As the $1,400 checks start moving (reportedly, they should start going out this weekend), I’ve been thinking about what I will be able to do with that money. It turns out that I have exactly $1,400 left in credit card debt to pay off, so that’s what I’m going to use it for. But what about after that?
With my most expensive, non-leveraged debt paid off, my credit score will increase to 740-750, based on the estimations I have run through the likes of CreditKarma. What do we do with good credit, ladies and gentlemen? Buy things.
I’m half kidding, but given the inevitability of (hopefully temporary) inflation as things reopen and people’s accumulated savings pour into purchases at restaurants and local retailers, I feel like it would be a good idea to make the big purchases that I’ve not made to this point because of my less-than-ideal credit.
I don’t have bad credit, to be clear. As of today, I in fact have “good” credit. Before, I had “okay” credit.
I’ve never missed a payment on any loans (according to the credit bureaus, at least), and I’ve never had a collections account, tax lien, bankruptcy or other dergogatory mark against me (again, according to the credit bureaus). But my credit usage is at 69% as of last report (nice). It should be less than 30% and ideally below 10%.
So, with my credit usage reduced to 0%, I will still be in the “good” category, but improved enough that, in this environment where debt (for now) is very cheap, I’m going to use the equity in my car to buy a camera.
I’ve always kind of understood the idea of leveraging your house to get cash in hand. You spend 10 years paying off a 30-year mortgage, and if you want, you can set yourself back a few years on the loan for cash in hand now.
In my case, I will set myself back… well, I’m not sure that a unit of time quite makes sense in this case. I have a balance of a little less than $11,000 on the loan, and the cash value of the car (as of today, according to the local credit union that holds the loan) is a little over $14,000. So, if I wanted, I could set myself back a little over $3,000. But, there is a bit more to it.
I bought my car in November 2018, so I’ve been making payments on it for that long. I had a really bad loan to begin with (the rate was close to 10%, though I can’t remember exactly; I have it somewhere) and didn’t recognize it for a while, but I refinanced it through the local credit union at the end of 2019 and now have a fixed rate of 5.25%.
But anyway, as I was looking into what I could do with an improved credit score, I realized that one thing I could do is get a slightly better rate on my auto loan. It wouldn’t be a huge improvement; it would be on the order of 4.25% (as compared to 5.25%), according to the loan officer I asked, if my credit score gets above 740 (which it will).
Compare that to an unsecured personal loan with a fixed rate of around 9%. That’s what Upstart could offer me, according to CreditKarma, on a loan of about $3,000.
I think then it makes sense to leverage my car to get a camera (or laptop, or drone, or whatever). It leaves me with a lot of credit (about $3,000, coincidentally) that I can use maybe in an emergency or something.
I’m thinking now about why people have credit cards with such high limits. I do not plan to go anywhere near 100% credit usage ever again; I’m keeping that shit below 30% for sure.
This is a bit rambling, but the short of it is: This $1,400 stimulus check is going to help me pay off the rest of my credit card debt, which will allow me to refinance my car loan for a slightly better rate and get cash from the equity I’ve built on it, and with that cheaper debt, I will be able to buy a new laptop, new camera, and or new drone and still have about $3,000 in credit available to me (which I plan to only use in case of an emergency).
But Apple has payment plans on laptops that have 0% interest, so do I exploit that and keep some of the equity I have in my car? It might increase my monthly expenses, but it would leave me with more equity or, if I want, cash in hand. I guess I should consider that next.
Beyond the checks
I told my dad about all of this and learned yet more about personal finance that I didn’t know before.
For example, I always knew that Health Savings Accounts (HSAs) were a really useful financial tool enabled by tax incentives. They are basically tax-free conduits between your source of income and your health expenses.
What my dad taught me is that HSAs can also serve as retirement savings accounts with better tax benefits than Traditional and Roth IRAs.
The way it works is that money you put into an HSA lowers your taxable income. If you earn… oh, I don’t know, let’s just make up a number: $30,000. If you earn $30,000, and you have a health insurance plan that makes an HSA available to you, you can contribute $50 per month to reduce your taxable income by (
12 * 50 =) $600, to $29,400.
That’s not the most impressive benefit because it’s not the most impressive HSA contribution. But, if that income number went up to, say $33,000, and the person has adapted to a $30,000 salary lifestyle, they could theoretically devote that $3,000 raise to HSA contributions and stay at the same level of income tax.
Now, the catch is that, if your employer doesn’t provide health insurance, you’ll still pay payroll taxes on the additional $3,000. That’s the Medicare and Social Security taxation that comes out of your paycheck before you receive it.
If your employer instead withheld some amount of each paycheck to deposit into your HSA on your behalf, that’s totally tax free. No payroll tax. But, that’s probably a marginal effect; I think Medicare and Social Security withholdings account for 0.5% of my income.
So, to turn to the original point about HSAs as retirement savings accounts: The purposes for which someone may pull from their HSA account without incurring a penalty include healthcare costs, retirement, and probably other things that I haven’t looked up because I just need to put up this update to the post.