1. Don't: Opt for lower monthly payments with a five-year (or longer) car loan.
According to Federal Reserve data, the average new-car loan term is 63 months. That's ten months longer than a decade ago, and, to put it simply, longer is a waste of money. Your car is a depreciating asset—after just one year, its value will be 30 to 50 percent lower. So don't pay interest on it for any longer than you have to.
Do: Sign up for a car loan only if it's for 36 months or less.
If the shorter term makes the monthly payment too high, you need to shop for a less expensive car.
2. Don't: Buy sale items on credit.
Say a product you buy often is 15 percent off, so you decide to buy in bulk. Paying with a credit card could get you in trouble. If you purchase $350 worth of merchandise at a 15 percent discount, your bill will be $298. But if the $298 goes onto your credit card at 20 percent interest and you pay only the minimum due each month (usually about 3 percent), it will take you two years and $67 in interest to pay it off.
Do: Pay with cash or a debit card.
If you do use credit, pay off the purchase in full when the bill arrives. If the item is nonessential, don't make the purchase at all. Use the calculator in the credit card section of BankRate.com
to compute the true cost of paying only the minimum due.
3. Don't: Get a low deductible on your auto or home insurance policy.
Limiting your out-of-pocket costs seems smart, but with a deductible of just $250 or so, you're more likely to file small claims in the event of an accident or loss of property. That's a quick way to get on your insurer's bad side—your premium may increase at renewal time, or your insurer may decline to keep you as a customer.
Do: Raise your deductible to $1,000.
Handle small issues out-of-pocket and save your insurance for major problems. Not only will you stay in your insurer's good graces, you'll reduce your annual premium by at least 10 percent.
4. Don't: Let your child go to that fantastic college if it's outside your price range.
Your teen understands the need to apply to a safety school—and it's your job to make sure every school she applies to is financially
safe, too. A college education can be incredibly valuable, but it makes no sense to rack up massive debt to obtain one. And I can't stress this enough: Do not deplete your retirement fund to pay for college. That money needs to keep working for your future.
Do: Start making the numbers work in high school (if you haven't already set aside funds in a 529 plan or other savings account).
If your teen is an academic achiever, scoring well on Advanced Placement tests can reduce her required coursework in college, and since fewer than 40 percent of students graduate in four years—and a fifth year can add 25 percent to the total cost—that's a huge leg up. Bear in mind that the average tuition at a four-year public college for the 2009–2010 school year was $7,020, compared with $26,273 for a private college. If your child's chosen career requires a graduate degree, spending less at the undergrad level will be a big help when it comes time to finance grad school. Once the acceptance letters arrive, make sure you fill out the FAFSA form to see if you're eligible for financial aid. And try to stick with federal loans—at a maximum 6.8 percent fixed interest rate, the Stafford loan program is the best deal going. Once your kid maxes out on Staffords, you can look into a PLUS loan; parents can borrow up to the full amount of school minus any aid, and the fixed rate is 7.9 percent.
5. Don't: Fall for teaser and variable rates.
Some credit card companies lure you in with a rate of 0 percent but raise it to 18 percent after the initial promotional period. Adjustable-rate mortgages that started at 2 percent or lower in 2005 have reset at much higher rates, sending thousands of people into foreclosure. And that private college loan that started at 10 percent? It could climb to 15 percent or higher if it's tied to an index that rises. The bottom line: If the interest rate isn't permanent, you could get taken for a ride.
Do: Stick with a 30-year fixed-rate home mortgage...
...(average is currently 5 percent), avoid credit card promotions altogether, and, as much as possible, steer clear of private college loans—again, Stafford and PLUS loans are the way to go.
6. Don't: Transfer balances.
A few years ago, transferring your debt to a card with lower rates would have been a no-brainer, as many card issuers charged a maximum balance transfer fee of $50 to $75. But today companies often charge a percentage of your entire balance—usually between 3 and 5 percent (and a 3 percent fee on a $5,000 transfer is $150).
Do: Try to find a no-fee transfer deal at CreditCardConnection.org.
And if you are considering a deal that charges fees, use the calculator at CreditCards.com
to determine whether you'll come out ahead.
7. Don't: Use a debt settlement firm.
Those TV ads that promise to negotiate a deal with your creditors so you pay only a fraction of the bill can be enticing—but you should change the channel, and quick. According to the National Foundation for Credit Counseling, debt settlement firms typically charge fees between 13 and 20 percent of your total debt, or a cut of the total debt reduction plus a hefty monthly fee of $50 or more. Not to mention that many of these companies are far from squeaky-clean—several simply collect your fees without doing much at all to improve your situation, and the Federal Trade Commission has numerous cases pending against the worst offenders. Furthermore, even if you are
able to negotiate a lower payment, you will likely owe federal tax on the amount forgiven (the IRS considers it income), and a settlement will hurt your credit score.
Do: The negotiating for yourself.
If you're unable to make your payments, call your creditors. They would rather get something than nothing from you, and they're just as willing to deal with you as they are with a debt settlement company. Asking to settle your bill for less than the full balance will work only if you have enough funds to make a lump-sum offer—you'll need to bring cash to the table. And remember that if they accept, there could still be a tax bill coming your way.
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Suze Orman is the author of The Money Class. Ask Suze your question.