By Deanna Parmenter

Thanks to all who responded to the quiz.  Some of the questions were answered correctly by everyone and others were a bit harder.  Erin Torres was the winner of the restaurant gift certificate - Congratulations!

Let’s find out how you did...

1. Knowing my credit score is not important unless I need to buy a house or car.

Everyone got this one right.  Your credit score affects how much you pay for insurance, credit cards, mortgage interest, car payment – all sorts of things.  It also affects how much of a deposit you have to pay for utilities.

There are three credit reporting agencies – Equifax, Experian and Transunion – that track your credit score.  They are required to provide you with your credit report (but not your score) one time per year for no fee.  Instead of pulling all three reports once a year, pull one report from each agency every 4 months.  That way, you can find any problems and correct them as soon as possible.  The web site for ordering your free credit report is www.annualcreditreport.com.  Be careful, though, because there are some fake sites out there with very similar names.  If you use one of the fake sites you will have to pay a fee and your email will be bombarded with ads.

2. Paying the minimum amount on my credit card each month will help my credit because I will have a longer history of making payments.

This is also false.  If you pay the minimum amount on the card, your credit report will say “Paid as Agreed”, which is a good thing.  But, and this is a very big but, the interest will add up quickly.  Do you really want to pay $50 in interest for that $10 item you just had to have?  That makes the cost of your purchase $60, not $10.

If money is tight one month, by all means pay at least the minimum so you are not late.  But don’t make a habit of it.

3. I should always take advantage of balance transfer offers if the interest rate is lower than what I am currently paying.

This one was a bit trickier.  A few years ago – okay, more like 10-15 years ago – credit card companies would offer balance transfers for no fee.  Sometimes the offer came from a company that wanted you to open a new card.  Sometimes it came in the form of checks from an existing credit card.  Tempting, huh?  I admit to borrowing money for 6 months and investing it in the stock market.  When the 6 months was up, I’d sell the stock for a profit and pay back the interest free loan.  Not bad.  But with the market not growing as quickly and with the fees now being charged, it no longer makes sense to do that.

Most balance transfers are charged on average 5% of the amount transferred.  This means that for every $100 you transfer, you are paying $5.  If you transferred $5,000, you’d pay $250.  Most of the time this doesn’t make sense and you aren’t really saving any money.  Let me explain.

                        Existing credit card debt                     $10,000

                        Interest rate is 12%                             $100 per month in interest

                        Interest paid on existing debt              $600 over 6 months

                        Transfer interest rate is $0 for

                                    3 months, then 10%                $0 for 3 months / $250 for 3 months

                        Transfer fee                                         $300

                        Interest and fee paid                            $550

You saved $50 over 6 months, but using balance transfers repeatedly shows up on your credit rating.  And if you applied for a new card to get this balance transfer, your credit rating will take even more of a hit because you applied for new credit.

4. If I settle a debt for less than the full amount, I don’t have to report it to the IRS.

Again, everyone got this right.  What with all the foreclosures and bankruptcies in the last few years, believe it or not this one has tripped up many an unsuspecting consumer.  If this applies to you, go to the IRS web site for more information.

5. The most important thing when buying a car is figuring out how much monthly payment can I afford.

Car dealers love people who answered TRUE to this one.  When you walk into a dealership, one of the first questions a salesman will ask you is how much you can afford each month.  And guess what?  Somehow that number – or one slightly higher – is quoted on the car.  If you add in the interest rate, add-ons, and fees, you could be paying above sticker price for the car. 

Tip: Know before you go. 
-Research the car on Edmunds or Kelly to find out what a fair price is.
-Check with your insurance agent to find out if your insurance premium will change.
-Look at repair and maintenance history on the vehicle – will your new car be in the shop a lot?
-Figure out how long you usually keep a car and look at the resale value.  For example, if you usually trade in a car every 4 years, what is your new car going to be worth in 4 years?  Some cars keep a high trade in value and others don’t.
-Check other ways to pay for the car before hitting a dealer’s lot.  That way, you can compare the offer they give you to see if you are getting the best deal.

6. Having an occasional bounced check fee is no big deal because the bank covers my check.

We’ve all had a bounced check at one point or another.  But banks make their money off people who make this a habit.  Why pay $35 extra because your account was $2 short?  You are paying a lot of money over the course of a year that you don’t need to.

Tip:  Check out my previous article on how to reconcile your bank account.  Or, if you want to avoid this problem but don’t balance your account, then deduct $50 or $100 from your balance so you always have a “cushion” for those times you accidently bounce a check.

7. Budgeting isn’t that important because I spend money on the same things every month and I’m locked into the payments.

False.  Let’s face it.  Budgeting may be easy, but tracking your spending is hard work.  Do I really need to write down that $3 cup of coffee?  What about the $5 I gave at the office for lunch?  Yes, you have to spend money on some things you have no control over – rent or mortgage, utilities, car payment.  But you’d be surprised at how much money is wasted without even realizing it.  When I started out in my early 20’s, I had no clue.  I would spend on impulse purchases and then not have enough money to pay bills at the end of the month.  Take a minute to figure out what you have to spend, and then set a budget for the other stuff.  I found that I saved hundreds of dollars a year hen I paid more attention to my spending.

8. Signing up for my employer’s 401(k) will have to wait until I’m not so strapped for cash.

Most people answered this correctly – false – but I’m amazed by how many people actually decline to join their employer’s 401(k).  Okay, do you really want to rely on Social Security?  Most employers match a part of what you put into your retirement.  So that 3% that you stash away tax free suddenly becomes 4.5% or 6%.  And the earlier you start, the more you’ll have when you retire.  It’s simple math.

9. Buying an extended warranty on a large purchase like a car or appliance is always a good idea.

Mixed reviews on this one.  The answer to buying an extended warranty is – it depends on what you are buying.  Car dealers and appliance salesmen always try to sell you an extended warranty.  Think about it.  First they try to sell you on how dependable their product is and how it will last you many years.  Then they try to sell you on a warranty in case anything breaks in the next 3 years.  Most of the stuff that goes wrong with electronics will go wrong in the first year, which is covered by the normal warranty anyway.  Before buying an extended warranty, ask yourself how expensive is a typical repair and how often do I think it will break down?  If the warranty costs more than the number you come up with, don’t buy the warranty.

10. Buying CDs or other fixed income investments is safer than stocks during an uncertain market.

Most people answered this as true, but the answer is false.  Fixed income investments, such as CDs or bonds, feel safer because they have a fixed return.  But have you checked out the rates lately?  Banks are paying between 0.5% and 1.15% on CDs.  Savings accounts are even less.  When compared to the rate of inflation, you are actually losing money by investing in CDs or bonds.  A good rule of thumb is to buy fixed income investments when you need to make sure you don’t lose the amount you invested or you need the money within the next year.  Other than that, stocks continue to outperform fixed income investments.

11. It is not necessary to plan for my retirement because I will have social security and Medicare.

Everyone got this one right.  Of course, knowing you should do it and actually doing it aren’t the same, are they?  I really believe that Social Security and Medicare will be there for all of us in one form or another.  Politicians won’t let these popular programs die.  But they will certainly change, so it’s best to be proactive.  Open an IRA or 401(k), and get advice on how much money you will need for your retirement.  Or check out this retirement calculator to estimate your retirement needs.

12. It isn’t important to buy insurance because I am renting an apartment and don’t own a house.

Insurance should only be purchased for those items you can’t afford to replace.  Otherwise, you pay more in premiums than the possession is worth.  So, unless you are a single person living in a one bedroom with hand-me-down or Craig’s List furniture and not much else, you will want to purchase renter’s insurance.  Renter’s insurance is like homeowner insurance except it only insures your possessions.  All major insurance companies offer this type of policy for a very low price.

Thanks to all who submitted responses to the quiz.  Please post comments with your own experiences or questions.