June 2014 ACap ReCap
1. Can I use my credit card to pay my mortgage or student loan?
This question comes up for those savvy credit card users who want to accumulate as much reward points as possible. It’s not possible to directly pay your mortgage or student loan with your credit card, but there are some online companies out there who offer such services. The service is not cheap and usually entails a high percentage charge. ACap generally discourages consumers to use debt to pay debt, especially if you use a revolving unsecured debt like a credit card to pay an amortizing secured debt like a mortgage. If you choose to pursue this route, you MUST be very diligent with your credit card debt and make sure to pay off your entire balance every month.
2. Does a 401k loan affect my credit?
This is a fantastic question and came up recently when a client wanted to apply for a home loan, but has a 401k loan outstanding. While credit reporting agencies are deliberately vague on how they calculate your credit score, they are very clear on this subject. 401k loans are not reported to the credit rating agencies and therefore do not show up on your credit report or score because they are not considered traditional installment debt. 401k loans are usually for 5 years, but your employer can allow for a longer term if the funds are used to buy a house. Stay tuned for a more detailed article on the pros/cons of 401k loans.
3. Why does my student loan balance keeps rising even though I make payments?
Unlike credit card debt, student loans are amortizing. That means that a portion of every payment you make goes toward paying interest and principal (the amount you borrowed). If your payment is not enough to cover the interest for that period, the unpaid portion of the interest is added to the principal. This type of loan is called negatively amortizing and is very dangerous because your loan balance can balloon very rapidly since you are now paying interest on interest. If you have negatively amortizing student loans, increase your monthly payments to cover both interest and principal. If you are unable to cover the interest portion of your payment, consider applying for an Income Based Repayment program through the U.S. Department of Education.
Have a financial question? Contact ACap Asset Management at firstname.lastname@example.org or 818-272-8511.
Ara Oghoorian, CFA, CFP® is the president and founder of ACap Asset Management, Inc., a “Fee-Only” investment management firm located in Los Angeles, CA specializing in helping doctors and physicians make sound financial decisions. Visit us at www.acapam.com