Counting My Pennies » credit cards

Stupid Mistakes

Megan — Mon, 21 Jun 2010 15:10:49 +0000

I made a really stupid mistake two months ago

I don’t automate my credit card payments, but I submit payments every month a few days after the statement closing date.

When my credit card bill was issued online in April, I went to pay it like normal. I selected the option to pay the whole thing, recorded the transfer, and it was done.

Then, when my May statement came, I noticed something weird. An interest charge. Now that was unexpected since I paid off the whole card (and have always done so). It was only a few dollars, so I called the company to find out what was up.

Turns out that I wasn’t paying attention when I submitted the online payment. Yes, I selected the option to pay the whole card, but I had logged onto the system too soon after the statement was generated, and it was showing the total amount that I owed on my March statement, not my April statement. So while I paid more than enough to meet the minimum payment, I hadn’t actually paid off the card as I thought. Which meant that I had interest due in May. And in June, in fact, as that interest just keeps accumulating, and had accumulated for the few days between the statement closing date in May and my subsequent payment.

This was my own fault for not paying close enough attention to the numbers. The payment didn’t zero out my credit card when I paid it because I already had additional charges on the card (I use rewards card for EVERYTHING). So I just didn’t notice.

Lesson learned. Thankfully, it was a relatively inexpensive lesson. Less than $20 all told. But frustrating. I will be sure to always make sure that I’m paying the proper balance from now on.

When getting your first credit card is tough

Megan — Mon, 21 Sep 2009 10:00:01 +0000

Over the weekend, I read this article on Slate about the author’s struggles with getting his first credit card. He had a job, no mortgage, and no debt. But he also had no credit history, which meant that no credit card was willing to take a risk on him.

Ultimately, he had to get a secured credit card, which will help him build credit.

My brother went through the same thing after he graduated from college. Why? He never had a credit card in college. He had a debit card, but that was it. Conversely, I always had a credit card in college. I didn’t have a debit card (I still rarely use one – only when I need to get cash), which meant that most of my purchases went onto my credit card. I was one of those smart college kids who always paid off my credit card and didn’t use my new found credit limit to go out and buy a fancy new tv or go on a crazy spring break trip. That meant that when I graduated from college, I had good credit and was able to get a reasonable credit limit.

So what’s the best thing to do here? Should we encourage college kids to get credit cards? After all, wisely using a credit card and building up credit is a great thing. But then there are the stories of the students who run up huge bills and can barely pay the minimum balances. I have plenty of friends, smart, intelligent friends, who ended up in that boat.

My first credit card had an extremely low limit. Somewhere around $250. That would keep a student out of too much trouble, but there are plenty of worthwhile purchases that cost more than $250. What about plane tickets, for example? And of course, credit cards are happy to increase those limits (though maybe not as much as they used to be).

Plus, is there a lesson to be learned about responsible credit card use? Who’s to say that making a college student wait til he’s out of school and has a real job is going to mean he will spend more wisely? He has an income now, after all. A way to pay those bills, or at least the minimum balances.

I don’t know what the best method is. Thoughts?

History of Credit Card Incentives — Cash Back and 0% APR’s

Megan — Fri, 13 Mar 2009 11:00:47 +0000

This is a special guest contribution from Steve Sildon, Senior Managing Editor for CreditCardAssist.com. Steve writes about a variety of personal finance topics, providing financial tips and guidance on a variety of subjects including credit cards and an assortment of other credit-related topics.

Most people are familiar with the concept of reward credit cards – simply using your card earns you something back in return, like a cash rebate or maybe even store discounts. Rewards programs offer ‘points’ that can be redeemed for discounts on merchandise, travel rewards discounts and even cash rebates. In fact, of all the various rewards programs in the market, the cash back rebate is by far the most favored rewards program of any. The concept of getting a cash rebate on purchases is beloved by American consumers who adore the idea of getting “up to 5% cash back” on their purchases just for using their cards. For whatever reason, Americans just love the cash back concept. There’s a problem with this scenario, however. The credit card companies are actually the ones making out like bandits with these rebate programs, not consumers. In fact, credit card incentive programs such as cash back rewards drive far more merchant sales volume and profit for credit card issuers than most people realize.

Andrew Kahr, the CEO and founder of First Deposit Corp., later known as Providian, and a financial services consultant for the credit card industry is widely recognized as the innovator who single handedly reshaped the industry with credit card incentives. In an interview for the PBS Frontline documentary The Secret History of the Credit Card in 2004, Kahr talked about the history of credit card incentives and the innovative concepts that he pioneered, including among others, two percent minimum monthly payments (instead of 5%), universal default, 0% APR teaser rates, as well as cash rebates on purchases.

In fact, Kahr was the first to propose the concept of the 1% cash back rebate program to credit card companies, a concept that was extremely controversial at the time. According to Kahr, banks and card issuers were very concerned about “revolvers”, those who paid their card balances in full every month. Kahr’s cash rebate program shocked the banks, who were having a tough time figuring out how their revolving card balance customers could ever be profitable. The prospect of giving those customers an additional 1% cash rebate seemed ludicrous. Kahr contended that there were plenty of “downstream” revenue opportunities, including the likelihood of eventual interest charges and fees (on those same customers) that would more than make up for the 1% cash rebate. Persisting, Kahr convinced card issuers to test out the program. Cash rebate programs eventually became a huge success and have been enormously profitable for credit card issuers. According to TNS Global’s Financial Services, 57.4% of all rewards cards in the marketplace today are cash back credit cards.

Another incentive program that Kahr came up with was the concept of the 0% APR teaser rate. It’s no mystery to anyone that charging people zero percent interest seemed like a difficult way to profit from lending money. Incentivizing customers to transfer their high interest credit card balance to a card that was charging 0% for even a short period of time sounded easy enough, but how could the card issuer possibly make money doing that? Kahr contended that even after the balance had been transferred that the cardholder would continue to use the card to make purchases and get cash advances, earning the card issuers interest and making the account more profitable in a shorter amount of time. The balance transfer effectively served as a “loss leader” for the card issuer to win the account, eventually profiting from it “downstream”.

Kahr encouraged this practice even though luring these customers over with 0% APR offers would require as long as 2 or 3 years to pass before the bank would earn back what they had invested with the offer. Kahr theorized that growing the customer base more aggressively and competing in the cut-throat credit card world would require these highly incentivized offers. After one of Kahr’s clients tried out the zero percent offer, the rest of the industry followed suit and the zero percent teaser rate has now become a staple of credit card marketing lexicon.

Some would argue that Kahr’s innovations have led to some of the credit market difficulties that American consumers are suddenly struggling with so mightily. The concept of universal default, which Kahr also spearheaded, has been so vilified that card issuers have started to pull back from it entirely. Universal default allows card issuers to charge higher APR’s on an account resulting from any “material” change in a cardholder’s credit profile. In fact, the practice has been derided so heavily by consumer groups that Congress recently enacted legislation to prohibit universal default entirely.

The concepts that Kahr was responsible for have been criticized heavily, but no doubt will spur more innovation in the future. The recent melt down in the credit markets will only spur the development of even more financial innovation, requiring the innovators to get very creative in order to appease consumer groups and lawmakers while also providing consumers’ with better, more effective products and services.

Direct Debiting Your Bills

Megan — Thu, 12 Mar 2009 11:00:44 +0000

Over on The Consumerist, they recently posted an article about a restaurant owner who had $1.28 million debited from her bank account by the utility company. This was, of course, a mistake, and the utility company is fixing the bill and paying the overdraft charges on her bank account. The restaurant owner had received the bill, but hadn’t looked at it too closely, as her utility bill was always around $1200, and she somehow didn’t notice all of the extra zeros. Besides, since she paid with direct debit, she didn’t have to sit down and figure out exactly what she had to pay – that part was taken care of.

In the comments, a number of people said “This is why you shouldn’t use direct debit.” I disagree. I think that perhaps this is why you shouldn’t use direct debit on your debit card or bank account, but I think it’s more a lesson of looking at your bills. She received a bill from this company. She should have looked at it more closely.

I don’t use direct debit, as I never use a debit card, but I do have a few bills that I auto-pay on my credit card. Some, like my gym membership, are a fixed monthly fee. I have budgeted for them and know when they are charged to my account, so a few days after that date, I check my credit card statement online to be sure that everything is as it should be. Also, I didn’t have a choice in this matter. To get the “deal” on the membership, I have to use auto-pay. I’m okay with that.

Other bills, like my cable bill, fluctuate a bit. The cable bill only typically fluctuates a few cents, so it’s not a big deal. I do get a hard copy of this bill, however, and I look at it every month to see if the bill has gone up or down and why. I don’t want to find out that somehow, my neighbor’s been stealing my cable and buying all sorts of pay per view movies, after all!

A lot of personal finance bloggers advocate automating your finances as much as possible, and I agree – I automate my savings. But I physically pay my credit card bills and am sure to closely track everything that is related to auto-pay. And I never have anything linked directly to my bank account. It’s not too difficult to dispute a huge charge on my credit card, but even if I can challenge a huge debit to my bank account, I still have to have other funds in that account to cover what I need to buy until the dispute is resolved.

Lesson learned

Megan — Wed, 17 Dec 2008 10:00:50 +0000

I learned a lesson this week. I hate learning by experience.

I got a letter in the mail that a credit card I’ve had open for five years, with a substantial limit on it, got closed for inactivity. Now, I know that I should use my cards at least once a year, but this one totally slipped my mind.

I’m not looking forward to seeing what this does to my credit score. I don’t carry a balance on any of my cards, so my debt at any reported time is low, but my credit limit on all my cards was high. This cancellation has very much decreased my debt to credit ratio.

I’ve been considering opening a new card, finding one with some great benefits I would like to use. I guess now is the time to start my research.

I will probably also call Discover and see if they will increase my credit limit. Not that I will ever spend near it, but it would be good to have an increased amount of credit.

So everyone, if you have cards you don’t use and don’t want to see them closed, go buy some gum with them!

Credit Crunch?

Megan — Tue, 21 Oct 2008 10:00:04 +0000

My main credit card is a Chase Amazon.com Visa card. I pay it off every month and I like it because I do a lot of shopping at Amazon.com, so the rewards are worthwhile for me. My credit limit on that card is absolutely ridiculous. As in something like 20% of my salary. Clearly, I’ve never gotten anywhere near that limit.

My credit card statement arrived a few days ago, and in glancing over it, I noticed the following message:

“Congratulations! Your credit line has been increased. Take advantage of your enhanced spending power to make purchases and transfer balances today.”

I admit, I had to go back and check my old statements to figure out just how much my credit line had been increased by. They gave me an additional $2000.

I am trying to figure out why this happened, given that the news seems to be saying that credit is going to be harder to get. I do have an amazing credit score, and my credit history with this card is perfect. Perhaps they think I’m a good bet. Convince me to transfer all my balances (I don’t have any, of course) to this card and then continue to be a good customer.

Either way, it seems to me things like this are the reason that people get into credit card trouble. It seems ridiculous to me that my credit limit is currently more than 4 months of my take home pay. I suppose in an emergency, that might be nice. I do have an emergency fund to cover, of course, but it’s not tied to a debit card. Being able to put a large expense on the credit card and then pay it off would make things a lot easier.

Either way, this new limit isn’t going to make me spend any more than I have been. But not everyone makes that decision, and that’s what the credit card companies want.

Lack of Credit

Megan — Tue, 30 Sep 2008 10:00:58 +0000

I’ve been reading a lot about our current financial situation and what Congress is trying to do to fix things, and something in a recent article caught my eye. This article discussed what we should know about the current financial crisis. There was a lot about WaMu and FDIC and SIPC insurance, but the point that caught my eye was about credit.

According to economists, consumers trying to borrow money for a loan or a home or trying to get a credit card might find it much more difficult. One key point here was that credit card companies are less likely to take on “riskier clients,” and are “getting tougher on who they lend money to.”

This… doesn’t seem like the world’s worst idea. Of course, I realize that there are some people who are using their credit cards just to get by – they use them to buy food and pay bills. But there are many more people who are spending on their credit cards because they can. Maybe it’s spending on big ticket items, like a new television or video game system, or maybe it’s a lot of smaller expenses, like frequent dinners out. Either way, taking a second look at people in this situation who are looking at getting new credit cards might not be a bad idea. Maybe this is what we need to teach us how to spend properly.

It may also be harder for people to get mortgages due to stricter lending requirements. I was listening to a co-worker talking the other day and he was saying that when he bought his home 25 years ago, he couldn’t imagine not having a 20% down payment. According to what he knew, that was just what people did. I’ve heard similar from my parents. Of course, even if you factor in inflation, a 20% down payment now is more than a 20% down payment in the early 1980′s.

This also doesn’t seem like a bad idea to me. Sure, it means that people will have to save that much more before buying a home. Or they will have to buy a smaller home. But I would think that stricter lending requirements make it that much more likely that a person will be able to continue to make their mortgage payments and not risk foreclosure.

I do realize that this will hurt people, and I don’t want to sound callous. But maybe if the bank or the credit card company isn’t willing to take a risk on you, you should take a second look at your spending and see what you can do to change.

Content with Credit Card Debt?

Megan — Mon, 14 Jul 2008 10:00:28 +0000

The more I learn about personal finance and the more people that I talk to about money, the more I realize that I have grown up with a very atypical view of credit cards. I think that has helped me more than I ever knew.

I have always been aware that people regularly carry balances on their credit cards and use cards to spend beyond their means. But I was unaware how many people are completely comfortable with this situation, and not only do they not have a plan to pay off the cards, they don’t care that they don’t have a plan to pay off the cards.

Maybe this is not news to anyone but me. Obviously, the way people get into major credit card debt in the first place is by spending in this manner and just paying minimum balances every month and not paying attention to the total balance of the bill. But at some point, I thought it set in that “Hey, I should pay this off.” Maybe not for everyone, but I am surprised at the number of people who claim to be smart about their money and who read personal finance books and blogs but who absolutely don’t care about their credit card debt.

How can you not care about paying a crazy amount of interest every month??

Now, I’m not trying to say that people who choose to carry a balance on credit cards are making a bad decision. But I think it truly needs to be an informed decision. I understand the use of 0% interest cards, and I understand the use of cards with very low rates. I’m aware that a lot of people will put large purchases on a card with a plan of how to pay it off. These are all perfectly understandable decisions. And I understand that sometimes emergency situations mean that you spend more money than you can afford to spend and end up with a high balance on your credit card. While that may not be an informed decision, it might not be one you can avoid.

But shouldn’t there be plans to pay it off? Even if those plans cover five years, there still should be plans. I really struggle to wrap my mind around this concept.

I wonder if it all relates to the level of consumerism in the world today. We are constantly barraged with advertising telling us that we should have this or we need that. And the credit card companies tell us “Sure! Go ahead and buy it. We’ll cover you. Yes, over the long run, you will be paying significantly more than the purchase price for that item, but you shouldn’t care about that because you will have the item in your hands right away.”

I can’t say that I have a solution to this. I would have said that educating people about credit card debt was the solution, but people who do supposedly know about credit card debt still find themselves in these situations and remain quite content with their current level of debt and make no plan to rid themselves of it anytime soon.

Other thoughts?

Maximizing rewards

Megan — Thu, 01 May 2008 18:08:00 +0000

Over on The Simple Dollar, there is a post about using a portfolio of credit cards for specific purchases, a way to try to maximize rewards and benefits on cards.

The “ideal” portfolio described seems like a lot of work to me – not in remembering to pay the bills, but simply in remembering which card to use when.

I currently use two main cards – an Amazon Visa from Chase and a Discover card. I use the Amazon Visa for most of my purchases – I get 3% back on Amazon.com purchases and 1% on other purchases. Everytime my rewards hit $25, I get an Amazon.com gift certificate in the mail. Given the myriad of things you can buy on Amazon.com, this has been a great rewards program for me.

I only use the Discover card for their 5% cash back bonus offers – every quarter, Discover sets up a few categories where all your purchases in that category gets you 5% cash back. Last quarter, it included things like travel and hotels. This quarter includes clothing and department stores. Take note people – next quarter includes gas purchases. To keep track of which things I should buy with the Discover card, I put a Post-It note on the card with the categories very clearly listed. Discover allows you to take your rewards as cash back or in the form of gift cards, and you often get a little bonus if you take the gift card – $20 will get you a $25 gift card from certain stores, for example.

I also have a few store credit cards, mainly because of the coupons provided. These are stores I shop at regularly, so the rewards and coupons are worth it. They don’t get much use though.
Again, I never carry a balance on any of my cards, which makes the rewards worth it. And also makes me a drain on the credit card companies, if you think about it! I’m happy with my current use of credit cards. I’m careful to keep track of what I’ve charged on each of them, and I can’t say that I’ve spent more just because I’m using multiple cards. Over all, it’s a good system that works for me. Of course, as with everything, your mileage may vary.

Cash or Credit?

Megan — Thu, 06 Mar 2008 17:20:00 +0000

I have discovered that I’m one of those people for whom cash just burns a hole in my pocket. I limit myself to taking a specific amount of cash out of the ATM each month. I can spend it on whatever I want, but when it’s gone, it’s gone. For the most part, it tends to go to the occasional caffeine fix during the afternoon, splitting dinner and drinks with friends, things like that. (Of course, during farmer’s market season, I take out more cash, deduct that amount from the grocery budget, and buy all sorts of fresh, delicious food.)

I am one of those people who does much better with budgeting if I use a credit card. Number one, I use only one credit card, even though I have multiple. It is an Amazon.com Visa by Chase. I love the rewards, and since I pay it off every month, the higher interest rate does not bother me. (I am working to better utilize my Discover Card though, and take advantage of their 5% cash back opportunities.) I am much less likely to pull out my credit card for a quick $2.00 purchase, where as plunking down that amount of cash is a quick process.

I’ve also found there’s something to having to transfer that big chunk of money to the credit card company every month – yes, I could automate it, but having to type it in and watch it transfer makes it sink in a bit more.

Part of the problem might be that I don’t track my cash expenditures. Maybe if I tracked it, I would be less likely to spend at random, but each time I tried that, I ended up without receipts, and forgot what I had purchased. It was a failed experiment. The new experiment is to always budget the same amount of cash every month. So if next month, I start the month with $20 in my wallet, well, I can take out $20 less from the ATM, and rebudget that saved $20 into another budget category, like an additional $20 to my clothing or book fund. For the most part, looking at it that way has helped.

It seems that among personal finance bloggers, there is a debate over whether it is better to go to an all cash system or to completely avoid cash and use credit or debit cards. After reading all the opinions, I don’t think there is a right answer. I think it depends on a number of factors, and everyone should do what works best for them. Which is why I’m sticking to mainly credit card transactions.