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Credit cards

How to get rich on Black Friday

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Saint_Nicholas
Saint Nicholas

Comes the American Express statement in the mail, bearing good tidings. In only two more months, our annual rebate will be comin’ your way.

Here’s a strategy, we’re told, “to give yourself or your family something special from Costco”: use the holidays as an opportunity to buy, buy, BUY and charge it all up on your credit card!!!

Woo. Hooo. I can hardly wait to run out to the sales tomorrow and rack up several thousand dollars worth of debt, so I can get a few bucks back.

As  practical matter, if you have one of these cash-back cards and you religiously pay off the balance every month, you don’t have to go out and spend yourself stupid during the holidays (or any other time) to get a nice kickback. I put all my budgeted discretionary spending on this card—that is, everything that is not a regularly recurring utility or insurance bill—and pay the entire balance promptly. AMEX says the rebate I’ve accrued so far is $276.04.

Nice. That will cover the cost of draining and refilling the pool. Merry Christmas!

The ghost of Christmas Present visits Ebenezer Scrooge
The ghost of Christmas Present visits Ebenezer Scrooge

Images:
St. Nicholas of Myra: Cultural Universe. Licensed under Creative Commons Attribution ShareAlike 2.5 Wikipedia Commons.
Ghost of Christmas Present: John Leach, from Charles Dickens, A Christmas Carol. Public Domain. Wikipedia Commons.


Time to dump the credit cards?

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Credit-card lenders, as predicted, are using the new credit-card consumer protection law to upgrade their profits. For a round-up of the latest “improvements,” take a look at Karen’s post at Smart Spending. Some of them are enough to make you consider canceling your credit cards altogether.

Citibank, for example, has raised its interest rates to almost 30 percent! Think of that. And especially think of the tricky ways credit-card interest is applied, so as to soak you on new charges made after the interest kicks in.

Karen reports that Citi proposes to gouge an annual fee of $30 to $90 from customers who have the temerity to charge less than $2,400 a year.

It’ll be interesting to see what else develops on this front. Personally, I never carry cash. I charge most purchases on Costco’s American Express card because AMEX gives a nice cash kickback; the very few merchants who won’t accept American Express get paid with a Visa from Chase. Every month I pay off the charges in full. Neither of these worthy organizations charges a fee.

Yet.

The minute one of them does, though, the card gets canceled. IMHO, credit-card lenders already earn plenty of cash from my purchases, even though I never pay a penny of interest. For every card transaction, the merchant pays the card issuer a fee. The truth is, you and I and everyone else pay the fee: of course, the merchant’s cost is passed along to the customers. The card issuer’s contract forbids the merchant from offering a discount for cash purchases. This means that everyone, even people who never charge anything on a card, has to pay extra for every item in the store. In other words, Dear Reader, we’re all already paying for the privilege of living in a credit-card culture. Card issuers earn quite enough from usurious interest rates and nicking merchants—they don’t need to zing you’n’me with annual fees to make a nice profit.

Evidently I’m not alone in that opinion. Karen’s Smart Spending article notes that a third of credit card customers have canceled their cards, half of them specifically because of changes such as higher interest rates or new fees.

Ever ask yourself how you would get by without a credit card?

If you travel a lot, it could be a challenge: you really need a credit card to make plane and hotel reservations. But they’ll probably take a debit card. You lose some of the advantages of a credit card: deferral of the payment date and some element of recourse if the purchase doesn’t work out for one reason or another. Still, if you were determined not to pay the additional rip of an annual fee, it might be worth the inconvenience.

But otherwise, it’s not horribly difficult. You have four fine alternatives to the credit card, at least one of them guaranteed to keep your budget running in the black:

• Cash
• Checks
• Debit cards
• Prepaid merchant purchasing cards

Each has its pros and cons. Videlicet:

Cash: The Good

🙂 Fast
🙂 Universally accepted
🙂 No need to memorize PIN numbers
🙂 No paper trail: protects your privacy
🙂 Hassle-free: no fights with banks or credit-card issuers
🙂 Built-in spending limit: keeps you on budget

Cash: The Bad and the Ugly

🙁 Too easy to spend
🙁 No paper trail: hard to track spending, no proof of tax-deductible purchases
🙁 No recourse in dispute with merchant
🙁 Easy to lose or steal; no recourse to insurance if stolen
🙁 No good for Internet shopping or phone transactions
🙁 Bulky to carry around
🙁 Unsanitary

Checks: The Good

🙂 Relatively easy to use: no PIN needed
🙂 Most merchants accept them
🙂 Check register: easy to track spending
🙂 Hard to use if stolen; no $50 liability limit for ID theft
🙂 ID checks at register: added theft protection
🙂 Paper trail; unarguable proof of payment

Checks: The Bad and the Ugly

🙁 Easy to overdraw account: stiff overdraft fees
🙁 Checking account fees: Need to use credit union to avoid bank gouges
🙁 Time-consuming hassle at check-out
🙁 Bulky and heavy to carry around
🙁 No good for Internet or phone transactions
🙁 Paper trail: accessible to those you’d just as soon not have knowing your business
🙁 Can be forged by thieves who know what they’re doing

Debit Cards: The Good

🙂 Lightweight, easy to carry
🙂 Fast
🙂 Widely accepted
🙂 Good for Internet shopping, phone transactions
🙂 Paper trail: statements show purchasing record

Debit Cards: The Bad and the Ugly

🙁 Many nicks and gouges from bank fees
🙁 Also some merchants’ gouges
🙁 Merchant-instigated holds on bank accounts
🙁 Vulnerability to ID theft, armed robbery
🙁 Paper trail: little privacy from intrusive merchandisers and other uninvited observers

Merchant Purchasing Cards: The Good

🙂 Budgeting device: Limit monthly expenditures by limiting amounts on card
🙂 Fast
🙂 Easy
🙂 Lightweight, easy to carry
🙂 No fees
🙂 Relatively little hassle

Merchant Purchasing Cards: The Bad and the Ugly

🙁 Recurring inconvenience: Recharge as money runs out
🙁 Limited to specific merchants
🙁 Stealable: great windfall for thieves
🙁 Little use for Internet or phone shopping
🙁 Hard to track purchases
🙁 But easy for merchant to track your behavior: privacy issue
🙁 Various merchant scams and limitations

Each of these devices has its uses. Personally, I distrust debit cards—too many opportunities for banks and merchants to zing you with incomprehensible fees, too vulnerable to identity theft. If things come to such a pass that I decide to get rid of my credit cards, I think I’ll use merchant purchasing cards as “cash envelopes” for certain kinds of recurring purchases and then use real cash or checks for everything else:

Purchasing Cards:

Costco

• gasoline
• lifetime supplies of household goods
• bulk food purchases
• wine and beer
• casual clothing
• office supplies
• books

Safeway

• fresh food purchases
• bargain meats
• small incidentals

Cash:

• eating out
• entertainment
• very small incidentals

Checks:

• workmen
• veterinarian
• doctors’ copays
• all goods not purchased at Costco or Safeway (such as clothing, linens, decorating items, prescriptions, etc.)

It’s interesting to contemplate, because abandoning credit cards would force me to rejigger my budget. Right now I budget a certain amount (it’s been $1,200; is about to drop to $1,000) for spending on all costs other than regular recurring monthly bills. Those costs are all put on the card. So, I use two debiting tools: automatic bill-paying and the credit card, each of which has its own sub-budget ($840 for monthly bills and monthly savings; $1,000 for all other spending).

If I dropped the cards, I’d have to budget for not two but four spending tools: automatic bill-paying, purchasing cards, cash, and checks. Drawback is an added layer of complication. However, the trade-off is that such a system mimics the cash “envelope” budgeting strategy, and it might be a great deal more effective at keeping one on budget.

More on that topic tomorrow!

How long will it take to pay off that credit-card debt?

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In debt on the cards? Or are you contemplating a big purchase and planning to put it on your credit card? Here’s a way to figure out how long it will take to pay off the balance making only the minimum payment each month…and gain some insight into credit-card debt.

Once the calculator has given you the bad news about the minimum-payment strategy, it delivers some more options.

Entering $2,000 as an outstanding debt at 17 percent, I learned it would take 17 years to pay it off, at a rate of $40 a month. By the time the two grand was finally erased from my record, I would have spent $3,181 in interest.  So, a swell-elegant $2,000 sofa (for example) would end up costing me $5,181, and the thing would be ready for Goodwill before it was paid for.

Okay, let’s say you can afford payments of more than forty bucks. The results page lets you explore what would happen if you paid more toward principal. Enter $100 a month, and you see you could pay off the card in 24 months, assuming you make no more charges. You’ll pay $369 in interest for the privilege, but at least the sofa will still be standing by the time you’ve paid for it.

You determine to accelerate your debt pay-off plan. How much will you have to pay per month to zero out this card in a year? Enter the number of years you hope it will take you to get rid of the debt, and the monthly payment comes up. Let’s say we want to pay for the sofa in one year: monthly payments would be $183, and in that year $189 in interest would accrue.

Eye-opening, isn’t it?

The extreme joy of deferred purchasing

The moral of the story: some English-major math reveals that if you simply delayed purchasing the sofa until you had $2,000 in the bank, you’d only have to put $166.66 a month aside to be able to buy it in a year.

At $183 a month, you could have the cash to plunk down in 11 months. But if $40 was really all you could afford, then you could buy the sofa outright after just four years.

And it wouldn’t cost you anything in interest. Matter of fact, if you put the swell-elegant sofa fund in a high-interest savings account, your purchase price would earn a few pennies for you. And a penny saved is a penny earned.

Image by Channel R, Creative Commons Attribution ShareAlike 3.0, Wikipedia Commons

Toothless credit card consumer protection laws

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Well, if there ever was any question about who holds sway in the halls of Congress, the outcome of the effort to regulate the credit-card industry to provide a little consumer protection. Who owns Congress? Big industries with deep enough pockets to hire persistent, heavy-hitting lobbyists, that’s who.

Have you received your notice from American Express yet? Mine came a couple days ago: a flatly worded announcement that late fees and interest rates are going up.

Not that I care: I don’t carry a balance on any credit card, and though I charge almost every purchase as a matter of convenience, I make it a point to pay well in advance of the due date.

Betcha this isn’t the last we’ll hear from AMEX on the subject. The Wall Street Journal recently reported that American Express and other major card issuers are canceling hundreds of cardholders’ accounts without explanation and without notice. In many cases, the canceled accounts are deemed inactive because the cardholders haven’t used them in some months. But at least a few accounts, including one reported in that W. St. J. article, belong to people who use their cards, never miss a payment, and pay off balances monthly.

Over at Freep, commentator Brian Dickerson calls the new legislation “regulation a regulated industry can love.” He points out that Congress rejected the only provision that would have given consumers any meaningful protection—a cap on the already usurious interest rates card issuers can charge. Says Dickerson:

In the end, card issuers preserved both their right to charge whatever the market will bear and their right to abruptly cancel a cardholder’s credit without advance notice.

Uh huh. I’ve said it before and I’ll say it again:

Politics is money, money politics.

Yep, I sure did say it before!

Economy Is All about Politics
Personal Finance IS Politics
Economy Is Politics: Arizona’s Politico-Economic Disaster

Pay off debt or build savings?

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Over at I’ve Paid for This Twice Already, Paid Twice invites her readers to think about the relative importance of paying off debt or building savings. Which should be a person’s top priority? It is, as she points out, not a clear-cut decision.

Some people say that there’s “good debt” (such as home and student loans, owed on property or training that eventually returns more than you pay…supposedly) and “bad debt” (everything else; especially credit cards). I personally would argue that there’s only debt, and debt is slavery. Debt forces you to stay in the traces until you pay it off or until you die, whichever comes first. Over at Debt Kid, Jessica describes experiencing the same revelation.

Freedom from debt is freedom to live as you choose. Period. If working brings you personal fulfillment, you can do it—and a debt-free worker is one who has a great deal more disposable income (to say nothing of more options) than one who labors under the lender’s lash. If you want to retire or devote your energy to low-paid but altruistic work, debt freedom will make either of those choices possible.

I’ve used savings—in direct contradiction of advice from money advisers—to pay off debt and never once regretted it. Here’s why:

1) Revolving debt cuts your purchasing power by the amount of the interest gouge. If you pay 18 percent for everything you put on a charge card, then each dollar you spend is really worth only 82 cents.

2) You don’t actually own anything when you’re making payments on it. The bank owns it; you’re just renting it.

3) For most mere mortals, the so-called tax benefits of mortgage interest are negligible.

4) If you own your home outright, the absence of a mortgage payment increases your real take-home pay enormously. I couldn’t live on my net income if I owed on my house or had to pay rent. I paid $100,000 for my first house, for which I put down $20,000. Until I paid off the loan, I owed $9,960/year on the PITI. In the best of times, that $100,000 earned $8,000 a year in mutual funds. Paying off the mortgage freed up $830 a month for living expenses and savings. Taxes and insurance on my present house, purchased with the proceeds of the sale of my first paid-off home, are about $2,200 a year, meaning that today I have to set aside about $183 a month to cover those annual bills. That’s a far cry from an $830/month bite…which at the time I paid off the loan represented half my monthly take-home pay.

5) Where real estate is concerned, in normal market conditions (which one day will return), when a house is paid off and appreciating in value, the money you put into it is growing just as it would grow in a conservative investment, at about 6 to 8 percent a year. Thus the $100,000 I paid for my first house yielded $211,000 a few years later, allowing me to buy my next house in cash. Once a house is paid off, you’ll never lack for cash to keep a comparable paid-off roof over your head.

6) This is not true while you’re paying on a mortgage, because the mortgage interest eats up the gains created by the property’s appreciation in value. Over 30 years at 6 percent, a you’ll pay $115,838 in interest on a $100,000 loan; in other words, you’ll pay $215,828.45 for your $100,000 house. If you’d put that extra $115,838 in mutual funds over the same period, the compounding interest would have been paying you, not the bank. Paying just $200 a month extra against principal would cut your payback time from 30 years to 16 years and 3 months and drop your total interest gouge to $57,386.

7) Clearing off  debt opens the way for larger and faster savings. If you could afford to make a payment on a car, a house, or a credit card, then once you’ve paid off the debt you can afford to put the amount of the payments directly into savings and investments.

So, in a way, debt pay-down is a form of saving.

On the other hand, in recessionary times when one’s income is at risk, you need a substantial emergency fund. If you find yourself starting out during a recession, your first priority obviously should be to stash enough to live on for at least six months, preferably longer. IMHO the ideal emergency fund contains one year’s worth of your present net income.  Once you have it, though, you’re justified in devoting every extra penny to paring down debt of all kinds.

In good times or bad, saving should be part of your agenda. But since freedom from debt makes your money go further and allows you to save substantially more, getting out from under debt should be your top priority.

How We Get in Trouble: Sensitivity and nonmonthly expenses

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This is a post by L. Burke Files, president of Financial Examinations & Evaluations, Inc.

I have seen hundreds of people in financial distress. Often the nonevent problems (as opposed to events such as medical, job, relationship issues) arise from two matters that are more devastating than problems that come up because of a single costly event:

1. Sensitivity
2. Covering nonmonthly expenses with credit cards

Sensitivity, or our sensitivity to financial change, is measured as the percentage difference between our total income and our total expenditures. If I make $100,000 and spend $95,000, my sensitivity is 5 percent, as it will be if I make $20,000 and spend $19,500. If I earn $100,000 and spend $85,000, my sensitivity is 15 percent. On a $20,000 income, I would have to restrict my spending to $17,000 to bring my sensitivity to 15 percent.

Five percent is both shamefully low and higher than the national average. As you can see, the lower your sensitivity rating, the more vulnerable you are to inflation and economic recession, the harder it will be for you to save, and the more you are likely to suffer in the event of a layoff.

Never has the issue of sensitivity been more tested and proven than over the last few years. Real wages have stayed the same while expenses related to oil went up substantially. Oil prices have affected gasoline for cars, energy for running our homes, the cost of food, the cost of medical (think of all the plastic stuff doctors use), and so on, at great length. Because we saw no increase in real wages during this time, while basic costs increased tremendously, in one three-year period we went from several years of saving 5 percent of our income to spending 105 percent. This deficit spending was financed by savings or by credit card. We wiped our savings and ran up our credit cards. We have never been a nation of savers, like Japan, but we had inexpensive housing and food, compared to the rest of the world, now we do not.

Check to see what you sensitivity is—it may surprise you. Take the amount you spend and subtract it from the amount you earn. Now divide the remainder by the amount you earn. The result is your sensitivity, expressed as a decimal:

In 2008, you earned $50,000.
You spent $45,000.

$50,000
–45,000
$ 5,000

$5,000 ÷$50,000 = .10 = 10%

Nonmonthly expenses are those expenses that we have agreed to pay but are not on our monthly budget or cash flow radar screen. These typically are annual or semiannual insurance bills, car repairs, and medical costs not covered by health insurance, but let us not forget school clothes and fees, veterinary bills, or unexpected repairs to our house. Most people manage by using a line of credit, usually in the form of credit cards, to bridge the gap. The balances grow and grow, because the root of the problem, failure to plan for these expenses, is never addressed.

How to address it? One way is to set up a small savings account or money jug at home. Estimate what your nonmonthly expenses will be for a year, and then divide that by 10. Put that amount of money in the account or jug. Yeah, I get there are 12 months in a year. If you estimated correctly, this will leave you have some money for the holidays and for savings. Over time, this practice will increase your sensitivity rating, allow you to avoid increasing debt, and improve your financial health.