use it as collateral for a $1,000 loan on my car. I realize that i’m going to end up paying for my credit score with the interest I pay the credit union but that’s a price I’m willing to pay. Here’s my question (finally!), I was thinking keep the loan for max 6 months and pay it off. Loan officer is telling me that in order to build my score I need to keep the loan for at least a year. I’ve tried to google research this and I’m coming up with nothing. Is this loan officer just trying to get a little more interest out of me or is there truth to this “at least a year” statement?

– David

It’s really difficult to say. I think keeping it for longer would have a slight positive effect, but not an enormous one.

The problem is that the formula for calculating one’s credit score is not public knowledge. All that’s known are the general guidelines provided by Fair Isaac (the company that developed the formula). They describe five factors in general terms:

How you pay your bills (35 percent of the score)
Amount of money you owe and the amount of available credit (30 percent)
Length of credit history (15 percent)
Mix of credit types (10 percent)
New credit applications (10 percent)

I’m guessing that having the loan will boost your mix of credit types, but that boost may drop when you pay it off, which is where the loan officer’s advice is coming from. However, I don’t think it’ll have a tremendous impact either way.

Q2: Handling changing mindsets
My husband and I got married two years ago. Neither of us had student loans or any credit card debt. My car was a gift from my parents and he had a loan for his car, which we promptly paid off with part of a trust that his grandfather set up for him when he was born. With the rest of his trust, as well as some other savings, we put a down payment on a single family home. We have less than $500 in debt, on interest-free credit cards from buying new glasses and a suit. It will be paid off before the interest-free promotion ends. We make extra payments of $300 (sometimes more) on our mortgage every month to increase the amount of equity we have so that we can get rid of our PMI earlier. We have about $15K in a CD as an emergency fund, and about $10K in savings. My husband has a 401K and a pension plan from work, and I’m opening a 401K this year (I was in school until recently). We both have life insurance policies. We’re in pretty good financial shape for 27 year olds.

But here’s the problem: we can’t get out of our youthful mindset. We both came from families who worked hard to give us everything we wanted- so we’re used to getting what we want. If we want a new camera, we go buy it. If we want to renovate our kitchen, we do it. I’m a bit of a shopaholic (although I really only buy things on sale or used- I definitely buy too much!) and he loves college football and will spend over $1.5K a year for tickets, travel, etc.

We’d like to have kids soon and begin saving for the costs of children as well as saving for their futures so they can start out the same way we did. But we’re finding it very hard to get out of spending habits and we-have-the-money-why-not-spend-it mindset. Do you have any advice for how we can change our ways? Any book recommendations? I don’t feel like the normal “save to reduce debt” ideas apply because we don’t have the burden of debt weighing on us. Thanks for any advice you can give!
– Jennifer

I don’t think any book can really help with your situation. You know what the problem is – you overspend on “wants.” You know what the solution is – spending less on “wants.” It’s up to you and your willpower to make it happen.

One method you might want to try is automating your savings right out of your checking account. Open up a savings account at another bank (like an online bank such as ING Direct) and direct them to automatically withdraw a small amount from your checking account each week. This alleviates you from the responsibility of remembering to save each week and having to make the choice to save.

The biggest factor here is simply personal growth. The more time you spend thinking about what you truly want from life, the more such inconsequential purchases begin to fade into the background as they become completely unimportant.

Q3: Spousal disagreements over budgeting
Do you and your wife ever disagree over budgeting? My boyfriend is a pretty frugal guy (doesn’t care about nice clothes, or cars, even thinks we can downgrade our one bedroom apartment to something less expensive), but is stubborn about certain things. I’d like to get rid of our cable as I feel we spend more time watching netflix and hulu and basic cable channels, but he disagrees. We spend a total of $161 for cable (we get only basic cable, no movie channels), phone and internet and my estimation is that if we cut the cable it would probably save us about $70 a month. What do you and your wife do when you disagree about cutting something from your budget or not?

– Kat

My wife and I budget in a pretty flexible fashion. We generally agree on certain bills that we both use – electricity, cell phones, the mortgage, and so on. Beyond that, we each have an informal “allowance” of sorts that allows us each to spend a certain amount each month on whatever we choose to spend it on.

As long as we each stick within our “allowance” (or stay close to it), there’s no problem. We each have separate interests that we maintain.

So far, there really has been no conflict with this arrangement, at least not in several years. We’re both happy with the arrangement.

Kat had a second question.

Q4: Rapid car loan payoff
Should I try to pay off my car loan faster? From everything I’ve read on your site I should be paying all debt down as soon as possible. However, I’ve also read that having a car loan (as long as you are making all the payments on time) can actually look good when you are applying for other loans as having “diverse” credit is good for your credit score. If I’m planning on getting a mortgage in 3 years or so, is it better to have a car loan that I’m consistently making on time payments on (which will at this point have a pretty low balance), or is it better to have no loan like that at all? I should note that the monthly payments are doable for me, barring an emergency, there is not any reason I should ever have to be late on a payment.

– Kat

If you’re looking at nothing but your credit score, it is perhaps slightly better to have a diversity of credit sources on your credit report. So, in that narrow sense, your plan makes sense.

However, in terms of looking at your finances more broadly, it’s not a good move. Paying off your car loan as fast as possible puts more cash in your hand that you can use for a down payment or for closing costs if you decide to get a mortgage.

The only situation where the credit score might trump this is if your credit score is really marginal and could use any little boost it can get. If your credit is mostly good (or better than that), you’re better off minimizing your debt and avoiding future debts.

The best solution, if you’re worried about this type of thing, is to just request manual underwriting for your mortgage when you apply for it. Manual underwriting means someone actually looks at your credit report and your situation before deciding whether to lend to you or not, so you’re probably better off in that situation paying off your car early and having some cash in hand.

Q5: High pay, hate my job
I currently work as a Technical Service Engineer at a top chemical company. I have worked here since October 2010 and did similar work for 5 years prior to that. I make a salary of $77,000 a year and support only myself ($765 rent payment, $210 car payment, utilities, etc). I live very comfortably and am able to save $400 a paycheck. I have been going to school since January 2009 to become a secondary math teacher. I currently live in Philadelphia and my boyfriend lives in Pittsburgh. His income is less than $30,000 a year but he owns a house (mortgage $700 a month including taxes and insurance). I have to quit and student teach Fall 2012 at the latest due to changes in teaching requirements. I am considering moving back to Pittsburgh earlier and student teaching Spring 2012. I need help figuring out what I should do financially. I have about $25,000 in savings. If I stick it out at my job until March 2012 (which would leave me enough time to go straight into student teaching) I would get a 15% bonus, but I would pay an extra 6 months rent (I can only sign a year lease). I can leave this October and get 25% vested in my 401K match and not have to pay any extra rent. I am really torn because I will likely not make this much money again soon in my life, but emotionally I am not interested in my job or in living away from my boyfriend.

– Christina

You’ve got the traditional dilemma of choosing between money and other life needs. It’s a call that everyone eventually has to make in their life, and different people make different choices.

From my reading of your note, my impression is that you’re leaning towards the personal side of things. If that’s where your heart lies, go for it.

Never forget that personal finance makes your life possible, not life making personal finance possible. You have $25K in savings and are heading right into a career that you want and a life with someone that makes you happy. You’re in good shape.

Q6: House financing question
I currently have a FHA 30 year fixed loan at 5.5%. I bought my town home two years ago. Since then interest rates have dropped including my house value. I called about refinancing to a lower 15 year fixed mortgage and wanted to know some your opinion. One mortgage provider I called said there is a streamline loan through FHA that I can get a lower interest rate as long as I’m up to date on my mortgage and it was an original FHA loan. The mortgage provider said my house was worth about 97,000. the stream line loan doesn’t require an appraisal so I can get the loan for the original amount of 105,000. He said I would need to bring the closing cost, 2600, and the application fee of 400, to the table when I close. My estimated new monthly payment would increase to 934, right now i pay 700.

1) would this be a good choice if my wife and I plan on living here for at least 5 more years?
2) when i originally qualified for the mortgage I was single now I am married and we make about 4500 a month after taxes. would we qualify for the streamline FHA loan?
3) the only debt we have aside from the house is about 27,000 in student loans.

– Nathan

If I understand correctly, you’re saying you would move from a 30 year to a 15 year with lower interest and somewhat higher monthly payments. That loan seems like a good option, especially if you’re going to be living there for a while.

From what I understand of the FHA streamline requirements and what I understand from your story, there’s no reason you wouldn’t be qualified for it.

If I were you, I’d go for it.

Q7: Running for office
I live in a community of about 7,000 people. I am considering running for school board. This is a contested election without party affiliation.

How do I go about winning this election? I know you’ve dabbled in local politics. I’m just not sure where to start.
– Ellen

In a community of that size, your best bet is probably to simply get to know people. Name recognition is enormous in such elections.

If I were you, I’d figure out why I wanted to be on the school board. What are your key issues? Why do you have that stance on those issues?

I’d then literally go door to door in the evenings, knocking on doors and introducing yourself. Take flyers around with you so that they remember you. Be sure that, beyond introducing who you are, that you ask if there are any issues they’d like to see before the school board. Carry a notepad and a pen with you and write down things you learn along the way.

I’d also be sure to be present and as social as possible at any community events between now and then. Talk to people. Get to know them, and let them get to know you.

Q8: Career choices
I’m currently working as a System Administrator and Supervisor. I make a decent amount of money, but I only took this job because I know I’m good with computers and needed the money. The problem is I really don’t like computers. I mean… they are ok, but I’d really rather not. I’m a hard worker and I’ve gotten promoted several times in the last couple years and even doubled my income there. With my current skill set, it would be difficult to move up any further though. I would need to take a few classes, each at around $500-$900 each, and if I wanted to go even further up the chain, I would look into getting a BS in computer science or networking. Whatever career path I suppose I’d want to take, but as I said, I’m mildly interested and I’d rather not.

What I really want to do is be a firefighter. A total 180 in career choice. I like the duties and awesomeness of the job, the variety of work, and the schedule. The money is about the same starting compared to where I currently am; although, it doesn’t get too much better after that, but I’m not really worried about it. Unfortunately, I’ve been trying to get hired for the last three years; although, one of those years, I had to jump out of the application process because I was pregnant! The application is a long process (6-9months) with a slim chance of getting through. About 1400 people apply for about 20 or less spots. Obviously, the odds are against me. I get most of the way through the process to about the last 40 people every time but don’t make it past the last interview. I live in a metropolis where there’s about 7 different companies I can apply to, so I do about 3 simultaneous applications a year, which is a pretty common practice. I know I can greatly increase my chances and most likely make it if I took EMT classes toward becoming a paramedic. This can cost around 900$ just for the basics and takes a lot of hard work. And if I do make it, I’d have to hope to pass through their 3-4 month academy. I’d have to quit my current job to do this academy, and if I fail out, I’m without a job. The pass rate is normally 80-90%. Then after that, I have to worry about layoffs, which is pretty popular nationally due to the government spending cuts. I do have enough saved to get me through a decent period of unemployment, I just wouldn’t like it.

So my question is this, do you think I should increase my skill set with my current job in a field i don’t really care for although tolerable, it’s pretty stable, I’m really good at it, and I’ll most likely double my income again with further education or do you think I should I increase my skill set for a job I might get and hope to maintain but would really love to have. I don’t have money or time to do both, and the firefighter thing is kind of age dependent. The older I am, the harder it can get physically. My husband would also like another child soon, but we can’t even think about it until I decide if I still wanna go for it. Granted, he’s also fine to not have another child. It’s really up to me. So yeah, just wondering what you would suggest?
– Randy

The only thing holding me back from saying “go for it” is the presence of a child in this scenario. The career jump you’re describing is incredibly risky and provides some dangers for your ability to provide long-term care for that child.

I’m not talking merely about the risks of being a firefighter. I’m talking about the economic risks inherent in the path you’re describing. You’re going to take a big income hit and a big job stability hit with that switch.

If you were without dependents, I would absolutely encourage you to take the leap. Given your situation now, though, I’d probably encourage you to take the safer route. It’s not just you that’s involved here.

Q9: Starting a side business
I’m a software engineer, and I’ve been thinking about writing a web application and seeing if I could get that going as a small side-business. I’m comfortable with the technical aspects of doing something like this; it’s the other aspects I feel like I don’t have a clue about. Do I just come up with privacy policies and terms of service by myself? Do I need to ‘create’ the business in some official way? I guess mostly I just feel clueless about the process of starting your own business, and was hoping you could shed some light on the process.

– Sarah

My experience with creating EULAs is that the organization that I was involved with essentially read the EULAs of several respected software packages and more or less cribbed their text as a starting point. They then took this document and had a lawyer review it, which was much less expensive than having a lawyer write it.

As for starting a software business, this is the type of business that has the advantage of having rather low startup costs. You can easily start work on it in your spare time, just to see if anything comes of it.

If I were you, I’d start as a sole proprietorship – no paperwork needed. If you actually begin to create a real product, then I’d consider forming a business. Don’t bother until you’ve created something of worth, though.

Q10: The future of the penny
Do you think the penny will continue to be made in the future, considering that it costs far more to make a penny than it’s worth?

– Vince

If I were President, the penny and the nickel would vanish. Instead, we’d merely round everything to the nearest tenth of a dollar. The exception to this would be online transactions, where cents could still easily be recorded.

What will they actually do, though? My suspicion is that they’ll keep making and using pennies until they’re absolutely deprecated. This has been the policy with past currencies such as the halfpenny and the farthing (a quarter of a penny) in various English-speaking countries.

Why not do it now? I think there’d be resistance to eliminating it and I think that resistance without a real reason for it is why we’ll still have the penny for a while.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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