Guiding Financial Principal: Don’t Spend What You Don’t Have
In “Some Chuck Credit Cards to Avoid Late Fees, Debt“, good arguments are made for avoiding the use of credit cards - entirely. Of course, the article also contains all the usual pro-credit card positions related to building a credit history, maintaining a high FICO score, and convenience.
And the article offers a few significant facts: 58% of people with credit cards don’t pay their balance in full each month and for those who don’t pay their balance in full each month, their average balance is $17,103.
The guiding financial principal of not spending what you don’t have is the philosphy of a 25 year old, New Yorker interviewed for the story. She sounds like a wise young lady.
The Plastic School of Hard Knocks
A new school year is about to begin in the school of hard knocks. College students will face a wall of credit card offers.
It doesn’t seem logical. Why would credit card companies want to account unemployed holders who are usually low on funds, and will have difficulty making their monthly payments?
Credit card companies do not make billions off people who pay their balance in full. Credit card companies make their billions from high interest rates and late payment fees. Most financially illiterate college students are perfect customers for credit card companies.
And credit card companies have help from an unlikely source. Colleges and universities are in cahoots with the credit card companies! Many alumni associations and schools make money by referring students to apply for credit cards and, now, even debit/student ID cards! The primary education many of these students who fall for these offers being pushed by schools will receive may come from the school of hard knocks.
Read about this in “Parents face a perfect storm: college kids and plastic” .
The Schumer Box
Many credit card customers tend to dislike credit card companies. By raising interest rates and increasing fees at will, credit card companies have all the power in the relationship they have with credit card customers who use credit cards. Much of the news about credit card company behavior shows them as excessively one-sided and selfish. However, credit card companies are required to declare the rates, fees, billing practices and triggers for increases in rates or fees on every credit card application.
This information is provided in the “Schumer Box”, named for Sen. Charles Schumer (NY) who sponsored the law in 1988 which requires credit card companies to declare certain information in a simple format in every credit card application in the “Schumer Box”.
CNN and Money.com offer a great article explaining how to use the information in an application’s Schumer Box to determine if the credit card offer is a rip-off. The article is easy to read and guides the reader through each of the Schumer Box features. For more information, read “How to spot a credit-card rip-off“.
Credit Card Interest Rates on the Rise
USA TODAY reports, “Credit card rates hustle higher“, in an article that describes what banks are doing to make up for losses on consumer lending and home loans. Some credit card customers’ interest rates are being increased by 100%. And good credit scores don’t seem to matter according to the article. It’s not looking pretty.
Schedule Automatic Credit Card Payments
How do you avoid making late fees on your credit card accounts? Make credit card payments on time.
How do you make sure you’re never late? Schedule automatic credit card payments.
Most credit card companies allow card holders to schedule automatic payments that are deducted from a checking account. While you might be concerned about giving your credit card issuer access to your checking account, if your credit card issuer allows scheduling automatic payments with a preset amount, this limits the monthly payment to the amount you authorize.
Scheduling automatic payments prevents you from paying late and incurring a late payment fee. If your credit card issuer allows it, automatic payments can make your financial life a little bit easier.
Credit Card Convenience Checks
You have probably received credit card “convenience” checks without requesting them. They may have arrived with your monthly statement. Or maybe they arrived all by themselves before school starts, before Christmas or anytime your credit card issuer wants to generate additional revenue.
And they probably came with an enticing, inviting letter containing a compliment similar to, “Because of your good credit, you deserve these convenience checks.”
Credit card convenience checks are mostly convenient for your credit card company. For card holders, the checks hold more risk than reward. Here are some tips about protecting yourself from the potential negative outcomes of credit card convenience checks:
- Ask your credit card issuer to quit sending them.
- Do not throw them in your trash for someone to find. Shred them.
- Before you use them, say to yourself, “This is debt.”
Credit Cards Are Safer
If you ever have money taken from you, you should hope it’s taken from your credit card account and not from your checking account. While credit card companies may charge exorbitant interest rates and have outrageous penalties for late payments, credit card companies are usually much quicker than banks when it comes to taking care of you in cases of fraud or theft.
In fact, if you’ve ever used your credit card in an unusual manner (perhaps you use a card you haven’t used in a few months), you may have received a call from the credit card company seeking to verify that you indeed made the odd purchase. If you do the same with a debit card, you will probably not get a call to check on the charge. And if someone else is using your debit card, you probably won’t know it until you get your bank statement or review your account online between statements.
Debit card fraud is real. One of my favorite consumer blogs is written by Bob Sullivan, MSNBC’s Red Tape Chronicles. In ‘Money disappears from checking accounts, again’, Sullivan writes of how thieves have been able to use debit and ATM card numbers to take money out of checking accounts.
When a bad guy uses a debit card or debit card PIN to steal from your checking account, your money actually disappears from the checking account. You have 60 days to report the theft to your bank. If you wait more than 60 days you lose your right to expect the bank to make it right. And while you and the bank spend weeks or months working out the details of what happened, you’ve lost access to your money. It was effectively stolen.
A credit card company, however, will remove charges from your card that are fraudulent. While you may be required to fill out a police report and fax it to your credit card company to document the theft, your bank may not be so willing or quick to help you without hassle.
Debit cards are good for over-spenders because you’re not borrowing money or paying interest when you debit your checking account. Read the ‘Money disappears …‘ article and decide whether debit or credit cards are better for your ability to tolerate financial risk.
Paying Your Credit Card Bill Online
Paying your credit card bill online is actually a good thing for most credit card users.
First, remember a late payment dings your credit score. Mail travels at varying speeds and even gets lost. (Though I don’t believe this happens as often as credit card companies hear this as an excuse.)
Online credit card payments generate a verification code. Once your payment is made or scheduled, you will receive this code. Keep it. It’s proof your payment was made and verifies the time. As one credit card company advertises, “Paid online is paid on time.”
Second, while most credit card company’s offer to suspend your paper statements once you begin paying online, I recommend you continue to receive paper statements. Believe me, you’re paying for them, and if you ever need paper, electrons may not be a good substitute.
Third, take care of computer security. Be certain the computer you use is secure and without viruses or malware. Don’t use the same user name or password for different accounts. Avoid using a publicly-accessed computer. Take all the precautions necessary to ensure your electronic transaction is protected from hackers.
Fourth, verify you have enough funds available in your checking account to cover your payment when you click, “Pay Now”.
Other benefits of paying your credit card online are that you can do it without going to the post office or mail box, you can usually schedule payments in advance, you have access to a lot of information about your account when you log in and in most cases can easily review a history of your payments and transactions. You can even schedule email reminders about upcoming payments or cautions about credit amounts, ala “your balance is now over $800.00″.
It’s Really a Debt Card
The term “Credit Card” begs a question: why is it not called a “Debt Card”. It was a brilliant marketing move to avoid calling them what they really are: Debt Cards.
Here’s an idea that you might find helpful. The next time you take out a credit card, look at it and think to yourself (or say it aloud if you think it will help), “This card in my hand is a Debt Card.”
Sure the bank offers you credit, but once used, it is absolutely debt. Teach your children to call them debt cards, too. They may thank you for it in the future. Think, “This card in my hand is a Debt Card.“
Consumer Debt, the BIG Picture from the Fed
The Federal Reserve publishes current data on the status of what they call “Consumer Credit”. The BIG picture is not improving. This month’s report states, “Consumer credit increased at an annual rate of 3-1/4 percent in January”. It continues, “revolving credit increased at an annual rate of 7 percent.” The full release is here: Federal Reserve Consumer Credit Report