AskDong

I got a question the other day asking “what’s a good first credit card to get?” from acquaintance (we’ll call her Joan). A relativley straightforward question.  Joan is going to graduate school, and this will be her first credit card.  She plans on paying graduate school tuition on her card. She doesn’t plan on carrying a balance. What she does want to do is build her credit history and enjoy some of the benefits of having a credit card such as cash back rewards for expenses she already makes such as tuition. I realize that there are many individuals who shy away from all types credit instruments - mortgages, credit cards, you name it.  That works for them, but plenty of other people including myself have taken advantage of the benefits of credit cards including but not limited to: building good credit history, earning cash back, and getting free auto coverage on rental cars.  Responsible credit card users don’t carry balance and use a credit card for convenience, not to borrow money.

Joan will be putting her tuition on the card, but her school only accepts Visa and Mastercard. I tend to think if you’re only going to have one credit card (and don’t shop at Costco), A Visa and Mastercard does make the most sense. They are mostly widely accepted with American Express coming in next, and Discover a good half lap behind that. Joan’s priorities in picking either a Visa or Mastercard should be:

1. Cash Back Percentage
2. Interest rate. Given that Joan is not planning to carry a balance, and I believe her, the interest rate shouldn’t be that important. However everything else the same, it’s still better to have a credit card with a lower rate than a high rate
3. Credit Card Perks. Car rental insurance, travel insurance, special access, etc. Platinum cards generally have extra features.

I think the following three cards having pretty good reward programs. I’ve listed they payout percentages for each of the cards. Where I’ve included two percentages the higher percentage is for everyday purchases, gas and groceries. In the case of the Chase Freedom, it’s actually the top three most commonly used categories (amongst a predetermined list) whatever they may be.

• Chase Freedom Visa, 1%/3%. The Chase Freedom is one my favorite credit cards and is currently offering a $50 signup bonus.
• Capitol One No Hassle Cash Back Card, 1.25% - it’s actually 1% with a 25% annual bonus.
• Citi Diamond Preferred MasterCard, <1%/<5%. The 5% redemption rate applies for the 1st 12 months. Technically this Citbank card is not a pure cash back reward, but a point card. The points translate roughly to something less than 1%/5%

Typically I would pick the Chase Freedom above the rest. The 3% cash back rate on the most common purchases is hard to beat. However because it’s likely Joan’s single biggest charge on her card will be tuition, getting a better payout in the form of the Capitol One No Hassle might make more sense.  In the end, any three of those credit cards should be good bets.
The cards below are interesting but because they offer slightly less flexibility than a reward card that can be redeemed for cash outright.

• Capitol One No Hassle Miles Card for Professionals 2%. Redeemable only for airline tickets, and has annual fee of $39. However assuming that one does need to travel by air, the 2% payout ratio for ALL purchases is fantastic.
• Fidelity Signature Visa, 1.5% paid in the form a credit to a Fidelity investment account.

Because this is Joan’s first credit card, and may not have much of a credit history, it’s quite possible she won’t get approved for very much credit.  I’m hoping she get approved for enough so she can put her tuition on the card (and get a 1-2% effective rebate).  While having access to alot credit can be dangerous, building a good credit history is a great reason to get a credit card.

I have a question from Noah S.

My wife and I own a condo that we rent out. We have been pretty much been breaking even on it (and hoping that it will increase in value), as the rent has been covering our mortgage payment, taxes, insurance, and condo fee. Until now.

The condo association has proposed to undertake a $450k masonry project, which will cost us about $10k. We can either pay it up front at a 5% discount, or take on a “temporary fee increase.”

I have three questions:
1) What is the difference between a temporary fee increase and a special assessment? I’m thinking both for sale marketing, and also potentially for tax-deductibility purposes.

2) Which option should we choose? Here are the specific numbers:
$249 existing fee
$796 18-month “temporary fee”
$547 net additional fee
$9,846 total cost over 18 months
$9,354 lump sum at 5% discount

3) Do we have any recourse if we do not feel that this project is worthwhile?

Sincerely,
Noah S.

(more…)

This meme has been incredibly popular. It’s blazed through the personal finance community like wildfire, and I’ve been tagged by goldnsilver (well at least I think I have).

1. I slept through a college final, and a midterm
2. I don’t like mushrooms, but like cream of mushroom soup.
3. I still have my wisdom teeth - hence all the wisdom on this blog
4. I have hard time watching awkward scenes in sitcoms and movies where everyone is in the know about something except for one poor guy
5. I’ve owned an Apple Mac of one form or another since 1989, and a Apple Computer since 1986
6. I developed a fondness for SPAM when I was Boy Scout before it became hip
7. I have had my current Netflix disc for 3 months
8. I brought my first pair of boxers for a coed slumber party sophomore year in high school, and haven’t looked back since

Boy, I sound like a pretty big geek, but that’s ok.

I don’t think I’m the tagging type, but given this is my first tag, I really should tag someone else. FinancialZen, you’re it.

Mrs B. Asks

Hi Dong! WOW this website is off the hook. Quick question: I’m renting my apt and I need to get his credit report. How do I do this? When I go on websites, they assume I’m requesting a credit report for myself. Hope you’re enjoying the sun down there!

When renting out an apartment, I think it’s critical to run a credit screen on your potential tenants. A good tenant who pays in full and on time is worth his or her weight in gold. In some regards, I feel asking for the information needed for a credit screen more useful than the credit screen itself. How a potential tenant reacts is a more useful indicator than the actual credit information. In addition to the credit screen, I would also suggest giving the prospective tenant a relatively simple questionnaire to fill out.  Job information, previous residencies, party habits, pets, smoking, etc.  In addition, I would also ask for at least one reference from a previous landlord.

Now back to the original question. There are a number of companies that will run credit checks for tenancy purposes.

I’ve used CitiCredit, but there’s also:

• YouCheckCredit
• eRenter
• Intelius

These are but a few of the on-line companies that will perform a credit check on a tenant. I’ve only used CitiCredit, so I can’t really comment on the others. They should all charge in the same range, about $10 for each report. I’ve been pleased with CitiCredit. I found the report they issued to be thorough and complete. Before doing a credit screen, you’ll need to obtain his/her social security number from your prospective tenant - another reason to give a questionnaire.

Baby P wrote:

Dong, how do you feel about gifting shares of stock to family? I hear it’s one
oft-used tax-shelter for those in the know.

BP

I’m a big fan of gifting shares in general, but I’m not sure if I’m in the know.  Gifting shares are not the big tax shelter some might think it to be.  Not that there are defininite tax advantages to gifting shares, but it you do if it’s all on the up and up (as it should be) it’s not a gigantic loophole to be exploited

When it comes to gifts, the first thing is understanding the annual exemption, and lifetime estate exemption. Everyone is allowed to give anyone else $12,000 (up form 10,000) free of of any special filings. After $12,000 you need to make gift tax filing, then it starts counting against estate tax exclusion. Taxes still don’t need to paid until the total gifts exceed the exclusion amount (which is $1,000,000).  [Correction, originally stated ast $2,000,000 and shifting - that's the Estate Tax exemption] There’s often confusion about whom the gift tax applies to.  It’s owed by the person making the the gift, not the receiver of the gift. So if for example you were to give your sister, $11,000 of MSFT that you purchased for $5,000, you would be under the exemption amount. No taxes would be due. Anything over 12,000 would then start chipping away at your estate exclusion. For this reason, it’s often advisable to start giving often and early but under the annual amount.

However your sister’s cost basis would still be $5,000, and if she were to sell the shares would have to pay taxes on the gain of $6,000. She also keeps your holding period. The clock on long term gains does not reset. Assuming that you and your sister were in the same tax bracket, no advantage would be had. However if she is in a lower tax bracket then in net the tow of you would save on taxes. Another thing to note is that you cannot apply the same logic to depreciated property. In the example above, let’s say the shares of MSFT were purchased for $11,000 and now are worth only $5,000. You can’t use a gift to transfer a tax loss to your sister. She wouldn’t be able to sell the shares of MSFT for $5,000 and claim a $6,000 loss. Her basis would be the lower of the value at the time of gift or the original basis if she’s selling for loss. If she sold between $5,000 (the value at gifting) and the $11,000 (the original basis), there would be no gain for tax purposes. At any value greater than $11,000 and she would have a taxable gain based on the original basis, $11,000. If gift taxes are paid then those taxes can be used to reduce the cost basis.

Inheritances are treated differently. An inheritance has something called “step-up” basis. The basis is set at the the time of death. For example if you were to inherit a house that is worth $1,000,000 but was purchased many years agos for $10,000, your basis is $1,000,000 rather than $10,000. This clearly makes a huge difference. Gifts and inheritances are highly related. As a result people who have “alot” really do need to have a carefully crafted plan of action to minimize both taxes and other complications for their loved ones. Gift taxes are also more complicated than I’ve laid out here. There are number of exemptions such as the unlimited exemption between a married couple. Gifts made directly to pay for medical and educational services are also exempt, the Kiddie Tax, etc.

Disclaimer:  I’m not a financial professional.  This is merely answer based on what little I know and should not be construed as financial advice.   It’s commentary more than anything else.

Corrections: The gift tax exemption is $1,000,000 not $2,000,000 as originally stated.  Thanks to savingforwealth for the correction.  I assumed that gift tax exemption would follow the estate tax exemption as they are closely linked.  I thought wrong.