What Happens If You Try To Spend More Than Your Credit Limit?

credit cards

When you sign up for a credit card, you are often assigned a credit limit when that account is opened.  These limits typically start at $200 and go up to tens of thousands of dollars.  With so many people out of jobs and finding it hard to make ends meet these days, credit cards have become a necessary resource to pay for things that we might not have the money for right now. However, the more you charge on your cards, the closer you may come to hitting that max limit.  If you do hit that amount, you are likely to get hit with over-the-limit fees. Before you decide to use your credit card to pay for necessities, there are alternatives to going over your max before risking having your credit limit cut or incurring unnecessary fees.  

Can You Go Over Your Credit Limit?

Yes, you can go over your credit limit, but there’s no surefire way to know how much you can spend in excess of your limit. Card issuers may consider a variety of factors, such as your past payment history, when deciding the risk of approving an over-the-limit transaction. Any approved transactions above your credit limit are subject to over-the-limit (or over-limit) fees. This credit card fee is typically up to $35, but it can’t be greater than the amount you spend over your limit. So if you spend $20 over your limit, the fee can’t exceed $20.

Due to the CARD Act of 2009, over-limit fees can’t be charged without your consent. As a result of these regulations, most card issuers have done away with over-limit fees and the default for any transactions over your credit limit may be that the transaction is simply denied.

If you do consent to a one-time over-limit fee, you can change your mind and opt-out at any time. However, in doing so, your card issuer will likely decline any purchases you attempt to make over your limit. Even if you opt-in to over-limit fees, transactions exceeding your credit limit may still be denied.

Should You Go Over Your Credit Limit?

While spending over your credit limit might relieve some short-term problems, it can also cause long-term financial issues, including fees, debt and damage to your credit score. The best practice is to try to maintain a low credit utilization rate – avoid maxing out your card and spending anywhere near your credit limit.  If you do go over your limit, you should sit down and consider why it happened in the first place and review your budget. You should figure out what purchases caused you to spend more and whether you can make any changes to your spending habits.

Alternatives If Your Credit Limit Is Low

For those that may have a low credit limit or if your credit limit recently got cut, there are some options to ensure you don’t max out your spending. If you’ve had a low credit limit for a while and currently have a stable job, you may want to request a credit limit increase. This can be a good idea if you have good credit (scores 670 to 739) or excellent credit (scores 740 and greater) or if you haven’t updated your income in a while and make more money than what’s listed. Your card issuer may pull your credit report for this request, which may cause a small, temporary ding to your credit score.

However, if your credit limit was reduced, you may want to consider other options. Cardholders with good payment history and a stable job should call their card issuer and ask for reconsideration.  You should ask why your credit limit was cut, explain that your account is in good standing and that you have a stable source of income to pay off your bill. This may shed light on why your limit was lowered and potentially result in your credit limit increasing — though there is no guarantee. Rather than asking for a credit limit increase on the card that had a reduction, you may want to consider any other cards you have instead. If you have three credit cards and one got the limit cut, see if you can get an increase on one or both of the other two,

If you have a history of missed payments or maxing out your cards, you are likely not a good candidate for reconsideration and don’t want to draw attention to yourself. Therefore, if you fall into one of these categories, it’s best to not try to request a higher limit.

When To Apply For A New Credit Card

Cardholders with only one credit card and a low credit limit may want to consider opening a new credit card, but should be aware of any potential risks. For starters, if you were recently laid off or faced a reduction in income, you may not be in the best position to be approved for a new card, and there’s no sense in adding a new credit inquiry to your credit report if your chances are low. Also, if you have a history of maxing out your card, you should be aware that more credit can lead to more debt. An additional credit limit can be helpful for affording your expenses, but it can also be harmful if you overspend.

Before opening a new card, give yourself clear guidelines on how you’ll use the card and stick to keeping a low credit utilization rate. When it comes time to pay your bill, make on-time payments of at least the minimum every month for all of your cards.  If you are able to do so, pay in full so that your credit score will  improve and your debt will be minimized. When applying for a new card, check your credit score first to narrow down your options. Then consider cards based on your credit score. 

In these tough times, we need to be responsible when it comes to spending and not see going over your credit limit as a choice. If you do need to use your credit cards to pay for utilities, groceries and other necessities right now, make sure you are aware of your max and other options you might be able to work out with the credit card companies before going over your limit. When you do receive those credit card statements, make sure to pay at least the minimum amount each month to maintain a positive credit score. And, make sure you are paying the bills on time to ensure you won’t incur any late fees either.  If you have any questions about credit, credit cards or other issues concerning your finances, please contact us.  We are all in this together and we’re here to help! 

The Financial Services Industry Is Evolving

As our world is evolving and industries are becoming more complex, we have found that consumers too are heightening their expectations in terms of products and services received. A recent survey by Spectrem Group found that there is quite a gap between what consumers expect and what they receive in actuality, especially in regards to the financial services industry. 

As you can see from the chart below, financial planning and wealth management were two areas in which consumers found that services expected and services received had the least discrepancy. As a financial advisor, we recognize that the financial services industry is evolving, relationships continue to grow and adapt, and advisors must strive to deliver a holistic service to their clients. 

The chart above shows the client demand for an all-encompassing approach to the financial services industry and the importance of finding an advisor who truly understands the value of a financial plan. At Sherman Wealth, our focus is on helping the whole client, whether it involves setting up a 529 for those with young children, making sure retirement goals can be attained, knowing how to best maximize your 401(k) or creating a monthly budget and thorough financial plan for those just starting out. We are constantly adapting our technology solutions to keep up with the ever changing advancements as well as refining our relationships with clients. If your needs align with our values, please reach out to us at info@shermanwealth.com or schedule a complimentary 30-minute consultation here.

Are These Psychological Biases Holding you Back from Building Wealth?

Our emotions are powerful. It’s hard to not let them take over and impact decisions we make in life. What people often don’t think about is that our emotions often times impact our financial decisions, even though it may not seem like it. At Sherman Wealth, we often discuss behavioral finance with our clients and how behaviors can drive or impact our financial decisions as humans. 

Investment biases get in the way of us making solid, un-clouded financial decisions. By acknowledging and familiarizing yourself with these behavioral biases, you can teach yourself to avoid them when you come across them. Here are some major behavioral biases to watch out for:

  1. Loss aversion

Loss aversion occurs when individuals are scared about an apparent “impending” negative outcome. When this happens, an investor, for example, could sell their stock when the market starts to tank. At Sherman Wealth, we always prioritize the long-term strategies and the importance of “time in the market”. When you feel these nerves coming on, stay calm and be sure to maintain a balanced portfolio.

2.Bandwagon effect

Do you consider yourself a leader or a follower? The bandwagon effect refers to individuals that follow the investment decisions of the crowd, because they are popular. As you will hear from us several times, make sure to do your own research and feel good about an investment before jumping into it because its “popular” or “trendy”. 

    3.Sunk cost fallacy

Dwelling on past and poor decisions is something we all have a hard time coming to terms with. The sunk cost fallacy prevents individuals from being able to fully move on from a poor investment, solely based on time and money they have put into it. If something is continually dragging you down, stop investing resources in it and consider that it may be best to move on.

4. Confirmation bias

As humans, we enjoy and seek for confirmation about our previous decisions, which often times allows us to be clouded in the reality of the situation. Before making big investment decisions, make sure to do proper research in order to make informed decisions. 

Confronting these behavioral biases can help you avoid making clouded decisions in the future. If you have any questions or want to learn more about how to avoid behavioral biases, schedule a complimentary 30-minute meeting here. 

Here’s How You Will Be Able to Locate Your Lost 401(k) Accounts and Pensions

Did you lose your company 401(k) when switching jobs? Well, you may be in luck.   There is a proposed retirement legislation that’s pending in Congress that will be proposing a “lost and found database to help locate those accounts”. 

As people change their jobs from one company to another — “the average is 12 jobs, according to one government study”,  they tend to lose their company retirement plans. “More than 16 million accounts of $5,000 or less remained in workplace plans from 2004 through 2013″, according to a report from the Government Accountability Office

The provision in the congressional proposal would create “an office at the Pension Benefit Guaranty Corp. to oversee and administer the lost and found program”. It would accept account transfers of under $1,000 from plans and would try to locate the owner. They also mentioned that people would have the ability to search for their missing plans in the database as well. 

“If the company has moved to South Carolina or New Zealand or wherever, or is now Company Z not Company X, the lost and found will have that information,” said Karen Ferguson, president of the Pension Rights Center, a consumer advocacy group. 

If you have an old 401(k) account or pension you are unable to track down, you first should contact your former employer to see if you can track it down. Hopefully soon this new plan pending in Congress passes in order to help millions across the country stay on top of their hard earned money. If you have any questions about your 401(k) and how to take the next steps if you have started a new job, please let us know at info@shermanwealth.com or schedule a complimentary 30-minute call here.

Here’s What Americans Say is Their Biggest Financial Regret

The coronavirus pandemic sent Americans’ financial situations into a whirlwind. A recent Bankrate survey found that the crisis actually caused many consumers to re-evaluate how much money they plan to save in their emergency fund. The coronavirus pandemic also led many people to think about financial regrets and mistakes they’ve made in the past and plan to improve on in the future. 

Bankrate’s May 2021 Financial Security poll found that Americans’ biggest financial regret is not saving enough for emergencies. In addition, building a better emergency fund is what most respondents said they would do differently with their finances after the outbreak, at 26 percent.

It’s clear that the deep recession caused by the coronavirus pandemic has proven the importance of having a sufficient emergency fund and being prepared for the unexpected. 

Bankrate also captured Americans’ biggest financial regrets, according to their survey:

When the respondents were questioned about how they plan to alter their financial habits based on their earlier responses, they said this:

  • 26% said they will save more for emergencies
  • 21% said they will spend less
  • 16% said they will carry less debt
  • 12% said they will find more stable income
  • 12% said they will save more for retirement
  • 8% said they plan to make no changes
  • 2% said they will do something else

This financial data drives home important financial concepts and habits such as building an emergency fund, starting early, contributing to your retirement, establishing and maintaining a good credit score, and more. You never know what curve balls life will throw your way, so it is always important to be prepared for the unexpected and be ahead of the game when it comes to your financial and financial future. If you have any questions about how to improve your financial habits or how to repair some financial regrets you have, contact us at info@shermanwealth.com or schedule a complimentary 30-minute introductory call here

4 Commonly Made Financial Mistakes Young Families Make

As we are halfway through financial literacy month, we want to continue to discuss simple ways to better your financial life. At Sherman Wealth, we focus on helping young couples and families get their finances on the right track, which is why we want to talk about common financial mistakes young couples and families often make in their 20’s and 30’s that come back to haunt them in the future.

One of the first commonly made mistakes we see with our clients is purchasing the wrong insurance products. We see tons of people in their 20’s purchasing whole life and non-level term policies from large insurance companies that are truly not right for them and that they truly do not understand. Oftentimes, it is not until these individuals are starting their families and progressing their careers that they realize they have been losing money with the wrong policy for them. It is very important to discuss with a professional or research what policies are best for you and your family before blindly purchasing the wrong insurance. 

Another commonly made mistake we see among this demographic is not signing up for your company 401(k) and taking advantage of the match. We have seen tons of cases where individuals are not signing up for their company’s retirement plan and matches until five to ten years later, which is giving away a large chunk of your salary benefits and essentially, “free money”. It is always the right move to sign up for your company 401(k) and contribute the full match if your situation allows you too in order to build a strong retirement account.

Budgeting and saving is always a priority when it comes to building your financial portfolio and especially starting a family. In previous blogs, we have talked about the importance of starting and saving from an early age and the power that compounding interest and  “time” in the market has on your money. Whether you are starting your first job or graduating college, it is never too early to start saving, even if it’s only a few dollars per month.

Lastly, another mistake we see individuals making is not contributing to their health savings accounts (HSAs). A health savings account (HSA) can help you lower your taxes as they are triple tax free. Our advice is to always take advantage of these types of accounts if you are eligible, that can help you make the most of your current situation and future. 

By avoiding these four commonly made financial mistakes in your early years, you and your family will be in a much better situation as you embark on the next chapter in your life. As always, speak with your financial professional to ensure you are making the right decision for your particular situation. If you have any questions, please email us at info@shermanwealth.com or schedule a complimentary 30-minute consultation here

Sitting on Cash? Here’s What To Do with It:

In our previous blog, we wrote about how a great deal of American’s households ‘ finances are in surprisingly good shape eight months into the pandemic. While this certainly is not the case for all households, we wanted to discuss options for those who may be sitting on an abundance of cash or have too much money in their checking accounts. 

It’s important to note that if you have more than you need to pay your bills in your checking account, you should consider putting away some of the cash in taxable investment accounts or savings accounts that accrue compounding interest. When choosing a savings account, consider banks that have higher interest rates than your standard bank, which currently have interest rates close to zero. Utilize FDIC-insured accounts such as Max My Interest or Capital One 360. With these record-low interest rates, it’s crucial to get your money into accounts that are maximizing and compounding your dollars overtime. 

Additionally, as the end of the year is just around the corner, think about checking off your financial planning to-do list, which may consist of funding your HSA and/or maxing out your 401(k) and IRA’s for the year. As mentioned earlier, if you have additional cash laying around, make sure to direct those funds into a taxable account.  If you are saving for your children or grandchildren’s college tuition, make sure to contribute to your 529 plans and inquire about all of your options there. Also, if you are considering end of the year charitable giving, make sure to contribute those funds as well. If you have any questions about your financial portfolio or end of the year planning, please contact us at info@shermanwealth.com and we are happy to set up a free 30-minute consultation with you. Lastly, check out our other blogs for more resources.  

 

How to Recognize Behavioral Finance Biases

Over the last few months, we’ve faced a great deal of economic turmoil and uncertainty, which has a great impact on the finances and mindsets of many all across the world.  Through these hardships, we’ve seen individuals face and struggle with a great deal of biases in respect to their portfolios and investments. We want to bring light to these behavioral finance biases that are only natural in human behavior and stress the importance of maintaining long term goals.

This past week has been stuffed with an overwhelming amount of news – the drawn out 2020 presidential election, the Pfizer vaccine announcing 90% accuracy and the coronavirus pandemic making a second wave with over 10 million cases.  As Americans are grappling with all this news, so is the market.

 Prior to the presidential election, we saw people selling out of their 401(k)’s or loading it up depending on which side of the political aisle they stood. Additionally, we spoke with individuals who were waiting to buy back in the market when the coronavirus cases diminished, even though the cases are the highest they’ve been since March and we are seeing the strongest market in a long time. Those who said “we won’t invest until the news settles down” back in April are still waiting as we still see a great abundance of news and a raving market. These biases prove the importance of sticking with a long-term goal and not being persuaded by beliefs and expectations.

 As we proceed into what seems like could be another coronavirus pandemic lockdown alongside a strong market, it’s interesting to look back at the data and hindsight biases and see how individuals may alter their investment approach a second time around.  These last nine months have been a wild ride and crazy for the market to digest. However, the market has proven many wrong these last few months, showing the power of its resilience and strength. If you have any questions specific to your portfolio and investment decisions, please reach out to us at info@shermanwealth.com and schedule a free 30-minute consultation here.   

 

Why Now May Be a Good Time to Consider a Roth IRA Conversion

The coronavirus pandemic and the upcoming election has created a great deal of uncertainty for investors. Income tax, furloughs, and job loss are lingering over the heads of many. As people are navigating these unprecedented times, they are becoming more and more unsure about where to and how much to invest. But it’s important to keep in mind that regardless of uncertainty in the market, it’s always a good time to invest for your future. 

The recent stock market meltdown may have dented Americans’ retirement savings, but there’s a silver lining: The downturn made one common retirement strategy less costly for investors.

The strategy, known as a Roth IRA conversion, involves changing a traditional, pre-tax retirement account — such as a 401(k) plan or a qualified individual retirement account — to an after-tax Roth fund. This strategy has some unique benefits when compared with its traditional cousin.

To do the conversion, savers would opt to pay income tax now, while markets are down and tax rates are lower under the Tax Cuts and Jobs Act. Investors who own traditional accounts defer income tax on their savings until withdrawing the money in retirement. Roth savers pay tax up front and don’t pay later. Having at least some Roth funds is beneficial for a few reasons, according to financial advisors. Retirees don’t have to take mandatory withdrawals from Roth accounts, unlike traditional IRA investors, who have to beginning at age 72. Taking Roth distributions could also decrease Social Security taxes and Medicare premiums, which are pegged to one’s taxable income.

In addition, there’s the benefit of tax diversification. Like the concept of investment diversification, tax diversification is important because it reduces the risk associated with unknown future tax rates, advisors said. Data suggest investors aren’t greatly diversifying their retirement accounts from a tax standpoint.

Traditional IRAs held around $7.5 trillion at the end of 2018 — almost 10 times as much as Roth accounts, which had $800 billion, according to the Investment Company Institute. Ultimately, investors should peg a conversion primarily to tax rates — if savers believe their tax rate is lower now than it will be in retirement, a conversion makes sense because it will cost less in the long run, according to tax experts. And, contrary to popular opinion, one’s tax rate doesn’t always fall in retirement, they said.

Tax rates are currently low by historical standards and are likely to increase (rather than fall further) in the future, experts said, given the eventual need to raise federal revenue to reduce the U.S. budget deficit, which is larger as a share of its economy than most other developed countries.

If you are considering a Roth IRA Conversion, please consult with your financial advisor  and your EA/CPA or tax preparer to ensure that this decision is the best for your financial situation. If you would like to discuss the potential of a Roth Conversion, please reach out to us and schedule a free 30-minute consultation

 

How Much Retirement Savings Is Enough? Why Couples May Disagree

As couples combine their finances and think about their financial future, its common for the conversation to be uncomfortable or tricky. While one individual in the relationship might think about money one way, the other party could think about it completely different. Just know, it’s normal and okay to have different background and approaches to money, but that communication is key in coming to a solid compromise and understanding. 

The first step is communication. When discussing your finances, it’s important to communicate and feel open about discussing an often uncomfortable topic such as money. 

The Wall Street Journal highlighted an issue that can get overlooked in retirement planning: the financial burdens that women, in particular, face late in life.

A survey last year by the National Council on Aging and Ipsos, a polling and data firm, found that fully half (51%) of women age 60 and older are worried about outliving their savings. In the same survey, almost six in 10 women (59%) said they are worried about losing their independence.

According to the survey, women, of course, typically live longer than men—about five years, on average—and are more likely to live their final years alone. In 2019, almost half (44%) of women age 75 and older in the U.S. lived alone, according to the Administration on Aging. 

As you can see from the survey data reference above, both men and women often have different expectations on how much money they need for their future, which is normal. Again, make sure to communicate and research with your partner to insure both individuals are comfortable with their finances and savings. Of course, a good financial adviser also can make a difference. But the most important step is to talk about retirement and how your finances might play out before you get there. If you have any questions, or want to discuss retirement with us, please schedule a complimentary 30-minute consultation.