credit cards how to master the credit card game Updat NEW C ed. Card Aredit ct BY JIM RANDEL “I love this book. It can literally save you a fortune!” Gerri Detweiler / National Credit Card Expert KEY TERMS Allocation: how your payments are attributed to your balance. Annual Percentage Rate (APR): the interest you are paying on your balance. Reminder: you can have different APRs. For example, if you have a low-interest introductory card and use that card to obtain cash from your credit card company, the APR on the cash advance will not be the same as the introductory rate APR. Balance: that portion of your credit card bill you do not pay off monthly. Balance Transfer Card: a card onto which you can transfer debt from another card or cards. Compound Interest: the earning of interest on interest. KNOWLEDGE that STICKS! KNOWLEDGE that STICKS! time management willpower how to develop self-discipline BY JIM RANDEL “Lose no time. Be always employ’d in something useful. Cut off all unnecessary Actions.” Benjamin Franklin “I loved it. Substantive, fun and funny. I give it my highest recommendation.” BY JIM RANDEL “I loved this book!” Dr. Barbara Nemko, Napa Valley Schools Superintendent “Don’t let the stick figures fool you ... Jim Randel will have you laughing and thinking at the same time. A very enjoyable read!” Daily Interest Rate: the APR divided by 365 days. Deadbeat: someone who pays off their balance in full every month. FICO: a credit score derived from the Fair Isaac Corporation algorithm. www.theskinnyon.com Steve Pagliuca, Managing Partner The Boston Celtics the art of persuasion how to move minds Ken Blanchard, author The One Minute Manager ® KNOWLEDGE that STICKS! BY JIM RANDEL success why not you? Cash Advance: money you can receive from your credit card company to use as you see fit. Credit Limit or Line: the total amount you can charge against your card. how to maximize your 24-hour gift “This book caught me completely off guard – tons of substance in a fun-filled, one-hour read. My highest recommendation!” Mike Goss, Managing Director, Bain Capital “This book caught me completely off guard – tons of substance. My highest recommendation!” Mike Goss, Managing Director, Bain Capital KNOWLEDGE that STICKS! real estate investing BY JIM RANDEL an introduction to the subject “The Skinny on Success is a funny, insightful and concise explanation as to why some people achieve their goals and others do not. I can’t think of a better way to spend an hour (well, maybe one way) but as far as reading goes, this book is as good as it gets.” Jeffrey Kindler / CEO/Chairman, Pfizer “The Skinny on Success is a funny, insightful and concise explanation as to why some people achieve ... this book is as good as it gets.” Jeffrey Kindler, CEO/Chmn, Pfizer www.theskinnyon.com Float: when your usage of the credit card company’s money is without charge. Grace Period: the time you have between receiving and paying your bill. Interest: the amount of money you are paying your credit card company on the money they loan you. Late Fee: big, ugly expense for paying your bill late – even by one day. Minimum payment: the payment you are required to make every month if you carry a balance on your credit card. Prime Rate: a published rate that is theoretically the interest rate banks charge their best customers; it can change daily. Over-the-Limit Fee: a fee you pay when your total charges exceed your Credit Limit. Rebate or Reward Card: based on your usage, you get cash back or points to use for other purchases. Revolver: a credit cardholder who carries a balance month after month. Usury: lending at interest rates above a legal ceiling. BY JIM RANDEL “I’ve tracked Jimmy’s incredible run of successful real estate investments for twenty years.” Jeff Dunne, Vice Chairman, CB Richard Ellis “I’ve tracked Jimmy’s incredible run of successful real estate investments for twenty years.” Jeff Dunne, Vice Chairman, CB Richard Ellis ANSWERS TO QUIZ ON PANEL 207: 1) E, 2) H, 3) K, 4) N, 5) T, 6) P, 7) A, 8) O, 9) C, 10) M, 11) F, 12) Q, 13) D, 14) S, 15) R, 16) G, 17) B, 18) J, 19) I, 20) L www.theskinnyon.com The Skinny on Credit Cards credit cards how to master the credit card game Jim Randel Welcome to a new series of publications entitled The Skinny On™, a progression of drawings, dialogue and text intended to convey information in a concise and entertaining fashion. Copyright © 2009 by Jim Randel Second printing 2010 No part of this publication may be transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or by an information storage and retrieval system, or otherwise, except as permitted under Sections 107 or 108 of the 1976 U.S. Copyright Act, without the prior written consent of the Publisher. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that neither the Author nor the Publisher is engaged in rendering legal, accounting, financial or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Neither the Publisher nor the Author shall be liable for damages, directly or indirectly, arising herefrom. ISBN: 978-0-9818935-4-9 Ebook ISBN: 978-0-984139-2-3 Library of Congress: 2008939251 Illustration/Design: For information address Rand Media Co, 265 Post Road West, Westport, CT, 06880 or call (203) 226-8727. The Skinny On™ books are available for special promotions and premiums. For details contact: Donna Hardy, call (203) 222-6295 or visit our website: www.theskinnyon.com Printed in the United States of America 10 9 8 7 6 5 4 3 925–4919 In our time-starved and information-overloaded culture, most of us have far too little time to read. As a result, our understanding of important subjects often tends to float on the surface – without the insights of writings from thinkers and teachers who have spent years studying these subjects. Our series is intended to address this situation. Our team of readers and researchers has done a ton of homework preparing our books for you. We read everything we could find on the topic at hand and spoke with the experts. Then we mixed in our own experiences and distilled what we have learned into this “skinny” book for your benefit. Our goal is to do the reading for you, identify what is important, distill the key points, and present them in a book that is both instructive and enjoyable to read. Although minimalist in design, we do take our message very seriously. Please do not confuse format with content. The time you invest reading this book will be paid back to you many, many times over. “ I also want to hear about the terms of the credit cards. The interest rates. I know my colleagues before said ‘shame on the credit card companies.’ I want to say ‘hooray’ for some of the credit card companies. They have single-handedly put the Mafia out of the business of making loans at usurious rates. “ Congressman Gary Ackerman New York, Fifth District Committee on Financial Services 107th Congress, March 2003 FOREWORD It’s important to distinguish between banks and other lenders who issue credit cards (called “issuers”), and, the companies who brand these cards, such as Master Card ® and VISA® . The former advance money to cardholders. The latter are administrators. Master Card and VISA make their money by overseeing the credit card transaction, the movement of money from your bank (issuer) to the bank of the person or entity selling you something (merchant bank). Since Master Card and VISA make money when one of their cards is used, they want to convince people that their card is better than all the others, and they want to inspire people to use their cards a lot. Hence, Master Card’s “priceless” campaign, and VISA’s “it’s everywhere you want to be.” Now that you understand the different participants, we will at times use “credit card company” to mean the “issuer” since that is the common usage. INTRODUCTION Credit Cards … a big topic about such a small item (3.37 inches by 2.12 inches). The first thing to know about credit cards is that nobody stood up and asked the banks to invent them. In fact, when credit cards first appeared on a grand scale (1958), it was because the Bank of America put thousands of cards into the hands of the residents of one California city. “America began to change on a mid-September day in 1958 when the Bank of America dropped its first 60,000 credit cards on the unassuming city of Fresno, California … a mass mailing of cards: a ‘drop’ … There had been no outward yearning among the residents of Fresno for such a device, nor even the dimmest awareness that such a thing was in the works. It simply arrived one day, with no advance warning, as if it had dropped from the sky.” Joe Nocera, A Piece of the Action (Simon & Schuster, 1994) In the past 50 years, the credit card has, of course, become an integral part of our society. Today there are about 700 million active credit cards – two for every man, woman and child in the United States. Total credit card debt is about $1 trillion, and it is estimated that U.S. households who use credit cards have an average debt of about $10,000. “Our story begins ...” That’s me, Jim Randel. 1 MEET BILLY AND BETH. THEY ARE HAPPILY MARRIED ... BUT HAVE VERY DIFFERENT ATTITUDES ABOUT MONEY. BILLY ... NOT SO MUCH. I really need a new motorcycle. $$ 2 4 BETH IS CAREFUL. What a great book on budgeting! 3 BETWEEN THEM, THEY HAVE 13 CREDIT CARDS ... BETH HAS THREE AND BILLY HAS TEN. “The bill looks fine. Just give me a minute or two to figure out which credit card to use.” 5 ONE MORNING 14% of U.S. cardholders have more than 10 credit cards. “Billy, we need to talk – we’re accumulating a lot of credit card debt.” Uh-oh. 80% of U.S. households have at least one credit card. 8 6 The numbers increase when we add in debit cards. A quick PRIMER: Credit card: used to borrow money. Issuing bank makes unsecured (no collateral) loan to cardholder. “Billy?” “I’m sorry, Beth, I didn’t hear you.” Debit card: used to access your own money. Usually backed by a checking account. Charge card: must be paid off in full every month. No extension of credit. Prepaid card: specific amount stored on the card for the cardholder’s use. 7 9 “We can’t seem to keep up with our debt ... it’s growing.” “Gee, Beth, we’re pretty careful about what we spend.” “I’d like to, but I have to run to the office for a few hours. How about tomorrow?” 10 12 “Billy, please sit down and look at these bills with me.” I’d rather get mauled by a big dog. That brief encounter reveals a lot about how people get into credit card trouble. Billy just doesn’t like to think about spending, budgets or debts. He believes that’s what tomorrow is for. Billy and Beth have very different “financial blueprints.” What is a financial blueprint? 11 13 Author T. Harv Eker writes about “financial blueprints” in his book, Secrets of the Millionaire Mind. Eker’s book helps people understand how they think about money … and why. Much of how each of us relates to money and debt comes from our upbringing. LITTLE BETH “A penny saved is a penny earned. Neither a debtor nor a lender be.” “Your financial blueprint consists primarily of the information or ‘programming’ you received in the past, and especially as a young child.” T. Harv Eker 14 16 LITTLE BILLY “Carpe diem, my son. Life is meant to be lived!” Have you had enough of the platitudes? 15 17 We have obviously oversimplified the way children learn about money. It is not just what children hear from their parents. More likely, it is what a young person sees and experiences ... those influences in his or her young life that impacted views about earning, spending and saving. The point is that as adults we need to reflect upon how we think about money … about debt … about our own earning power and need for security. In doing so, by bringing awareness to the subject, we improve our ability to manage our finances. One of the best-known advisors on financial matters is Suze Orman. I have never met her, but she seems sincere in her desire to help people get on top of their money issues. Here is an excerpt from her book, The 9 Steps to Financial Freedom (Three Rivers Press, 2006): “When I was very young, I had already learned that the reason my parents seemed so unhappy wasn’t that they didn’t love each other; it was that they never had quite enough money even to pay the bills. In our house, money meant tension, worry, and sorrow.” Ms. Orman’s financial blueprint was formed at an early age. Money needs caused stress. So, as an adult, Ms. Orman has done what she can to provide for her own financial security, and that of the people who follow her teachings. 18 Our study of successful people has taught us something: Many successful adults grew up in households with money troubles. The pain and stress of the struggle often provided a strong drive for financial security. Suze Orman 19 20 Before we go any further, take a few moments to reflect on your own “financial blueprint.” Who or what has influenced your own views about money? About debt? How do you feel about savings? Will you ever feel comfortable that you have enough? Do you believe that more money will make you happier? There are, of course, no right or wrong answers to these questions. But thinking about them may help you understand how you use (or abuse) your credit cards. 21 Unless you are fabulously wealthy, you need to live within your means. Those who live beyond their means often bridge the gap between inflow and outflow with credit card debt. Credit cards are so darn easy to use. They have what one commentator called an anesthesia-like effect because they numb you to what is really happening when you use them: you are borrowing money! Credit card use is abstract in that there is a gap between when you use the card and when you have to pay the piper. That is why people spend much more when they use credit cards than when they have to use cash or a check. “The more abstracted spending becomes, the larger the houses of credit card CEOs.” Anonymous 23 One interesting study of credit card use was done with college students. “Knowledge is power.” Sir Francis Bacon “Self-knowledge is SUPER power.” 22 Anonymous As students walked out of a college bookstore, they were asked how much they had spent. Those who used cash or a check were very accurate in their recollection. But those who had used a credit card were way off! Here’s the point: Credit cards are thin and easy to use (you don’t even have to sign a receipt for charges under $25). The design is deliberate. Just don’t let their ease of use disconnect you from the expenditure. 24 Every financial advisor in America advocates making a budget to help you with live within your means. A budget is simply a tracking of all the money you anticipate receiving (don’t forget income taxes) in a given period, and all the expenditures you anticipate incurring. By taking the time to make a budget, you can identify exactly how much you can spend for various items without going into debt. If you want to learn more about budgeting, we suggest visiting mint.com, geezeo.com, or pearbudget.com, or reading about budgeting (Chapter 1) in The Wall Street Journal Personal Finance Workbook, Jeff Updyke (Three Rivers Press, 2006). Even big earners have to cut back at times. “I try to do the right thing with money. Save a dollar here and there, clip some coupons. Buy ten gold chains instead of twenty. Four summer houses instead of eight.” LL Cool J 25 27 “For a lot of people, budget is a four-letter word because they often picture a budget as something that restricts them – something that says: you can’t have this, you can’t buy that, or you can’t do this. Well, that is the wrong way to look at a budget. A budget is really a part of your personal prosperity plan. … Without a budget – without a clear sense of exactly how many dollars are coming in the door and how many dollars are really going out each month – you’re doomed to constantly live paycheck to paycheck.” And now back to our story... ZERO DEBT for College Grads, Lynnette Khalfani (Kaplan, 2007) 26 28 Billy realizes that he cannot put Beth off forever. He knows that she is getting upset with him. THEY GO THROUGH THEIR CREDIT CARD BILLS. “Statistics show that the number one cause of all relationship breakups is money. The biggest reason behind fights people have about money is not the money itself, but the mismatch of their ‘financial blueprints.’ ” T. Harv Eker 29 31 And so, Billy and Beth have a candid discussion. “Billy, I’ve added up our credit card bills. We owe $25,000!” How can that be? Beth speaks to her fears about never having enough money, and Billy reveals how buying things makes him feel successful. 30 32 Billy and Beth realize that they need a better understanding of how credit cards work. A FEW DAYS LATER ... “Hey Beth, how’s the reading going?” “Billy, we’ve done some dumb stuff.” BOOKS! 33 Beth agrees to do the homework. Beth finds that there are many books written about credit cards. 35 “What do you mean Beth?” “We have not used our cards very well.... We are credit card idiots!” She feels overwhelmed! And that, of course, is the exact reason why we’ve written: The Skinny on Credit Cards 34 36 “But, Beth, I went to an Ivy League college – I must be very smart.” “I don’t know what they taught you there, Billy, but according to what I’m reading, you are a financial blockhead!” Although Billy graduated from Harvard, he didn’t learn much about real-world topics ... like credit cards. Unfortunately, very few U.S. high schools or colleges teach even basic financial principles. “Tens of thousands of students … learn the hard way the pitfalls of misusing their credit cards – that colorful and friendly plastic which was irresponsibly pitched to them on registration day with offers of free candy, T-shirts, and beer mugs.” Forever in Your Debt, Harvey Z. Warren (Booksurge, 2007) 37 39 “Blockhead, Beth?” 38 “Well, Billy, we’ve made some pretty basic mistakes.” I’d use “dimwit” but that might hurt his feelings. I think it’s time for me to make an appearance. I hope you don’t think I’m butting in. 40 g Din ! ng -Do “I’m here to help you understand how credit cards work.” “Beth, the doorbell ... I’ll get it.” “Thanks, anyway.” 41 43 “Hi, my name is Jim Randel. May I come in?” 42 What a goodlooking man! “What do you want?” “Billy, let him come in. What do we have to lose?” 44 Thanks, Beth! “Thanks ... I won’t stay long. I know you have made some credit card mistakes and I want to help.” “One, I don’t know how you would know about us. Two, we usually pay our credit card bills right on time. And three, we always make the required payment.” 47 45 “OK, come in.” 46 “Yes, I know ... and the banks just love you!” “See, Beth, I’m not such a blockhead.” “Billy, I don’t think he meant it as a compliment.” 48 “Billy, you are a credit card company’s dream … you occasionally pay late, earning them profitable late fees, and you always carry a balance, earning them lots of interest. In credit card lingo, you are a ‘revolver’ – you keep rolling over your debt and never pay it down.” This guy went to Harvard?? “Eventually we will pay it down … if we keep making our monthly payments, we will pay it down.” 49 51 To credit card companies, someone who pays off his or her balance in full every month is a “deadbeat.” 50 “Yes, eventually you will … but do you want to know how far out eventually is?” Uh-oh! “Yes, Jim, please tell us.” 52 “Well, if you never use your credit cards again, with $25,000 of debt, an interest rate of 15% and fixed payments of $500 every month, it will take you 79 months to pay off your debt!” The median* amount of credit card debt in U.S. households with at least one credit card is $7,066. If a household with that level of debt stopped using their card(s) this minute, assuming an interest rate of 15% and a minimum monthly payment of $150 (2% of their present balance), it would take them 6 years to pay off their debt. During that period, they would pay the credit card company $3,655 in interest (more than half of what they presently owe)! *median: half have more, half have less. 55 53 Oh, no! 54 “I know this is confusing … In fact, the credit card companies like it that way.… Here, this may help.” 56 “Beth, we don’t own a blackboard. Where’d that come from?” ??? “It is really important that you understand how credit cards work. A credit card is nothing more than a way to borrow money. You present the card to a merchant and your account is instantly contacted. In just seconds, your credit card company says ‘Yes’ or ‘No’ to your purchase. If the credit card company says ‘Yes,’ it loans you the money so that you can make the purchase. Nothing confusing there.” 57 The Skinny On™ was inspired by the popular Japanese writing style known as manga. Manga books are illustrated, with a story line and dialogue. There is a moderator who jumps in and out of the story, and with whatever accessories he wants, e.g., a blackboard. 58 “What a strange looking couple!” How Billy and Beth might look in a manga book. 59 “The confusing part is what happens once money is loaned to you. Let’s start with the basics: #1: You will have time between the date when you use your card (and get a loan), and the date when you receive a bill. #2: If you pay the bill (loan) in full when it is due (the ‘due date’), you owe no interest. #3: If you don’t pay the bill in full, you will pay interest on that portion of the bill you do not pay off. #4: The rate or amount of interest you pay is very important. #1: T he credit card companies send you a bill once a month. This bill lists all your charges. You should have about three weeks (“grace period”) from the date you receive your bill to the date when your payment must be received (“due date”). If you are going to be away from your usual address for an extended period, call your credit card company and ask them to e-mail or forward your bill to you. Not receiving the bill is no excuse. You must be sure the card company receives your payment by the due date. Explore paying your bill online. #5: Every month you are required to pay the ‘minimum payment.’ 61 #6: If you don’t pay the minimum payment by the due date, bad things happen. #7: There are additional fees when you use your card for anything other than purchases. I need to spend just one minute on each of these points.” #2: If you can pay 100% of your bill, do that. Then you will not pay any interest to the credit card company. About one-third of all U.S. cardholders pay their bill in full every month. The term “float” is used to describe the period between the date you use your card and the date when payment is due. If you pay your bill in full every month, this float is a real convenience. 60 62 #3: If you don’t pay your bill in full when it is due, the portion you don’t pay is called your “balance.” The credit card companies make money by charging you interest on your balance. For example, let’s say you charge $500 to your credit card during the month of June. On July 1 you get a bill and your due date is July 22. You pay (on time) $100 of your bill. Your balance is $400, on which amount your credit card company charges you interest. If you carry a balance, your credit card company starts charging you interest on any new expenditures from the day you make them. #5: The credit card company wants you to pay some portion of your bill every month – but it is a very small portion (usually about 2% of the amount of your bill). The amount they want you to pay is called the “minimum payment.” Paying just the minimum payment every month is a prescription for trouble, which we will discuss a little later in this book. Billy and Beth will need almost seven years to pay off their credit card balance if they cut up their cards right now, and pay $500/month (presently their minimum payment) every month. 65 63 #4: The rate or amount of interest you pay is a big deal. If you are carrying a balance, you want to know the Annual Percentage Rate (APR) you are being charged for the right to use the credit card company’s money (i.e., the loan). The average APR in the U.S. today is about 15%. Note that you can be charged different APRs for different ways you use your card, such as cash advances. 64 #6: Credit card companies have no sense of humor when they do not receive your payment on time. If you are late with a payment (the credit card company receives it after the due date), you will be hit with a “late fee,” usually about $35 $40. Sometimes you can get these fees waived (reversed) if you complain to your card company. In addition, if you are late, your APR will most likely spike upward to what is called a “default rate.” A default rate is the APR charged on your balance when you have made mistakes. You won’t like the default rate, as it is much higher than the APR you were being charged. 66 #7: T he credit card companies are ingenious when it comes to finding ways to charge you. One of the most profitable fees for the card companies is the over-the-limit fee. This is the fee they can charge you if your purchases exceed the maximum borrowing power you have (your credit limit). However, you cannot be charged over-the-limit fees unless you have opted in (chosen) to have your purchases honored when they exceed your limit. Depending upon how far you exceed your limit, your card company will decide whether to honor the charge; if it does, it will hit you with an over-thelimit fee. “Now that you understand the basics, I can explain why it will take you about seven years to pay off your credit card debt. First, let me ask you a question: Do either of you know what Albert Einstein called the most powerful force in the universe?” 67 Back to Billy, Beth and Jim 68 “Nuclear fission?” 69 “Good guess, Beth, but no. It is something called ‘compound interest.’ Compound interest is the earning of interest on interest. Let me give you an example. If you invest $1,000 in a savings account that is earning you 5% in interest, by the end of one year, you will have earned $50 in interest. OK, now how much in interest will your account earn in the next year?” $1,000 5% “$50 ... that’s easy.” “Now here’s a short trick to help you understand compound interest. It’s called ‘The Rule of 72.’ If you want to know how fast your money will double in any particular investment with a fixed rate of return, divide the return into the number 72. The result is the number of years it will take your money to double. So, for example, if you invest $1,000 in an account earning 8%, then in 9 years … 72 divided by 8 … your account will be worth $2,000.” $1,000 8% 9 years $2,000 8 72 “That’s cool.” 72 70 “Sorry, Billy, no … you’re wrong. The interest in the second year will be $52.50 because 5% interest would also be earned on the $50 of interest you earned in the first year. End of year #1, the account = $1,050.00 End of year #2, the account = $1,102.50 End of year #3, the account = $1,157.62 Then, in the third year, the interest earned on the account would be $55.12. Here is the math: End of year #1, the account = $1,050.00 End of year #2, the account = $1,102.50 End of year #3, the account = $1,157.62 And so on. And in about 11 more years, your $1,000 investment will total $2,000.” 71 “Unfortunately, the power of compound interest can also work against you. That is why the credit card companies make so much money. Let’s say you owe a credit card company $1,000 and they are earning 15% interest (the APR) on this balance. Do either of you want to guess how long it will take before you owe them $2,000?” $1,000 8% 9 years $2,000 8 72 “Well, Jim, I am thinking that the Rule of 72 works in this example, too. So, I would guess about 5 years … 72 divided by 15 = 4.8.” 73 “Great analysis, Beth, but unfortunately, wrong. It’s actually much quicker than that.* You see The Rule of 72 assumes that interest is being added on interest at the end of every year. But the credit card companies are smarter than that. They compound interest on interest every day. That is why they are required by law to tell you your average daily interest rate. In your case, 15% APR, the daily interest rate is .04% (.0004).” $1,000 8 72 15% $1,000 8 72 15% .04% $2,000 “Jim, maybe you should stop saying that ... Billy gets very tense when money is discussed.” .04% $2,000 * The math is actually very complicated. 74 Go to theskinnyon.com for the answer. 76 “I don’t want to spend any more time on the math, but here is the point: “I’m sorry, Beth, but there is one more point that I need to make. Every day you owe your credit card company money, they are earning interest not just on the amounts you charged but also on the interest they have earned on your balance. In other words, the interest you owe them is compounding … getting larger and larger every day.” When you carry a balance on your credit cards, there is no longer an interest-free period between the date of a purchase and the date your payment is due. In other words, you start paying interest the day a new purchase is made. I’m sorry to say, Billy, that you are already paying interest on that new motorcycle jacket you bought this morning.” $1,000 8 72 75 15% .04% $2,000 $1,000 8 72 15% .04% $2,000 77 $1,000 8 72 15% .04% “Will you please stop showing how smart you are? Look at him!!” $2,000 “That’s totally unfair.” 80 78 “Fair has nothing to do with it. The credit card companies are in business to make money. You don’t have to borrow it. You need to understand how the game is played.” 79 “You’re right, Beth ... I’m sorry ... I’ll be going now.” 81 Life is a series of steps and missteps. “I am a blockhead, Beth.” “Billy, did you really need that motorcycle jacket?!” As one who has studied successful people for many years, I have learned that they do not dwell on their missteps. They acknowledge their mistakes, resolve never to repeat them, and then immediately start making plans to remedy their situation. Billy now needs to learn what his and Beth’s options are to get on top of their credit card debt. 82 84 Billy should not be too hard on himself. Yes, he made some poor decisions. He did not control his spending. He did not budget. But now he needs to move forward and take positive steps in an all-out effort to resolve his and Beth’s difficulties. 83 Billy and Beth, now very attuned to the risks of credit cards, have an additional concern: 85 THEIR 21-YEAR-OLD SON, JAKE. “Credit card issuers love the college bunch, because they turn out to be one of the most profitable groups of customers for the credit card industry.” DEBT CURES, Kevin Trudeau (Equity Press, 2008) 86 JAKE IS A SENIOR IN COLLEGE. NOTE: AS OF FEBRUARY 22, 2010, CREDIT CARDS CANNOT BE ISSUED TO ANYONE UNDER THE AGE OF 21 UNLESS (1) THE CREDIT CARD AGREEMENT IS CO-SIGNED BY SOMEONE OLDER, OR (2) THE INDIVIDUAL RECEIVING THE CARD CAN ESTABLISH THAT HE/SHE HAS THE INCOME TO PAY EXPECTED DEBTS. THIS NEW LAW WAS THE RESULT OF THE UNITED STATES CONGRESS BECOMING FRUSTRATED WITH CREDIT CARD COMPANIES FOISTING CARDS ON YOUNG ADULTS NOT READY FOR THEM. 87 88 You might be interested to know that 31% of high school seniors have use of a credit card – either their own or as an authorized signer on a parent’s card. 89 BILLY AND BETH WORRY THAT JAKE IS NAIVE WHEN IT COMES TO FINANCIAL MATTERS ... AND THAT HE MAY BE VULNERABLE TO SLICK CREDIT CARD MARKETERS. BILLY AND BETH MAY BE RIGHT TO BE WORRIED ABOUT JAKE. Many young adults are anxious to be free of their parents’ financial oversight. 1103 1986 0706 1986 1986 VALID 11/12 JACOB K. BRANCH 90 92 Dear Jake: Start building e yo ur credit th right way w ith our Platinum card. Of course, it’s not just young adults who are vulnerable to credit card marketing. All of us, whatever our age, are susceptible to the genius of the credit card marketing gurus. Dea Now r Stud to t is the ent: ak t est e step ime abli sh y s to fi inde nancia our l pen den ce… OPEN IMMEDI ATELY! TIME-SENSITI VE MATERIAL The card companies spend hundreds of millions of dollars a year not just to get you to select their card over others but also to induce you to use it (over and over again). Many commentators are critical of card marketers who push people to take on debt. JAK E PR : YOU E-A ’ PP VE B RO EE VE N D! 91 ! “What has changed is the marketing of credit, the notion that credit is not a tool but a lifestyle. The financial industry spends vast sums of money spreading the myth that debt is good … that wealth is spending, not saving, and that there will always be more credit….” Maxed Out: Hard Times in the Age of Easy Credit James Scurlock (Scribner, 2007) 93 “Those who go a-borrowing, also go a-sorrowing.” “Jake, we need to have a talk with you.” “Is everything OK?” Ben Franklin The great American thinker and leader Benjamin Franklin would probably agree with those who call credit cards “financial junk food.” 94 96 HERE’S AN AD I’D LIKE TO SEE: 1 3 95 CAR LOANS CREDIT CARD BILLS 2 4 MORTGAGES FINANCIAL FREEDOM: PRICELESS “Yes, yes … everything is OK… we are just worried that you might have gotten a credit card.” “Yes, I have two. Isn’t that great?” 97 “Jake, we think you should cut them up.” “Dad, you must be kidding… I’m sure that I would not have gotten these if I was not qualified. Credit card companies know what they are doing.” “In the world of credit card marketing … it is easier and cheaper to mail credit cards by the tens of millions and clean up a financial disaster with a few customers, than to do the hard and labor-intensive work of genuinely qualifying all of the customers.” Forever in Your Debt Or, as one credit card executive told me (in confidence): “We figure that the great percentage of young adults will find a way to pay us. It is too expensive to carefully prequalify all applicants, so we just extend lots and lots of cards.” 98 100 “We are worried that you might get in over your head.” Jake is wrong in assuming that if a credit card company is willing to give him a credit card, someone determined that he could pay back any debt he incurred. 99 “Hey, guys, don’t worry about me … I know what I am doing. If I’m old enough to join the Army, I’m old enough to handle a couple of credit cards.” 101 “Join the Army?!?!” Jake?!? “I’m just making a point, Mom. I’ll call you next week ... Love you.” 102 104 Jake has a point. He is old enough to join the Army (in fact, he could have enlisted at age 18). He should be able to handle a couple of credit cards. The problem is that we, as a country, have done a poor job preparing our young people for a very smart and well-armed credit card industry. “Next time we see Jim Randel we should ask him to write a book about credit cards that we can buy for Jake.” “Great idea!” Billy and Beth now realize that it was their responsibility to teach Jake basic financial principles. They hope it’s not too late. 103 105 “In the meantime, let’s learn all we can about credit cards ... both for ourselves and for what we can teach Jake.” “Definitely! And, by the way, Beth, I’m sorry for getting us into this mess.” Fortunately for Billy and Beth, there are steps they can take to pay down their debt more quickly. My job is to help them understand their options. 106 108 Hey, good for Billy and Beth. They are now moving forward – taking responsibility for their mistakes and starting the process of learning, looking for solutions to their problem. As we go down that path with them, let’s review exactly where they are: “Billy, there’s only so much reading I can do ... Would you object if I call that Jim Randel guy and see if he will help us?” “I don’t mind, Beth.” Billy and Beth are in debt to credit card companies in a total amount of $25,000. For the past year, they paid just the minimum payment ($500/mo.) and were late one time. Assuming they cut up their cards right now and continue to pay $500 every month, it will take them almost 7 years to get out of debt. 107 109 “Hey guys, thanks for inviting me over. I brought a bottle of wine.” “Gee, Jim, thanks, but I hope you didn’t think it was a dinner invite. We need your help to learn more about credit cards.” “Fortunately, I always carry a PowerPoint ® presentation with me.” 110 112 Gosh, I’m so hungry! “Oh, my misunderstanding, Beth. No worries ... I’m happy to help.... Why don’t you guys sit down?” 111 “We need to discuss how to reduce your credit card debt, and I have a three-point plan.... Number 1: Minimum payments equal maximum problems.” #1: Minimum payments = Maximum problems ??? 113 I stole that phrase from author Harvey Z. Warren (actually, he told me I could use it) because it explains so well how people get into debt … and can’t get out. About twenty-five years ago, credit card companies were requiring monthly minimum payments that were about 5% of card balances. Then along came a smart credit card consultant named Andrew Kahr, who convinced his clients to lower minimum payments. To see a rare interview of Andrew Kahr (the guy is kind of secretive) and an excellent video about credit cards – a PBS special called “The Secret Life of Credit Cards” – go to: Kahr was very shrewd. He knew that the less people were required to pay every month, the more they would use their card, and the longer it would take them to reduce their debt. In both situations, his card company clients were earning more interest. http://www.pbs.org/wgbh/pages/ frontline/shows/credit/view/ Kahr also understood psychology. He knew that people who were making the “required” payment would believe that they were acting prudently. Given the size of some people’s balances, there were times when a minimum payment was not even covering interest due the card company. Card companies are now required to bill an amount that at least covers their interest due. The reality is that by inducing people to pay just the 2% minimum, credit card companies were helping people dig themselves into deeper and deeper holes. “No, not yet ... just keep digging.” 115 “Let me ask a question: Do you think you can pay an extra $250 a month toward your credit card balance?” #1: Minimum payments = Maximum problems “Jim, we’re pretty tight right now.” “I think I hit bottom.” 114 116 “Actually, Beth, I think we can. If I carpool with Jon and resign from my bowling league, we would save at least $250 per month.” BOWLING 119 117 “But you love your bowling league!” “Beth, I got us into this mess. I can live without bowling.” Good for Billy. He is making lifestyle changes to find money for debt reduction. An author named David Bach has created a series of successful books around the idea that by saving small sums every day, one can use that money (with compound interest) to build up a healthy net worth. You may have heard of his idea, “The Latte Factor”: 118 “How we dribble away what should be our fortunes on small things….” The Automatic Millionaire (Broadway Books, 2004) 120 “That’s great, Billy ... and by paying $750 a month instead of $500, you can pay off your debt in 44 months instead of 79!” $25,000 15% $750/month 44 months “Now for Number 2: Lowered rates equal increased opportunities.” #2: Lowered Rates = Increased Opportunities “Wow, we can shave off three years.” 123 121 It’s easy to determine how long it will take to pay off credit card debt using differing variables for the interest rate and monthly payment. Several websites have calculators that can do the math in seconds. You might try: “If you will allow me, I’d like to give you a short tutorial on interest rates.” #2: Lowered Rates = Increased Opportunities www.creditcardratings.com/creditcarddebtcalc or, www.bankrate.com/brm/calc/creditcardpay.asp “We’re all ears.” What’s more, under The Credit Card Accountability Responsibility and Disclosure Act of 2009 (commonly know as the Credit Card Act), card companies must disclose in plain language and plain view on monthly invoices how long it will take to pay off one’s balance making only the monthly minimum payment. 122 124 OK, thanks. Thousands of years ago, lenders were not allowed to earn interest on money they loaned to others. But that kind of system only worked if borrowers paid back a loan when the lender wanted it. Unfortunately, that is not human nature. Eventually, lenders were allowed to charge borrowers a fee for using the lender’s money. This fee is called interest. “The key for any borrower is to keep the interest rate on his or her debt as low as possible. The lower the rate, the less the borrower has to pay the lender, and the greater the opportunities a borrower has to make good use of the borrowed funds. Credit card users should always be on the lookout for ways to lower their interest rate. In that regard, I have two suggestions.” “Wonderful ... what are they?” Even though lenders can now charge borrowers interest, there are laws about how much interest they can charge. A rate in excess of what is considered reasonable is termed “usurious.” Lending beyond the lending limit is called “usury.” Most states have laws against usury – generally any interest rate above 18%. Credit card companies outsmarted the system by locating their credit card operations in states with no usury laws – like South Dakota or Delaware. That is why credit card issuers can charge rates as high as 30% or more. 126 “First, I was thinking you might be getting a little weary with all the money talk. So, how about a joke? Want to hear my favorite?” “OK!” 125 127 “OK, get ready to laugh ... “And the guy with bananas in his ears says, ‘Sorry, I can’t hear you ... I have bananas in my ears!’” A guy is walking down the street with bananas in his ears.” “I don’t get it.” “Me neither.” 128 “Another guy comes up to him and says, ‘Hey Mister, why do you have bananas in your ears?’” 130 ? “Told you it was a good one!” What a geek! There’s something odd about this guy. “Great joke!” 129 131 Did you like the banana joke? Probably not. My daughter told me that if I put that joke in the book she would tell her friends that I wasn’t her real father. I think she was kidding. “OK, back to the serious stuff: how we can lower your interest rates and increase your opportunities.” 134 132 “Money isn’t everything but it sure keeps you in touch with your children.” J. Paul Getty 133 “My first suggestion is that you call your credit card companies and ask them to lower your rates.” “That’s silly, Jim. We have a contract with them. That’s like them raising rates just because they want to.” 135 “Exactly, Billy, and that’s just what they might do.” Huh? “Well, it would be a lot of fun to read one. Beth, do you still have your contracts?” “Yes, I’ll go get them.” 136 138 “Credit card companies have an almost unlimited ability to raise interest rates if they want to. Did you read your contract with them?” A lot of fun? “OK, and I’ll be right back too.” “No.” 137 139 “What the heck is that?” “You’ll see.” “And it does help with the fine print!” 140 142 “Do you really need that to read a credit card agreement?” 141 “No, not really, I just thought I’d add a little visual humor.” “Just as I suspected ... typical language: Your credit card issuer can change your rate pretty much whenever it feels like it.” 143 “Here is the language that gives card companies enormous discretion to change your rate: ‘At any time, we may add, delete or change any term of this Agreement unless we told you that we would not.’” “But, Jim, as I recall, my application indicated what our interest rate would be.” 144 “But, I do have good news. Effective February 22, 2010, the Credit Card Act made significant changes as to when and how credit card companies can increase interest rates.” “Yes, Beth, the application is required to do that. But, again, you need to read the fine print. Your application also happens to say: “#1: N o rate increases at all in the first year of a card agreement unless a) you are more than 60 days late with a payment, b) you have a special offering rate which expires, or c) you have a variable rate and the index, usually the prime rate, changes. ‘In the future, we may increase your APRs if market conditions change.’ ” #2: A ny rate increases can only apply to future purchases – not existing balances. #3: Y ou must receive at least 45 days advance notice before your card company can change your rate (after the first year). #4: If your card company changes your rate and you do not want the card anymore, you can close the card and pay off your existing balance at the old rate over 5 years.” 145 146 “Finally someone watching out for cardholders.” “Yes, and there’s more.” “This is sounding better by the minute.” “Yes, Beth, there’s a lot of good stuff in the new law, but let’s talk about what the new law did not address.” “The new law also provides that: Card companies cannot change any other important term of your card unless they give you 45 days advance notice. Card companies must give you a period of at least 21 days from the date they mail you a bill to the date when your payment is due. Card companies must give you at least until 5 PM on a business day to make your payment. Card companies must ask you whether you want over-the-limit protection. This means that they cannot charge you an over-the-limit fee unless you want that coverage. But, please understand that if you do not elect this coverage, they can refuse to pay for purchases that put you over your card limit.” 147 “#1: After the first year and with 45 days notice, card companies can raise rates to whatever they want. #2: Card companies can close your account or, lower your credit limit pretty much whenever they want. When they do that, you retain the right to pay off your existing balance at your existing rate. #3: C redit card companies can impose other fees on your account, like annual fees. #4: C redit card companies can still charge you for late fees and over-the-limit fees.” 148 JUST A BIT MORE LEGAL STUFF In addition to The Credit Card Act of 2009, there are other laws you should be aware of: The Fair Credit Reporting Act (FCRA) became law in 1970 and speaks to the rights consumers have against credit bureaus. Credit bureaus are the companies that collect and sell financial information about each one of us – basically our record for paying debts and other obligations. “Are any of you sleeping? I know there has been a lot of text in these last several pages… I apologize, but there is a lot to learn!” FCRA requires credit bureaus to provide consumers access to the information in their databases, and to address consumer complaints about inaccurate information. This law also mandates how long negative information can remain on a consumer’s credit report (for most items, seven years). 150 The Fair and Accurate Credit Transactions Act (FACTA) became law in 2003 as an amendment to FCRA. This law requires the credit bureaus to provide consumers with a free copy of their credit report at least once per year. FACTA also protects consumers against fraudulent use of their card and identity theft. For example, FACTA requires the credit bureaus to put alerts on a credit report when fraud is suspected. The Fair Debt Collections Practices Act (FDCPA) became law in 1978 and regulates debt collectors. This law limits the tactics debt collection agencies may use in trying to collect a debt from you. It also requires them to verify the legitimacy of the debt. 149 And now, back to our story... 151 “This has all been very helpful, Jim. And now that I’m educated, I’m going to call my company and demand that they lower our rates.” Billy needs to remember that the voice at the other end of the phone is a person with his or her own personal challenges. Winning over this person will never come with force. Quiet, courteous persuasion works best. Author Larry Winget, in his book You’re Broke Because You Want to Be (Gotham, 2008), writes about his first job: “Thirty years ago I worked in the business office for Southwestern Bell, calling people about their telephone bills. I got yelled at, cussed out, and called names just for asking people to pay their bills. … creditors are only doing their job when they try to collect from you… Work with them, not against them, and you might find them pretty easy to get along with.” 152 154 “Well, Billy, let’s not use the word ‘demand.’ You can be forceful, but you should be polite. The person you speak with initially may not even have the authority to lower your rates. Always ask to speak with a supervisor and, like everything else in life, be persistent. Don’t lose your cool. Keep pressing until you get satisfaction, or until someone in authority tells you that a rate reduction is just not possible.” 153 When dealing with credit card companies, remember that although the company itself may be faceless, the people working for them are pretty much like you and me. If you are unhappy with a rate increase, a late fee or just want to lobby for a lowering of your existing rate, you are much more likely to achieve success if you remember that the voice at the other end of the phone is a person. Treat that person with courtesy, and you dramatically improve your hopes for a positive result. 164 155 “Jim, are there any special words we should use when asking for a rate reduction?” “No special words, Beth. You can tell them that you need some assistance so that you can stay current with your debts. You should also tell them that you have offers from other cards at lower rates.” Author David Bach says, “The fastest way to save money on your credit card debt is to … get your credit card company to lower the interest rate it charges you … when you are connected with a supervisor, tell him or her that a competing bank is offering you a much lower interest rate … unless he can match or beat the competitor’s rate, you intend to transfer your balance to that competitor.” 157 With the exception of one late payment, Billy and Beth have been steady customers. If Billy and Beth indicate that they have alternative card opportunities, some of their card companies may be willing to lower rates to keep them as customers. In fact, if the credit card company believes you are serious about terminating your account, you may be transferred to a “retention specialist.” 156 David Bach Here is a really important point to understand: Unless you are a problem, your credit card issuer does not want to lose you as a customer. The fact is that in most cases it costs a credit card company more to obtain a new customer than it loses by lowering an interest rate for an existing customer. Start Late, Finish Rich, David Bach (Broadway Books, 2006) “This department (retention) is trained to hold on to would-be quitters, so rest assured you’re going to get their best attempt at keeping you as a customer. The specialist will ask why you want to end such a great business relationship, at which point you should explain that the card did not offer a good enough ___________ (tell them exactly what you’re looking for). The specialist may immediately … give you even better offers.” Credit Arbitrage: How To Take Advantage of the People Who Are Trying to Take Advantage of You, Joseph Morse (Amelior, 2007) 158 AND NOW, ANOTHER IDEA FOR LOWERING YOUR APR: “Have either of you explored getting a low-rate balance transfer card?” “Yes, Jim.” “You have ... what is that?” IMPORTANT POINTS ABOUT LOW-RATE BALANCE TRANSFER CARDS: 1. The card company will charge you a fee for the transfer, usually about 3% of the amount to be transferred. If you are contemplating a large transfer, look for a cap that puts a maximum amount on this fee (i.e., 3% but in no event more than $X.). 2. The new card issuer will decide how much you can transfer … don’t close an existing card until you know exactly what you can put on the new card. 3. Low rates go sky-high if you are ever late with a payment. 4. Low rates often do not apply to new charges … just the transferred balance. 159 “Balance transfer cards usually have very low rates for a specific period of time. Upon paying a fee, you can transfer other, higher-interest-rate card balances to the new card.” 161 Any questions so far? We at The Skinny On™ don’t want you to think that since you’ve purchased our book, we no longer have an interest in you. Any buyer of our books is a lifelong friend. If you have a question, please visit our website, theskinnyon.com. If the information you seek is not there, please e-mail me at: [email protected] In other words, we want to help you learn about credit cards ... so don’t hesitate to contact us. 160 162 “Beth, these low-rate balance transfer cards sound great…let’s start applying for these cards right away.” “Not FIDO, Billy – FICO.” ??? Oy! Does Billy know anything? 163 165 “I’m trying, Billy, but unfortunately, we have a problem ... FICO.” 164 “He peed in the kitchen again?” “Jim, please help me here.” 166 “Billy, I’m surprised you have not heard of FICO ... it’s a really big deal when it comes to credit cards.” “Sorry, Professor, but I’m sure you’re going to explain it to me.” The way it works is this: The Fair Isaac Corporation sells to credit bureaus the right to use its algorithm. The credit bureaus then plug in the information they have accumulated about you and come up with a three-digit score (ranging from 300 to 850), which supposedly predicts your ability and willingness to pay your obligations. This score is called your FICO score. This FICO score is widely used by creditors in determining whether to extend you credit, and at what price. In addition, prospective employers may check your FICO score to get an indication of your reliability. 169 167 CAUTION Yes, Billy, I am … and no reason for the sarcasm. Anyone who uses the Internet can’t help but see all the offerings of “free” credit reports and scores. FICO is an acronym for the Fair Isaac Corporation, a company that has developed an algorithm to measure people’s creditworthiness. Our team here at theskinnyon.com has spent the last few months opening/trying most of these offerings. Here are our takeaways: ACRONYM: a word made up of the first letters of several words ALGORITHM: mathematical formula CREDITWORTHINESS: likelihood of paying all obligations on time 1. These offerings are all about upselling you some service (turning you into a paying customer). 2. Many of the services are of nominal value. 3. Some companies try to trick you into paying for something you think is free. 4. Several companies give you a credit score using their own math, i.e., not a FICO score. In other words, be careful! 168 170 “Beth, do you know what your FICO score is?” “It’s 650, Jim. We had some problems recently with some department store cards.” “Will one of you please tell me how this FICO thing works?” Oops. 171 “Unfortunately, that score will make it hard to get a 0% balance transfer card.” 172 173 “I know, I’ve already tried.” “Beth, would you like to?” “Yes, Jim… In fact, I have been making a list for Jake of the most important points he needs to know about credit scores and credit reports.” 174 #1: Your FICO score is theoretically a predictor of how you will pay your bills. #2: Your FICO score is only as accurate as your credit report. There is an expression ‘garbage in, garbage out.’ FICO just provides the formula. #3: Get a copy of your credit report right now. Each of the three big credit bureaus, Experian, Equifax and TransUnion, must give you your report once a year for free. Go to: www.annualcreditreport.com. #1 FICO score is a predictor #2 FICO score as accurate as credit report #3 www.annualcreditreport.com 175 #4: Read your credit report carefully. One study indicated that 25% of all credit reports have mistakes in them. #5: If you find a mistake, contact the credit bureau immediately. There are procedures established by law for disputing a negative credit entry (or “ding”). If you want to learn more about how to read credit reports and how to dispute inaccurate information, we recommend Chapters 5 and 6 of a book titled Credit Scores & Credit Reports, written by Evan Hendricks. #1 FICO score is a predictor #2 FICO score as accurate as credit report #3 www.annualcredit report.com #4 25% of credit reports have mistakes #5 Read report carefully; dispute mistakes 176 #6: S ince each of the three big credit bureaus have their own data, each produces a slightly different FICO score. So, you actually have three FICO scores. Some creditors disregard the high and low score and rely on the middle score. The median FICO score in the U.S.is 723. #7: T here is no law requiring Fair Isaac or the credit bureaus to give you your FICO score for free. Some people get their score for free by signing up for a monitoring service (the “come on” being a free score) offered by Fair Isaacs (www.myfico.com) or one of the credit bureaus, and then canceling. But this only works once. Last year Experian announced that it would no longer provide consumers with their FICO score. #8: E ven if you have to try out a monitoring service to get your FICO score, it is not that expensive (+/- $15/month). #9: The two most important factors in the FICO algorithm are: (1) your payment record, and (2) your ratio of debt to available debt. #10: G enerally, don’t expect to change your FICO score overnight. It usually takes a month or two at best. #11: O ne of the quickest ways to improve your FICO score is to lower the balances on your cards (if you can) even temporarily. If you are about to borrow a large amount (e.g., a mortgage), you want a good FICO score. Lowering debt lowers your ratio of debt to available debt. Of course, if you can get your card companies to increase your credit lines (much easier to do a year ago), that has the same effect. #12: S ome suggest that another way to improve your FICO score is to transfer debt from one card to several. Apparently FICO gets nervous when you have a card(s) that is maxed out. #10 Can’t change FICO score overnight #11 Lower balances #12 Transfer debt to a few different cards #1 FICO score is a predictor #2 FICO score as accurate as credit report #3 www.annualcredit report.com #4 25% of credit reports have mistakes #5 Read report carefully; dispute mistakes #6 Middle score most important #7 FICO score for free by signing up #8 Monitoring services are not too expensive #9 Current payment record and ratio of debt 177 178 #13: An additional suggestion for a quick boost to your FICO score is to provide information to the credit bureaus that they generally don’t track. For the most part, the credit bureaus only learn about your payment history for items like rent, utilities and insurance if you are a late payer or, you default... Look into www.prbc.com. This company supplies information to the credit bureaus and can supplement your credit report with positive information. #14: One thing that trips people up – even those who pay their balance in full every month – is the timing of credit reporting. Understand that the day when your card company reports your balances to the credit bureaus may be the day prior to your payment being received. So, if you use your cards a lot, your credit report (FICO score) may be lower than it should be. #16: If you want to stop using a card, that’s fine, but don’t close the account. Doing so lowers your debt-to-available-debt ratio. #17: When there are lots of requests for your credit report in a short period, FICO gets worried that you are overborrowing. Therefore, limit the situations when you authorize others to pull your credit report. #18: If you obtain your own credit report, there is no impact on your FICO score. #19: FICO likes longevity in borrowing relationships. Keep old accounts open. Use these accounts occasionally so that your credit card company does not close them due to inactivity. #20: Don’t do nutty things just to keep up your FICO score. Be a responsible borrower and a good score will ensue. #15: FICO pays more attention to your recent behavior than past. With time, even mistakes lose their scoring impact. #16 Don’t close your account #17 Limit authorizing people to pull your report #18 No impact if you get your own report #19 FICO likes longevity #20 Be a responsible borrower! #10 Can’t change FICO score overnight #11 Lower balances #12 Transfer debt to a few different cards #13 Check out companies that report new info #14 Watch the timing #15 With time even mistakes lose their impact “Billy, Billy ...” Zzzzzz 179 180 “Wow, Beth, that was a great list. I only have one thing to add. After much discussion, the Fair Isaac Corporation has revised its formula to improve on prior versions. Among other things, it allows authorized users on another’s credit card to piggyback on that person’s credit history.” “But Jim, if Fair Isaac is saying that this version is improved, does that mean earlier versions produced scores that may have rated some people unfairly?” Beth’s question is certainly an important one. SOAP BOX There is something about the FICO scoring system that bothers me. It is too secretive. We really don’t even know how accurate it is in predicting behavior. 181 Here is what a 2002 joint study conducted by the Consumer Federation of America and the National Credit Reporting Association had to say: “That’s an excellent question, Beth.” 182 “Despite the gatekeeper role that these scoring systems play regarding access to credit, housing, insurance, utilities, and employment, as well as pricing for those essentials, exactly how the formulas perform the transformation from credit report to credit score is a closely guarded secret. For consumers, regulators, and even industry participants who rely on the computations in their decision-making, the scoring models largely remain a ‘black box.’ No scholarly reviews of this extremely powerful market force have been permitted, and apart from reviews by federal banking regulators to protect against discrimination, no government regulator has insisted that they be examined to ensure that they are adequate and fair.” 183 FICO is a really powerful factor in how people get credit, jobs and even insurance. The question I ask you is whether it should be subject to some kind of oversight – some independent body or regulation. The issue for debate is whether we should rely solely on profit-making companies to perform such important functions as rating people (FICO and other scoring systems). One of the lessons from the economic meltdown (see The Skinny on the Housing Crisis) is that the agencies (Fitch, S&P and Moody’s) that were rating mortgage securities made some serious miscalculations. So I ask: Should there be some form of oversight over the credit scoring system? “Given all the problems with credit scoring, it’s understandable that some people think the system is fatally flawed. Some of my readers tell me they’re so angry about scoring… they’ve cut up their credit cards ….” Your Credit Score, Liz Pulliam Weston (Pearson, 2007) “Hey, Jim, wonderful speech. Now let me ask you this: given our FICO score, do you think we can find a low-rate balance transfer card?” 185 “Billy, given the current climate, it won’t be easy to get a 0% rate, but I think you can find a card with an APR a lot less than the 15% you are now paying. Here, in fact, are three sites I like that separate and compare credit cards by type, and that list many offerings for balance transfer cards: www.creditcards.com www.cardratings.com www.bankrate.com” SOAP BOX 184 186 “And here’s some good news. If, by calling your card companies for lower rates and by transferring debt to a lowerrate card, you can bring the average APR on your cards down from 15% to, say 10%, then the time it will take you to pay off your credit card debt will drop from 44 months to 39 months.” “Beth, I am getting excited. I feel that we can definitely do this.” “So do I.” That short exchange between Billy and Beth is really important. They have gone from disheartened to hopeful. 187 “Beth, I am getting excited. I feel that we can definitely do this.” “So do I.” Once people see that they can work their way out of debt, they gain energy and momentum. For this reason, some commentators recommend that in paying down debt on several cards, people should target the credit card with the lowest balance. In this way, they see the results of their efforts more quickly, giving them the impetus to keep working hard. Other advisors suggest that people pay off the card with the highest interest rate first. This, of course, makes economic sense and is the conventional wisdom. “(Paying off the card with the smallest balance) doesn’t necessarily jibe with conventional wisdom that says you should first pay off the card with the highest interest rate. Yet by concentrating on extinguishing the smallest balance first, you see more quickly the fruits of your labor. That will keep you motivated.” The Wall Street Journal Personal Finance Book, Jeff P. Opdyke (Three River Press, 2006) 188 189 “Jim, you mentioned that there were three points to your debtreduction program.” “Yes, Billy, the last suggestion is to do whatever you can to find a chunk of money to immediately lower your credit card debt. Doing so will dramatically reduce the time it takes to get out of debt. I call this one: ‘Big Chunk = Less Funk.’” HERE’S A QUICK RECAP OF HOW THESE POINTS HELP ACCELERATE CREDIT CARD DEBT REDUCTION: #1: By paying more than the minimum required payment every month, instead of just treading water, you chip away at the amount you owe. #2: By lowering your APR, more of your monthly payment goes to debt reduction. Call your company and ask for lower rates based on competitive rates with other companies. Explore a balance transfer card. #3: By making a lump-sum payment, you reduce total debt immediately, meaning that every successive monthly payment bites off more and more debt. 190 192 HERE ARE JIM’S SUGGESTIONS TO BILLY AND BETH: #1: Minimum Payments = Maximum Problems “Well, I need to go now. Good luck.” #2: Lowered Rates = Increased Opportunities #3: Big Chunk = Less Funk 191 193 Just for fun, I have prepared a little FICO-inspired quiz for you. While Billy and Beth are strategizing, try to match up the left with the right. Answers are on our bookmark. POP QUIZ 1) FIFO 2) DOJO 3) HILO 4) SOSO 5) FIDO 6) KUDO 7) HOJO 8) LIDO 9) BONO 10) NATO 11) VITO 12) RICO 13) ERGO 14) TOJO 15) TITO 16) MOJO 17) FSBO 18) KILO 19) TOTO 20) COCO 194 A) Restaurant chain B) Real estate term C) Singer D) Therefore E) Accounting term F) First name of famous gangster G) Vibe H) Martial arts studio I) Dog in The Wizard of Oz J) Measurement of weight K) Seaport in Hawaii L) First name of famous designer M) Treaty organization N) Ordinary O) Swimming pool in U.K. P) Honor Q) Legal statute R) European dictator S) Japanese general T) Billy and Beth’s dog “I’m feeling optimistic, Beth. I used a credit card calculator, and if we get our average APR down to 10%, make monthly payments of $750, and find a $10,000 chunk like Jim said, we can wipe out our debt in about 18 months.” “I’m excited too, Billy, but where are we going to find $10,000?” 195 “Well, on Randel’s website it talks about thinking outside the box to find whatever cash you can … so I’ve been thinking outside the box.” UH-OH. 196 “I think we should ask Randel for a loan. He wants to help us, and he seems like a nice guy. I can repay him with my next year’s bonus.” “Uh-oh!” Business arrangements among friends and family are fraught with risk. 199 197 “That’s my cell phone.” “Now I’m in a soup ... my wife always tells me not to stick my neck out.” 198 Beethoven’s 5th Symphony “Hi, Billy ... sure, I’d love to come to dinner.” 200 “Jim, Beth and I are grateful for your help to date ... and we were wondering if you’d help a bit more.” “I know you love your motorcycle, but if you sell it for, say, $10,000 and use that money to reduce your credit card debt, with other ideas we’ve discussed, you could pay your debt off in no time.” 201 203 “Billy, my guess is that you are talking about a loan. Unfortunately, I am not in a position to do that. But I do admire your effort to reduce debt as quickly as possible. Let me make an alternative suggestion.” I hope that Billy and Beth understand why I am unwilling to loan them money. Believe me, I have been in these situations before and they often turn nice relationships sour. Billy, like many of us, needs to identify what is important to him right now. One year ago, he used his credit card to buy a new motorcycle for $20,000. And since he and Beth have been making only minimum monthly payments, this purchase, with interest compounding, is a big part of their $25,000 debt. I realize that Billy loves his motorcycle, but he and Beth need to get their finances in order. Let’s see what he decides. 202 204 “If you care about financial security for yourself and your family … you will not get there with wishful thinking or procrastination. You cannot sit this one out. … The fact is that the new reality r equires new strategies … tactical actions to make sure you do not let the credit crisis knock you off course.” Suze Orman’s 2009 ACTION PLAN: Keeping Your Money Safe and Sound (Spiegel & Grau, 2009) le Sa For 205 207 Do you think it was pushy of me to suggest that Billy sell his motorcycle? After all, he was about to ask me for a loan. Billy’s decision to sell his motorcycle was painful for him. He got great pleasure from riding on his Harley. And perhaps that was more important to him than living debt-free. But Billy and Beth were starting to struggle under the weight of their debt. And given the economy today, we all need to face the reality of tough times ahead. For 206 Sale We at The Skinny On™ are not anti-debt. We believe in the judicious use of debt. We believe that there are times when the ability to borrow enhances your enjoyment of life. “People borrow to smooth the timing of income and consumption over their lifetimes. … There is no reason why anyone would want their level of consumption over time to track their income exactly. So, borrowing, including on credit cards, is a way of using future income to pay for immediate consumption. … (Many people) value the present more than the future and are willing to pay to pull future consumption toward the present.” Paying with Plastic, Evans and Schmalensee (MIT Press, 2005) 208 On the other hand, some financial advisors believe that debt is simply bad, bad, bad. Here is a quote from a well-known, no-debt advocate, Dave Ramsey: A FEW DAYS LATER “Billy, now that we understand so much about credit cards, I think that we should speak with Jake again.” “Good idea, Beth ... let’s call him and see if we can visit next weekend.” “I remember a finance professor telling us that debt was a two-edged sword, which could cut for you like a tool but could also cut into you and bring harm. The myth has been sold that we should use OPM, other people’s money (debt), to prosper. “The academic garbage is spread really thick on this issue…. My contention is that debt brings on enough risk to offset any advantage that could be gained through leverage … According to Proverbs 22:7: ‘The rich rules over the poor, and the borrower is servant to the lender’ … I was confronted with this Scripture and had to make a conscious decision of who was right – my broke finance professor, who taught that debt is a tool, or God, who showed obvious disdain for debt.” The Total Money Makeover, Dave Ramsey (Thomas Nelson, 2007) 209 Dave Ramsey 210 “Jake, your mother and I have learned a lot about credit cards these past few months. We’re a little worried that you might get over your head in debt the way we did.” “Gee guys, thanks, but I’m OK. I have two cards, but each has a limit of only $500. I can’t get into much trouble.” 211 BIG POINT: Holy cow, this kid is strong. “Great to meet you. My mom and dad mentioned what a great friend you have been to them. … May I call you Uncle Jim?” If you are the parent of a young adult, start talking to him or her about credit cards and debt!! RIGHT NOW!! 212 214 Billy and Beth asked me to meet with Jake and give him some pointers about credit cards. “Hi, Jake, I’m Jim Randel – a good friend of your mom and dad.” Here is what I told Jake: 1. D on’t sign a credit card application just to get a free T-shirt. Any application can affect your credit (FICO) score. 2. I do, however, recommend getting a credit card as soon as you turn 21. Credit card expert Liz Weston advises that “it will never be easier for you to get an unsecured credit card than while you’re in school.” 3. T he cards offered on campus may not be the best deals available. Shop around online. 4. Your card should not have an annual fee. 5. U nless you pay for your charges every month, do not opt for a credit card that emphasizes rewards. These cards are more expensive to use for those who carry a balance. 213 215 6. Keep your credit card receipts to verify your charges. Sometimes merchants in college towns take advantage of students. 7. You don’t need more than one credit card. 8. If you are concerned about overspending, get a debit card instead of a credit card. A debit card is backed (and limited) by the funds you have in your checking account. 12. You need to have a basic understanding of how FICO works. You might start at www.myfico.com. 13. How you handle credit during college could impact postcollege employment opportunities (one estimate: 1/3 of prospective employers check credit scores). 14. Start each school year with a $0 balance. If you carry a balance, use your school breaks to earn money and pay card debt down to 0. 15. Enjoy yourself during college. It is a great time of life! Find joy in learning, meeting new people, exploring your interests and boundaries … not in consumption. There is plenty of time for that later. 216 218 9. Every time you reach for your credit card, ask yourself whether you can repay what you are borrowing. When? How? 10. Wrap a rubber band around your card, which takes at least 10 seconds to remove. Use that time to reflect on whether you really need what you are buying. “Thanks, Uncle Jim.” 11. If you carry a balance on your card, be very cautious about card offers that increase your spending (borrowing) limit. This is how people get into trouble. 217 219 “And every monthly payment is chipping away more and more debt.” Back to Billy and Beth 220 222 SIX MONTHS LATER “Billy, our plan is working. Our credit card debt is almost half of what it was.” I sure do miss my motorcycle. Beth has just made a very important observation … as you begin to pay down credit card debt, the amount of each payment that goes toward interest decreases and the amount that goes toward debt reduction increases. In other words, with each successive payment, you are reducing your debt faster and faster. 221 223 “Beth, I have a surprise for you. Although I made a mistake using too many cards tied to rewards programs, I’ve redeemed our points to book a trip to Niagara Falls.” Billy’s comment that he “made a mistake” references the fact that cards which emphasize rewards or rebates are usually more expensive (rates and fees) than other cards. People who carry balances (like Billy) should not be using these cards. For an excellent resource on how to make good use of credit card rewards programs, see Chapter 2 in a book by Curtis Arnold, How You Can Profit from Credit Cards (Pearson, 2008). Arnold’s point is that if you are a person who carries a balance, you should not be worrying about rewards. “Rewards cards usually carry a higher interest rate than non-reward cards, and the interest you’ll be charged will more than wipe out any rewards you might earn.” 226 224 “Ohhh, Billy!” “In other words, there’s no such thing as a free lunch!” “I’m not sure why – but all the stick people I know love Niagara Falls.” 225 227 Rebate and reward programs try to encourage credit card usage. Credit card companies want you to use your card even if you pay off your balance in full every month. That is because in addition to earning interest/fees from cardholders who carry a balance, credit card companies also receive money from the merchants who sell cardholders products and services. This fee is called an interchange fee, and it is usually about 2% of the price of the product/service. This 2% is shared by the bank that issues the card (issuingbank), the bank that handles the merchant’s business (merchant bank), and the credit card brand (Master Card and VISA being the big two). SIX MONTHS LATER “Billy, today is a wonderful day for us. Six months ahead of schedule we have worked our credit card debt down to 0.” It is for this reason that some consumers (especially for big ticket items) will offer a merchant cash (instead of credit card) and expect a 2% discount off the price of the item. 228 BILLY AND BETH HAVE A GREAT TIME IN NIAGARA FALLS. 229 230 “And, you’ll be excited to hear that I have prepared a very detailed budget for us. I was reading Suze Orman’s 2009 ACTION PLAN, which I downloaded at oprah.com, and I got some great ideas for saving money.” Why doesn’t Oprah just send us a car? 231 GARAGE “Billy, this experience has helped me. I am a little less fearful about spending than I was. So I sold some of my books on eBay and bought you a present. It’s in the garage.” “It’s the best mountain bike they make, Billy.” 234 232 s m oo ch “Thank you, Beth!” 233 235 The 15 Most Important Points to Understand About Credit Cards Good for Billy and Beth! We here at The Skinny On™ are very happy for them. And, for you, we have prepared a summary of the 15 Most Important Points to understand about credit cards. 1. Credit cards are a loan. 2. Preapproved is not prequalified. 3. Credit cards are going to be harder to get, and to keep. 4. Low monthly payments are not your friend. 5. The Credit Card Act of 2009 levels the playing field between card companies and cardholders. 6. Make a budget! By the way, I’m the one who bought Billy’s motorcycle. He doesn’t know. I overpaid, but so what? I’ve always wanted a Harley. 7. Credit cards are deliberately designed to make borrowing very, very easy. 8. Watch for warning signs that you are incurring too much debt. 9. Protect yourself against credit card fraud. 10.Keep up your FICO score. 11. Be a comparative shopper. 12.Don’t be sucked in by rebate or reward programs. 13.Credit card issuers do not want to lose your business. 14.Learn the strategies for reducing debt. 15.Take personal responsibility. 236 237 1 2 Credit cards are a loan. Preapproved is not prequalified. Credit cards are simply a mechanism for borrowing money. If you pay your balance in full every month, the loan is the period of time between when you make a purchase and when the card company receives your payment. In this situation, you do not pay the card company any interest. The interest-free period between date of purchase and date of payment is sometimes called a “float.” Just because a card company is willing to give you a loan – a credit card – does not mean that person has reviewed and analyzed your ability to repay the loan. Most cardholders (2 out of 3) do carry a balance. For these people, the loan extends out past the due date (when is payment due). And the card companies earn interest on these accounts. Some people think that if they get a credit card offer, a banker must have concluded that they have the ability to repay whatever is borrowed. But that’s not how it works. In fact, oftentimes the issuance and approval of credit cards is far from scientific. The key to managing credit cards is understanding the terms of the credit card issuer loan. As with any loan, you need to know: 1) Your interest rate; 2) The amount of your monthly payment; 3) When it is due; 4) How you make payment; 5) What happens if your payment is late; 6) What happens if you request an amount beyond your approved loan (credit line); and 7) How long it will take you to pay off your loan. There is other information you should know, of course, but the above points are the most important. 238 Credit Card Executives 239 3 Credit cards are going to be harder to get, and more expensive. 4 Low monthly payments are not your friend. Until recently, it was said that anyone who could fog a mirror could get a credit card. For those with a poor credit rating (FICO score), the terms might have been expensive, but credit cards were still available. Credit card issuers make money by lending you money and charging you interest. As of this writing, credit card issuers are nervous about the magnitude of defaults – that is, the number of people who are walking away from their credit card debt. As a result, the credit card issuers are: 1) Making it harder to get a card; 2) Raising required minimum payments; 3) Raising interest rates and fees, what they call “risk profiling”; 4) Creating new fees a cardholder must pay; 5) Lowering credit limits; and 6) Canceling cards. It is therefore more important than ever for you to maintain a good credit score, and meet all the terms and conditions of your existing credit cards. They do not like people who pay off their monthly balance every month. They prefer people who make the minimum monthly payment and carry a balance. The higher your balance, the more they like you. That is why credit card issuers make the monthly minimum payment so low. The less you pay every month, the higher your balance. Those who pay only the required minimum are often digging themselves into a hole. Paying a monthly minimum of 2% is a prescription for many years of debt payments. Minimum Payments = Maximum Problems Like most things in life, credit cards have two sides to them. Whereas they can cause trouble when not used carefully, they are also an incredible convenience. In addition, most credit cards provide benefits such as protection against defective merchandise (cardholders can dispute payment) and travel insurance. 240 241 5 The Credit Card Act levels the playing field between card companies and cardholders. The Credit Card Act became effective February 22, 2010 and made several important changes in the law as it applies to the rights of cardholders: 1. Card companies cannot change interest rates during the first year after a card is issued unless: a) a special offer expired, b) the rate is variable and the index rate changed, or c) the cardholder was more than 60 days late with a payment. 2. Card companies cannot change any important term in the card agreement, including interest rates after the first year, until they give the cardholder not less than 45 days advance notice. A cardholder can elect to terminate a card if he/she does not like the new terms and can pay off his/her balance at the existing rate. (Note, however, this may affect your FICO score - see panel #247). 3. Card companies have to ask cardholders whether they want over-the-limit card protection. If the cardholder says “no,” then the card company can refuse to pay purchases in excess of the card’s limit (and there is no over-the-limit fee assessed). 6 Make a budget!! How can you control your life and use debt responsibly if you do not know exactly what you are spending? Making a budget means sitting down with a sheet of paper and identifying how much you have coming in every month, and how much you have going out. If you have more going out than coming in, you are operating “at a loss.” When people operate at loss, the spread between what comes in and what goes out is often bridged with debt – credit card borrowing. Credit card borrowing is not in and of itself a bad thing. It allows you to cover shortfalls and enjoy products/services in advance of your ability to pay for them. But credit cards get very dangerous when used indiscriminately. “A budget is just a method for worrying about your expenditures before you make them … rather than after.” 4. Card companies must mail invoices at least 21 days before they are due. 5. Card companies must give cardholders prominent notice in invoices as to how long it will take to pay off a balance making only the minimum monthly payments. 242 243 7 8 Credit cards are deliberately designed to make borrowing very, very easy. Watch for warning signs that you are incurring too much debt. It is not an accident that credit cards are so small and thin. I suspect that if the issuers could grease them up a bit so that they slipped out of a pocket that much easier, they would do that too. Many financial writers and commentators recommend watching out for warning signs that you are overusing your credit cards. Credit card issuers do not want you to think about the money you are borrowing when you use your card. Studies have shown that people spend considerably more money when they use a credit card than when they pay with cash. “(I)f people harbor a suspicion that they bought impulsively because their credit cards make such buying easy, they were right ... ‘Plastic cards have an anesthetizing effect,’ speculates Stephen M. Pollan, the writer and financial advisor. ‘They allow people to temporarily ignore the question of whether they can really afford something or not.’” A Piece of the Action: How the Middle Class Joined the Money Class, Joseph Nocera (Simon and Schuster, 1994) 244 Here are some of the common warning signs: 1. You delay opening your credit card bills. 2. You need more than 20% of your monthly takehome pay to make debt payments. 3. You don’t make more than the required monthly payment for months at a time. 4. You have more than five cards. 5. You use your credit card without thinking about the fact that you are borrowing money. If you want to survive and succeed in the 21st century, train yourself to borrow and use debt responsibly. 245 9 Protect yourself against credit card fraud. Credit card fraud occurs when someone illegally uses your credit card number. A related crime, identity theft, is when someone obtains personal information (e.g., your Social Security number) and uses that information to spend or borrow in your name, sometimes obtaining a credit card in your name. To protect yourself against these crimes: Do: Keep a record of your account numbers in a secure place, destroy carbons of credit card transactions, save receipts to compare against bills, notify card companies in advance of a change in your address. Don’t: Lend your card to anyone, give your credit card number over a cell phone, sign a receipt that has blank spaces, give your account number to a vendor you are unsure about. If you lose your card, call your credit card company immediately. Your maximum exposure for unlawful charges on your card is $50/card. An excellent resource on consumer fraud and identity theft is: www.ftc.gov/ “Who steals my purse steals trash: ‘Tis something, nothing; Twas mine ‘tis his and has been slave to thousands. But he that filches from me my good name … makes me poor indeed.” 246 Iago in Shakespeare’s Othello 10 Keep up your FICO score. There are many writers and online commentators offering advice on how to keep up your FICO score. The Fair Isaacs company itself tells you its most important criteria: (1) How you pay your existing debt, and (2) How much debt you have against your total borrowing power. Here are some of the advisors’ tips: 1. Make all your payments on time … DUH. 2. B e cautious about closing cards – you can choose not to use them, but by closing them, you reduce your total borrowing power, and thereby increase your debt-to-available-debt ratio. To prevent your card company from closing a card that you are not using, use it occasionally for small purchases. 3. If you feel you need to close cards (to stop yourself from using them), close those you obtained most recently. FICO likes to see longevity in borrowing relationships. 4. As a young adult, consider temporarily “piggybacking” on a parent’s card (as an authorized user). A new FICO formula that goes into effect in 2009 will take into account your parent’s credit history in calculating your score. (If your parent has a low FICO score, ignore this point!) 247 11 12 Be a comparative shopper. Don’t be sucked in by rebate or reward programs. Even in these difficult times, when credit card companies are pulling back on offerings, you will have cards to choose from, especially if you have decent credit. Go online and compare cards. Here are a couple of good sites for credit card shopping: www.bankrate.com www.creditcards.com www.cardratings.com Sign on to a couple of the online credit card forums where you can ask people about their experience with a particular card or card company. In selecting a card, consider how you are going to use it. For example, if you are going to pay off your balance every month, then focus less on the APR, and more on rebates and rewards offerings. On the other hand, if you know you will carry a balance (in other words finance certain purchases), seek out a card with a low APR. Finally, read all the snail mail and e-mail offers you receive. Card companies have different objectives at different times, and sometimes you can find a good deal in these offerings. 248 Curtis Arnold, founder of www.cardratings.com and author of How to Use Credit Cards to Your Advantage, advises people who are going to be carrying a balance not to select a card based on its rewards offerings. Credit card companies are not offering you rebates and rewards just because they like you. They are doing this to encourage you to use their card. They hope you will spend a lot and pay them lots of interest and fees (much more than the rewards are worth). But even if you pay your balance in full, they will earn money from the merchants selling you things (the interchange fee). In other words, the credit card companies make money “coming and going.” If you are a person who never carries a balance, you might want to read the chapter (“Show Me the Money”) in Curtis Arnold’s book where he outlines strategies for maximizing rewards and rebates. By the way, 85% of U.S. households with credit cards have at least one rewards card. 249 13 14 Credit card issuers do not want to lose your business. Learn the strategies for reducing debt. Credit card issuers want to make money, and that means they need to issue cards and maintain lending relationships. Although they may presently be cutting back on offerings and credit limits, and in some cases even canceling cards, they still need customers. So, if your credit card does something that you do not like, e.g., hits you with a late fee, don’t hesitate to pick up the phone and ask them to waive the fee. If you have been a decent customer, it will cost the credit card issuer more money to replace you with another decent customer than it will to eliminate the fee. I suggest being very polite but making the point that if the fee is not waived, you are prepared to close your card and transfer your balance to another card (bluffing is not illegal). “I would like to speak with a supervisor….” 250 If you do find yourself in a credit card hole (like Billy and Beth), do not lose hope. There are many approaches to reducing debt, short of bankruptcy or some other extreme measure. Here are some of them: 1. Call your credit card company. Explain your situation. Ask for a reduction of your interest rate, even if on a temporary basis. 2. Look for balance transfer opportunities at low rates. 3. If at all possible, pay more than your minimum payment. 4. Sell something and use it to pay down debt. 5. If you feel unable to handle your debts, consider going to an advisor to develop what is called a Debt Management Plan. This is a program where a third party negotiates with your credit card companies on your behalf. You make one payment every month (to the third party) who then pays your card companies. The card companies pay this third party some portion of your monthly payment. The key is to find a reputable advisor. We recommend starting at the National Foundation for Credit Counseling (www.nfcc.org/). 251 15 Take personal responsibility. Your credit card company wants to take money out of your pocket and put it into theirs. With minor exceptions (predatory lending), they are not doing so illegally. They may be giving you a shovel and tempting you to dig yourself into a hole, but they are not forcing you to dig. You have the power in the relationship. Ultimately, it’s your choice whether the winner of the credit card game is YOU or the credit card company. You can use your credit cards responsibly. You can take advantages of your cards’ conveniences, float, and rebate and rewards programs. Don’t look for excuses (yes, the credit card companies are tricky and their marketing is seductive). Learn to use credit cards to your advantage. By the way, there are even some credit card “success stories.” For example, it is rumored that Larry Brin and Sergei Paige started Google™ using credit cards to finance their young company’s computers. “We are going to call our company ‘Google.’” 252 “‘Google,’ are you nuts? You’ll never be successful with a name like that!” Venture capitalists who are now very upset with themselves. DEBIT CARD ADDENDUM May, 2010 A debit card has most of the benefits of a credit card except that its usage is backed by money you have in a bank account. Whereas the debit card can be used almost universally instead of cash and thereby has the benefits of a credit card, the debit cardholder is limited in purchases to the amount he/she has in the account backing the debit card. The credit card user is able to spend money he/she does not have and thereby goes into debt. The debit card user cannot spend money he/she doesn’t have (except for overdrafts). As credit cards have become harder to get and more restrictive to use, debit cards are increasingly popular. In fact, for the first time since credit and debit cards came into existence, debit card usage passed credit card usage as the most popular noncash alternative. Whereas only 1% of noncash purchases were by debit card in 1990, in August of 2009, 50.4% of all noncash purchases were with a debit card. By the way, there are now about 450 million debit cards in the United States, about 2/3 the number of credit cards. Debit cards do have dangers, however, and these relate primarily to overdraft charges. If you have $1,000 in your account and your charges exceed that amount, then your bank will either refuse to honor any additional charges or, will loan you the amount to cover the excess and charge you an “over-the-limit” fee – usually about $35. This fee can be especially painful when you have several charges over the limit – each time you make a charge that is honored, another $35 fee. To prevent over-the-limit fees you can “opt out” of overdraft protection. The negative of this election is, of course, that your bank will refuse to pay any charge which puts you over the amount you have in the bank. This can be very inconvenient and even embarrassing at times. Many of the principles we address as to credit cards apply to debit cards as well. If you have questions, please get in touch with us: [email protected]. CONCLUSION Sir Francis Bacon said that “knowledge is power.” Here is what I hope you have learned: 1. The credit card companies are not your friend. They are in business to make money. 2. With a credit card education (which you now have) and self-control, you can protect yourself against credit card pitfalls and take advantage of credit card conveniences. 3. Understanding how to deal with credit cards is not brain surgery. With time and effort anyone can master the credit card game. 4. Budgeting, restraint, and personal responsibility are key. You have the power in the credit card relationship. We at The Skinny On™ hope that you have enjoyed our book. As always, we would love to hear from you. With warm regards, Jim Randel [email protected] FURTHER READING 51 Ways to Save Hundreds on Loans and Credit Cards, S. Smith (FDIC 2007) 101 Tips for Legally Improving Your Credit Score, Manuel Braschi (e-book, 2008) A Piece of the Action: How the Middle Class Joined the Money Class, Joseph Nocera (Simon & Schuster, 1994) Credit Arbitrage, Joseph Morse (Code Publishing, 2007) Credit Card Nation: The Consequences of America’s Addiction to Debt, Robert Manning (Perseus, 2000) Personal Finance for Dummies, Eric Tyson (Wiley, 2006) Start Late, Finish Rich, David Bach (Broadway Books, 2006) Talk Your Way Out of Credit Card Debt, Scott Bilker (Press One Publishing, 2003) The Automatic Millionaire, David Bach (Broadway Books, 2004) The Credit Card Guidebook, Hardekopf and Oldshue (Hampton, 2008) Secrets of the Millionaire Mind, T. Harv Eker (Harper, 2005) Credit Scores & Credit Reports: How the System Really Works, What You Can Do, Evan Hendricks (Privacy Times, 2007) Suze Orman’s 2009 Action Plan, Suze Orman (Spiegel & Grau, 2009) Debt Cures “They” Don’t Want You to Know About, Kevin Trudeau (Equity Press, 2008) The Millionaire Zone, Jennifer Openshaw (Hyperion, 2007) Fighting Fire with Fire: Charging Your Way out of Credit Card Debt, Bob Donnelly (Author House, 2007 Forever in Your Debt: Escaping Credit Card Hell, Harvey Z. Warren (2007) How You Can Profit from Credit Cards, Curtis Arnold (FT Press, 2008) Maxed Out: Hard Times in the Age of Easy Credit, James Scurlock (Scriber, 2007) Paying with Plastic: The Digital Revolution in Buying and Borrowing, Evans and Schmalensee (MIT Press, 2005) The 9 Steps to Financial Freedom, Suze Orman (Three River Press, 2006) The Total Money Makeover, Dave Ramsey (Thomas Nelson, 2007) The Wall Street Journal Personal Finance Book, Jeff Opdyke (Three River Press, 2006) You’re Broke Because You Want to Be, Larry Winget (Gotham Books, 2008) Your Credit Score, Liz Pulliam Weston (Pearson, 2007) Zero Debt for College Grads, Lynnette Khalfani (Kaplan, 2007) Join The Skinny OnTM community today! • Get 20% off your first purchase • Receive exclusive offers, previews and discounts • See excerpts from all The Skinny On books TM • Suggest topics for new books • View and subscribe to The Skinny On weekly webcomic TM • Become a writer for The Skinny On TM www.TheSkinnyOn.com Connect with us on: After years of studying how people learn, Rand Media Co has created The Skinny On™ series of books to provide a plain-English explanation of today’s most important topics. Information is presented in an entertaining story format. “ Written in an easy style and with a good sense of humor, The Skinny on Credit Cards gives the reader everything he/she needs to know. A must read for teens and adults alike.” James Roberts / Professor of Marketing & Entrepreneurship, Baylor University “T he Skinny on Credit Cards discusses a complex financial matter in a way that is easy to understand…no small achievement! After reading it, you will have the knowledge to make credit cards an empowering financial tool. A must read! ” Curtis Arnold, National Credit Card Expert and Author learn how to: • escape from credit card debt • s elect the right credit card • improve your credit score • p rotect yourself against fraud • lower your interest rate (APR) • t each your kids about debt • identify credit company tricks • avoid paying fees about the author: Jim Randel is an attorney and entrepreneur who has studied topics of financial literacy and personal achievement for thirty years. learn more at: theskinnyon.com
© Copyright 2024