Q: I’m trying to consolidate some relatively minor debt, and I wondered if it was allowed to use one of my credit cards to pay off others. — Abby (via Facebook)
A: Abby, what you’re talking about is a balance transfer. The process for doing this is to call the company whose card you want to use to pay off the others and give them the information for the cards whose balances you want to pay off. There are a few things that you need to bear in mind though if you’re going to do this.
First, not all companies allow you to use their cards in this way. And if yours does, there will likely be a balance transfer fee. Also, many cards have limits on the amounts that you can transfer to them. And even without such a limit, your transfer amount cannot exceed your credit limit. If you have credit card debt that you’re not going to be able to repay within three to six months, a balance transfer might make sense. However, if the amount you owe is manageable within that timeframe, I would recommend just concentrating on paying it down rather than going to the trouble and expense of consolidating.
Now you may hear that you can also use a cash advance instead, and then use that money to pay off the balances on your other cards, but this is a terrible idea, predominately because of the interest. The Annual Percentage Rate (APR) on cash advances is a separate APR than on regular purchases ... and the cash advance APR is probably much higher. There is also no interest-free grace period with cash advances, so unlike your regular purchases, you don’t get that 21 day grace period before interest starts to accrue.
In general, I recommend avoiding credit cards entirely, and this is especially true if you’re not able to pay off the balance in-full every month. It sounds like you’re heading in that direction though, so kudos to you!
Q: What is the difference between an income annuity and a charitable annuity? I’ve heard that they both give you lifetime income. — Luke (via Facebook)
A: Luke, they do both give you lifetime income. And in neither case can you get your initial purchase money back. But there are a few important distinctions.
A standard (income) annuity is an investment vehicle wherein the company from whom you buy it determines how long they think you will live, and they schedule their payments to you accordingly. Before you write the check, they will tell you what your income will be, and you will decide if you like that answer before you give them your money. From that point on, you will get a check in the mail which will be partly the money you gave them and partly investment return from that money. The major downside of an income annuity is that the financial advisor who sells it reaps an abnormally large commission which takes a bite out of your income.
With a charitable gift annuity (often called a CGA), you’re buying it from a charitable organization, which means there is no commission taking a portion of your income. Instead, the charity gives you their proposal (again, based on life expectancy) with the understanding that if you die when you are expected to, they get to keep whatever has not yet been distributed to you as income. In essence, you are making a gift to that nonprofit, but they don’t get it until after you die. Your income will still come to you every quarter while you’re alive, legally guaranteed by the existence of that nonprofit. However, you will reap a significant income tax benefit at purchase that you can spread out over up to five years, you’ll get a lifetime of mostly tax-free income from the annuity, you’ll get a higher relative interest rate, and at the end, you’ll be leaving a generous gift to a charity that is important to you.
CGAs are a valuable tool for many nonprofits, so if there is a cause that means a lot to you, give them a call and see if they are equipped to sell CGAs.
If YOU have a question for Ask Eric, tweet it to @AskEricKSUN, send an e-mail to AskEric@mail.com, or like “AskEric” on Facebook.
— Eric Litwiller has spent the last nine years of his professional career helping people achieve their financial goals through the use of budgets, retirement vehicles, and estate planning options. He is a firm believer in the importance of using earthly riches to fulfill a mission of Christian stewardship. Eric is not a licensed financial planner.