Money Management

I don’t want to get hit with overdraft fees, so I always keep an extra $1,000 in my checking account. Find out more. 

I don’t keep too much money in my checking account. In fact, the only money that’s in there are funds that are going to be used for upcoming purchases or bill payments. Most of my money is diverted out of the account soon after it’s deposited, moving into either a high-yield savings account or a brokerage account where it can be saved or invested.

I do, however, keep an extra $1,000 in the account. And there’s a very good reason why I always have that money sitting even though it’s not earning interest and not meant to be spent.

My $1,000 serves as protection against overdrafts or bounced checks

The reason that I keep $1,000 in my checking account is because I want to have a cushion in case I make a mistake with keeping my checkbook balanced.

I do not want to accidentally overdraft my bank account because I think I have more money in it than I actually do. My bank does not charge an overdraft fee if I spend more money than I have available to me. It offers overdraft protection in the form of a transfer from a savings account, but I don’t have a linked savings account because I prefer to keep my savings in a separate bank.

Instead, I’m eligible for its CoverDraft Service, which offers up to $250 in relief. However, I could still end up with a negative balance and be scrambling to bring the balance up in the 14 days I’m allotted. I don’t want to find myself in this situation, so I’d rather be sure I have extra money in there in case I miscalculate my available balance.

Even more importantly, I don’t want to bounce a check, which could lead to the recipient of the bounced check charging me. And since both my husband and I write checks out of the account and people don’t always cash them right away, it’s harder to keep track of when I might be at risk of this happening.

With an extra $1,000 in the account, we’d have to misjudge our balance and spending by a lot — or have a whole bunch of checks go uncashed that we forget about — before we end up with a negative balance and a risk of fees. It’s much less likely this is going to happen than if we kept less in our account and even a small overlooked purchase sent us into negative territory.

Keeping a cushion in your bank account can help you avoid a world of hassle

If you can keep a cushion in your bank account, you can reduce or eliminate the chances of problems caused by having insufficient funds for a transaction or for a check to clear. We’ve chosen $1,000 to make sure we’ve eliminated the chance of an issue entirely, but even a smaller amount — like $250 or $500 — could go a long way toward saving you from unpleasant surprises.

If you don’t already have this extra money in your checking account, consider trying to build up to it. This way, you can have the peace of mind of knowing you’re not likely to end up with a negative bank balance and the fees that can go along with it.

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A $1,000 credit card balance could end up being more expensive than you think. Read on for the math to see how much interest charges will cost you over time. 

A $1,000 balance on a credit card may not sound like a very big balance. But, if you don’t have enough in your savings account to pay this balance off when your statement comes, you will start owing interest on it. As of February 2023, the average interest rate on credit card accounts offered by commercial banks was 20.09%, according to the Federal Reserve.

If that interest rate sounds high, that’s because it is. Paying so much in interest to borrow can have a big impact on your finances. But, just how big? Here’s what you need to know.

What could a $1,000 balance really cost you?

Although a $1,000 balance isn’t a huge amount, making only the minimum payments on this debt could mean you end up spending a fortune to become debt free. In fact, if you have a 2.00% minimum payment and you only pay the minimum on a card with a 20.09% rate, you would end up paying $2,126.17 in interest before your credit card debt was paid off for good. It would also take you 195 months to erase that $1,000 balance — a total of 16.25 years.

A $1,000 balance can cost a fortune if you pay only the minimums because of the fact you won’t make much progress at reducing the balance on the debt. Each payment will mostly just cover the interest charges instead of reducing the principal. If you’re only paying off about $3 or $4 of the $1,000 each month and the rest just covers your creditor’s fees, it takes a long time to become debt free.

How can you avoid getting hit with huge interest charges

The good news is, you don’t have to let a $1,000 credit card balance haunt you for a decade and a half. You just have to pay more than the minimum payment due.

Ideally, you should pay off your balance in full so you don’t owe any interest charges at all. If you pay off the $1,000 balance when your statement comes, your interest charges would be $0 and your credit card debt wouldn’t cost you anything extra. In fact, if you had earned rewards, you’d end up better off for having used your card to charge items you had to purchase anyway.

If you can’t pay off your balance in full when the statement comes, you can still dramatically reduce your interest paid by paying more than the minimum required. If you paid $100 a month instead of a minimum payment equaling 2% of your balance, you would be debt free in a year and would incur about $103.60 in interest charges.

The bottom line is, making only the minimum payment on your credit card is a recipe for disaster. Don’t do it. Whether you owe $1,000 or your balance is more or less, you need to pay more than the minimum due each month to avoid a world of financial trouble. And the more you pay, the faster you can say goodbye to your credit card debt for good — and the lower your interest costs will be over time.

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Are you sick of credit card issuers charging outrageous late fees? Find out how a rule change proposed by the CFPB could make late fees more reasonable. 

When using credit cards, it pays to be aware of potential fees. If you miss a payment or pay your credit card bill late, your credit card issuer will charge a late fee to your account. Fees like this add up fast and impact your personal finances. The Consumer Financial Protection Bureau hopes to cap credit card late fees, which could be a win for consumers.

Updated credit card late fees caps could come

The Consumer Financial Protection Bureau (CFPB) is a federal agency that protects consumers from unfair, detective, or abusive practices in the financial industry. The CFPB has been working to reduce junk fees imposed by companies. One particular cost that the agency is focusing its attention on is late fees charged by credit card issuers.

The agency recently proposed a rule change that could put an end to excessive credit card late fees. Current regulations allow credit card issuers to adjust late fees yearly for inflation. Card companies also have the ability to impose a higher late fee for a second late payment or missed payment incident occurring within six months, which then costs consumers more money.

The CFPB wants to cap credit card late fees at $8. This would apply to any missed payment. The agency believes $8 would be a sufficient amount of money for card issuers to charge to cover collection costs as a result of late payments. But under the proposed rule, card issuers could charge more if it was necessary to cover their incurred collection costs.

The CFPB also hopes to end the automatic annual inflation adjustment and ban late fee amounts above 25% of the required minimum payment amount. These proposed changes would be a significant win for Americans and could save them $9 billion in fees annually. But it’s important to note that this is only a proposed idea at the time of writing.

Here’s how much credit card late fees cost Americans today

Credit card late fees remain a significant money maker for credit card issuers. A 2022 report from the CFPB noted that late fees account for 99% of penalty fees imposed by card issuers and over half of the credit card market’s total consumer fees. According to the CFPB, American consumers spent about $12 billion on late fees in 2020.

The CFPB found the average credit card late fee to be $31 in 2019. However, many factors influence these fees, such as card type, credit score, location, and income. Ideally, positive changes will be made in the near future to make these fees more reasonable so consumers can keep more money in their checking accounts.

Review all fees before getting a new credit card

It’s possible to avoid fees like credit card interest charges and late fees. Paying your credit card bill in full and by the due date listed on your bill can help you avoid wasting money on fees. It’s also essential to review all credit card fees before opening a new credit card account so you know what to expect when using the credit cards in your wallet.

By doing what you can to avoid paying credit card fees like this, you may be able to reach other financial goals sooner, like building a solid emergency fund. Additionally, charging only what you can afford, always paying your bills on time, and paying your entire credit card balance every month are responsible actions that could help you improve your credit score.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Business credit cards can be a great way to build your credit and earn rewards. But if you max out your business credit card, it could prove costly. Learn why. 

Maxing out your business credit card happens when you reach your credit limit — the maximum amount your card issuer will let you spend. So, if you have a credit limit of $10,000 and the balance on your card reaches $10,000, or just below it, you’ll have maxed out your card.

As a small business owner, you may reach a point where maxing out your business credit card seems like your only option. However, maxing out any credit card, whether business or personal, can have an impact on your finances, your spending, and your ability to borrow money. Here are three things that will happen if you max out your business credit card.

1. You won’t be able to use your card to spend more

Once you reach the limit on your credit card, your transactions will be declined if you try to use it. You might be able to call your card issuer and ask for a higher limit, but there’s no guarantee your request will get approved. It helps if you have a strong record of making on-time payments and a good relationship with your bank.

Many small businesses experience cash flow challenges, particularly if they don’t have a business emergency fund to cushion against a late payment or other unexpected issue. A business credit card can come in handy in this scenario as it can tide you over. But it is a short-term solution that has fixed limits. Once you’ve maxed out your card, you’ll have less wiggle room in terms of how you can cover expenses.

READ MORE: Best business credit cards

2. It could cost you in interest payments

If you don’t pay off your balance each month, you’ll accrue interest. That’s assuming you don’t have a business credit card with a 0% promotional APR, in which case you’ll have a set interest-free period. Interest on credit cards can be much higher than other forms of credit, and if you’ve maxed out your card, the costs can add up.

For example, if you carried a balance of $10,000 on a card with an APR of 20% for a whole month, the monthly interest would be around $165. The total interest you pay depends on when your charges occurred and how many days are in your billing cycle. The card issuer will use your average daily balance to calculate interest charges. Let’s say you started with a balance of $5,000 and spent another $5,000 on the 20th day of a 30-day cycle. In this case, your average daily balance would be $6,666 and you’d pay around $110 in interest that month.

3. It could impact your business credit score

Credit utilization is the ratio of how much you owe on your credit card against how much you’re able to borrow. It’s one of the most important factors in calculating a personal credit score. Business credit scores are calculated differently, but credit utilization still plays a role. Experian, one of the three business credit bureaus, recommends keeping your credit utilization below 30%.

A good business credit score could make it easier to borrow money, which can be a challenge for small businesses. It could also help you negotiate better terms with your suppliers and make a difference when you’re renting a property or applying for insurance. Dun & Bradstreet, who specialize in business credit scores, focus more on payments. Even then, debt is a factor, so maxing out your card could impact your score.

On the topic of credit scores, it’s also worth noting that, in many cases, maxing out your business credit card will not impact your personal credit score. Most credit card companies do not report business credit card balances to personal credit bureaus. Check to see what your card issuer will report. In many cases, as long as you don’t miss any payments — which would have an impact — your personal credit won’t be affected.

Know how business and personal credit cards differ

Business credit cards don’t always work in the same way as personal cards. On the positive, they often have higher credit limits. On the other hand, you may not benefit from the same consumer protections. While many business credit card issuers offer the consumer protections in the 2009 Credit Card Act, they don’t have to. If you are close to maxing out your business credit card or missing a payment, call your card company to find out what late fees you may pay and whether there’s a penalty APR.

It isn’t always easy for a small business to access the credit they need, but it could get harder if you max out your credit card or miss a payment. If you’ve already maxed out your card, it’s important to understand why. If it’s a cash flow issue, you might look at urgently chasing any unpaid invoices and cutting unnecessary expenses. If there’s a deeper problem, don’t ignore it.

Moving forward, try to map out your spending at least a couple of months ahead so you can identify issues in advance. If you’re able to build an emergency fund to give yourself a buffer in the future, even better. If that’s not feasible, you might be able to apply for a small business loan or increase your credit limit before you reach it. Maxing out your credit card can happen, but avoiding it could save you both stress and money.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Investing $10 a day may not seem like a lot, but it could leave you very wealthy over time thanks to the power of compound growth. Learn how it works. 

Becoming wealthy can seem like a pipe dream, especially if you don’t have a ton of money in your checking account. In fact, you may feel like you’d have to make such big changes to grow your brokerage account balance that it’s hopeless to even try.

But, what if that wasn’t the case? What if investing just $10 a day could make a huge positive impact on your financial stability?

How much of a difference could investing $10 a day make?

Investing $10 a day can have a huge impact on your financial future because it has a snowball impact. The $10 a day adds up to $3,650 a year — which is a pretty good sum of money. And, once you have invested that money, you get to benefit from compound growth. That’s when your investments earn returns that are reinvested so you earn even more money going forward.

Investing $10 a day also means you’ll be consistently putting money away. Your investment balance will grow and grow and compound growth will continue to have an even bigger impact each year.

Just how big of an impact? Let’s say you invest $10 a day over a period of 20 years and earn a 10% average annual rate of return. By the end of those two decades, you would have an account balance of around $208,945.93. And, if you continued for another 10 years, by the end of 30 years your balance would have grown to over $600,000! You’d have more than half a million in your brokerage account just from that $10-a-day commitment.

Can you find your $10 a day?

Investing $10 a day is something that should be within the reach of most people — especially if you can make some simple lifestyle changes in order to free up the money. Some possible options that could enable you to find the money include:

Making lunch or dinner at home instead of dining outDoing one hour of extra work a day at a side job that pays at least $10 an hourSwitching to buying generic brand groceries and cutting coupons to reduce your grocery bill and other spendingChoosing a free event instead of a paid night outMaking your home more energy efficient to cut your electric bill by turning your thermostat up or down, caulking your windows to seal up gaps, and unplugging appliances that use phantom electricityCanceling memberships you no longer use and diverting the money to savingsPaying off a credit card that has a high interest rate and a hefty monthly payment and not charging up your cards again

Ultimately, everyone’s budgets are different, so taking a look at where your money is currently going can help you to identify ways you can invest $10 a day. It may take a little bit of effort to free up the cash, but the small sacrifices that you may have to make are well worth it when you end up with hundreds of thousands of dollars in the bank that will give you the financial security that you deserve.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Dave Ramsey doesn’t believe drivers need rental car insurance. Keep reading to learn why this coverage could be a good idea. 

Having the right auto insurance coverage is very important for motorists. Without sufficient protection in place, a collision or other incident such as a stolen car could drain a driver’s checking account and damage their finances irrevocably.

There are many different types of auto insurance, though, and it can sometimes be hard to figure out which ones are necessary. Finance guru Dave Ramsey has some advice about this, including a suggestion that drivers skip a particular type of insurance coverage.

Unfortunately, Ramsey’s advice about this is wrong, and drivers who follow it could end up with regrets.

Here’s the type of insurance Ramsey says to skip

Ramsey said that most drivers can avoid adding rental car reimbursement to their auto insurance policy.

Rental car reimbursement is different from rental car insurance. It pays for the cost of a rental car after a covered accident so motorists have something to drive while insurance is evaluating the car’s condition to cut a check and while repairs are being made.

“The truth is, you probably don’t need this coverage — especially if you have a fully funded emergency fund in place, access to a second vehicle, or nice friends who can shuttle you around for a few days,” Ramsey said.

Here’s why most drivers shouldn’t listen

This advice from Ramsey is pretty short sighted. See, rental car reimbursement typically adds about $4 or less per month to the cost of auto insurance premiums — so around $48 a year.

Meanwhile, the daily cost of renting a full-size car typically comes in at around $40.43 per day. So, basically, a driver who needs a rental car for just two days after an accident would have been better off having rental car insurance coverage.

The reality is, sometimes it can take weeks for everything to be resolved after an accident — especially if the damages are serious, there is a dispute about which insurance company should pay for losses, or if there’s conflict with an insurer over how much repairs will be or how much the insurer could pay out to replace a totaled car.

In fact, when I was involved in an auto accident years ago, I ended up without a car or an insurance check for close to a month. And had I not had rental car insurance, I would have been out hundreds of dollars.

Most people don’t just have an extra vehicle they can drive around while their car is in the shop — and most people have a car-dependent lifestyle that requires them to be able to drive places. While a motorist theoretically could use an emergency fund to pay for a rental car, it just doesn’t make sense to drain an emergency fund when it costs so little to purchase insurance coverage to make sure you don’t find yourself in that position to begin with.

Anyone who would need a car if theirs was stolen or if they were in a collision should have rental car insurance coverage on their policy. Listening to Ramsey on this issue is a decision that could lead to serious regrets.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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