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To Charge or Not To Charge?

The Stock market is down, the stock market is up; Congress is about to approve the bailout bill, Congress did not approve the bailout bill, Congress is in recess for two days; the Credit market only has one day of float, three days, a week . . . the bailout is good, the bailout is bad.
Confused by conflicting reports? You should be. Like they say, if you are not confused you are not paying attention.

In the meanwhile people on Main Street and on Wall Street realize that the balances on their credit cards are getting unmanageable, and some are wondering if they should even use credit cards at all.
As usual each individual situation is different, but if you have decided to do something to cut down on the amount of personal debt, step # 1 is to stop adding new debt. And while it’s easy to say that you’ll pay off the new charges at the end of the month, some people don’t have the discipline to curtail their spending in order to be able to pay off their monthly charges.

We have some suggestions for tactics that you can use to manage your spending:

Use a credit card the same way you use a checkbook: put as a starting balance the amount of money that you can afford to spend, and each time you charge something you write it on as if you’ve written a check and deduct the amount from the total.
If math is not your forte, round up the numbers of what you’ve charged to the whole dollar amount, so if you charged something for $26.06 write in $27.
If you need to, you can write in as starting balance a (lower) weekly balance, and deduct (spend) from there, adding a new amount (deposit) every week. Make sure to NEVER go into negative balance, you are trying to bring discipline into your spending.
On a weekly basis you can send a payment to your credit card company, either via mail, pay by phone, or internet banking. Credit card companies don’t mind if they receive 4 or 5 payments in a month. And if you are carrying a balance on your credit card, this method not only will decrease the amount of interest that you’ll be charged, but it will practically eliminate the risk of you being late in your credit card payment.

It might seem like a lot of work, but it’s not. It’s an investment of time to learn money management skills, well worth the time, it will pay dividends for a lifetime.

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Photo Credits: neurmadic aesthetic (cc)

September 30, 2008 | Filed Under Articles about Credit Cards, Credit Cards, Debt Management, News | Leave a Comment

Credit Card rewards and the turmoil on Wall Street and the Banking System

Maria M., a reader of CreditCardsMojo.com asked us: “Are my credit card rewards with [redacted] safe?”
Great question Maria! We have done some research, and called and emailed some very smart people in the industry, and the answer is: “Probably, but it depends”.

Let me explain: there are three major categories of rewards

Airline Miles
Cash Back/Rebate
Points and similar rewards

In case of Airline Miles, the issue might arise with the fate of the Airline for existing miles, and not with the credit card issuer, unless you are concerned with your ability to continue earning miles.

In the case of Cash Back/Rebate, and Point rewards, when a credit card issuer that is a bank is taken over by another bank, without filing for bankruptcy, operations continue and slowly are integrated into the acquirer’s operations, so the credit card holder should have a long notice of things coming down the pipeline. When a credit card issuer files for bankruptcy, the issue gets a bit more complex, since depending on which state you live, which state the issuer has the charter, and the terms and conditions, you might risk losing something there.

While Cash Back / Rebate rewards are probably safe, the general consensus here at CreditCardsMojo.com is that you should keep an eye on your balance, and have the credit card company send you a check as soon as you hit that threshold, so that you can save it, use it to pay some bills, or spend it and reward yourself!
For the points, why not enjoy them now? Week-end away, hotel stays, restaurant meals, magazine subscriptions are all welcome now that most people are on a budget. Enjoy them, you’ve earned them!

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Photo Credits: Wm Jas (cc)

September 29, 2008 | Filed Under Articles about Credit Cards, Credit Card Articles, News | Leave a Comment

Urban Myth: Debt is bad

Debt per se is not bad, and it’s not evil either. Debt, any kind of debt, including credit card debt, is a tool; and just like any tool must be used according to its purpose.
When it comes to personal finances, you must run your household like a company, with the same principles and strategies of corporate finances.

Those of you who went to business school and didn’t fall asleep during Corporate Finance 101, might remember the principle which states that assets should be financed for the same length of time as the duration of the asset itself.
In plain English, there are two components to effective debt strategy:

Only finance assets, actual tangible things that last longer than one year, and that are productive,
The length of the loan should match the life of the asset.

Therefore monthly expenses like rent, mortgage, grocery don’t qualify because they fail the test of duration. And things like jewelry, vacations and large screen TV don’t qualify either.

What does qualify are: a house as a mean to secure a place where to live, not as a mean of investment or speculation; a car as a mean of transportation, tools that you need for your job or business, and few other major expenses.

For everything else, there’s a long forgotten principle: it’s called saving for rainy days.

So if you are buying a house, unless you have special circumstances where you are sure to have your income and cash flow increase in the future, the safe principle is: 20% down payment, and a 30 year fixed rate mortgage, with a payment that you can afford. Should the interest rate decline by 1% or more, refinance with a new mortgage that has the same duration as the remaining time left on your mortgage, and it’s also a good idea to continue paying the same (higher) payment that you are used to in order to eventually pay off your mortgage. Having a house fully paid is the #1 step in retirement planning (that’s another topic).

If you are buying a car, a 5 year loan is usually a safe bet for a brand-new car. If you are buying a good used car, a 3 year loan is usually appropriate.

Student loans are a separate case, educations is the greatest asset that anyone could have, so student loans to finance one’s education is indeed one of the best investment anyone could make. Of course while in college, it’s a good idea to stay away from credit, and – if your courseload and time allows you – to pick up a part time job to take care of everyday expenses.

Debt is not bad, bad use of debt is bad. Debt is a tool, that when used correctly can make a difference in overall quality of lifestyle.

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September 26, 2008 | Filed Under Articles about Credit Cards, Credit Cards, Debt Management | Leave a Comment

FICO score and Credit Cards

FICO score: art, science or alchemy? Most people believe it’s more alchemy than anything else, but in reality the algorithm used to calculate individual’s FICO score is secret and proprietary and it is often adjusted and refined, therefore the mystique surrounding it.

However the overall principle is still the same, maintain a good rating, or improve a bad one, and the rules of engagement in this game are:

Always pay your bills on time, and since it is such an important factor, don’t wait until the very last moment to send the payment, and account for eventual mail or other delays. Unlike your taxes, the payment date is not the day by when you have to put the payment in the mail. A good idea is to set up an automatic payment with your credit card company, so that you are not responsible for any eventual delays, since they are the ones managing the entire process. And if you set up to have the minimum payment withdrawn from your bank account automatically, you can make additional payments by sending a check in the mail, online banking, or pay by phone.
How much credit you are tapping. This is a ratio of the total amount of the balance outstanding and the total amount of available credit, the lower this ratio, the better. Try not to tap more than 50% of your available balance, better if you can stay in the 25% range, or less. If you are trying to improve your FICO asking your existing credit card company to increase your credit limit it’s a good idea, and better than opening a new account since the length of time that you have had the account matters as well.
Length of credit history: as we were saying before, the older a credit relationship with an institution, the better. So if you are carrying a balance on one card and you are trying to play the game of moving the balance from one card to another, it pays not to close the old accounts, moreover when the introductory rate on the new card is about to expire, chances are your old card will gladly take you back and offer you a promotional rate to transfer the balance back to them.
New accounts. This is actually an extension of #3 above, since once you acquire new additional credit, other institutions will be wary about extending additional credit to you.
Quality of credit: depending on what types of credit accounts you have, lenders will be more or less willing to extend you additional credit. A classic example is that when people buy their first house and become homeowners and have their first mortgage, they are inundated with both credit cards offers and store cards offers, since traditionally homeowners are considered to have lower credit risk.

This are general guidelines, at the end of the day patience and diligence always prevails in maintaining good credit and improving not so good credit.

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September 24, 2008 | Filed Under Articles about Credit Cards, Credit Cards, Credit Report, Credit Score, Debt Management | Leave a Comment

Will the Federal Government Bail People Out From Their Credit Card Debt?

Probably no. Last month we would have said “NO”, but after the latest event, the rule of “Never Say Never” must be applied, hence the “Probably” clause.
However all the indicators point to the Federal Government wanting to acquire most of the bad debt on the books of the Financial Institutions including Credit Cards, Student Loans, and Auto Loans.
Which will mean that – if the plan goes through – you will owe money to the Federal Government.

In the meanwhile, between now and the time when the bailout will be approved, executed and implemented, there will be some turmoil in all the markets: stock market, credit market, banking, international markets etc. . .

We have always advocated that ideally you should carry two credit cards, one for every day purchases, paying off its balance in full each and every month, and another one for emergencies.
If you carry a balance on your credit card, then you should not use this card at all, make regular monthly payments as high as you can so that you can eventually pay it off; hence – in this case – you’ll carry three cards.

During the times of turmoil, that “emergency” credit card, the one that has an untapped credit line might come handy. If you have a business, you might want to get additional credit in the form of a business credit card, not to use foolishly, but to have the credit “just in case”. Like Donald Trump says: credit is something you get when you don’t need it.

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September 23, 2008 | Filed Under Advanta, Credit Cards, Debt Management, News | Leave a Comment

Is this the best time to pay off your credit card balance?

There’s a financial mayhem going on in Wall Street, Main Street, and in most streets of the entire world. And chances are that nobody fully understands the ramifications of the actions of the Federal Reserve and the Treasury, but everyone is wondering: “what does this mean for me and what’s the advantage to me?”.
Every situation has some opportunity for those people in the right situation. One thing that’s clear right now is that credit card companies are trying to “limit their exposure”, which means they are trying to cut the amount of balances on everyone’s credit cards.
If you are on a plan of paying down / repaying your credit card debt as we have advocated many times (see: How long will it take you to pay off your credit card) we’ve got good news for you. According to the Wall Street Journal, some credit card companies are starting to offering incentives for payments, some of them going as far as matching payments above the minimum payment due, up to $550, which means that if you have money sitting in a savings account while you owe a balance on your credit card, you can effectively double your money by sending an extra $550 payment to your credit card company if they offer you this incentive.
While this is restricted to Citibank for now, expect most credit card companies to offer incentives for facilitate paying down those balances.
In the meanwhile you can pick up the phone and call your credit card company asking if they have any similar programs, and since you have the Customer Service Representative on the line, ask for your own personal ‘bailout’ in the form of an interest rate reduction.

Sources:

- Wall Street Journal
- Boston.com

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Photo Credits: Silas216 (cc)

September 22, 2008 | Filed Under Citi Credit Cards, Credit Cards, Debt Management, News | Leave a Comment

A Business Credit Card for the New Global Philanthropist

Today, more than ever, it’s extremely important for you, the entrepreneur of this very new economy, to select those service companies that understand your business, offer the right services, and share with you the same philosophy and vision. The winds of changes are sweeping the business landscape, including the non profit world, and they leverage the pervasiveness of communications to play on a global scale. No matter how small your business is, no matter how targeted the niche that you are serving is, what happens in Bangalore, Zanzibar, or Kampong Cham does affect you.

And you can affect what happens there as well!

At Credit Cards Mojo we are very fond of Kiva.org, and we are quite intrigued by the partnership between Kiva and Advanta. With the Kiva BusinessCard, an entrepreneur not only gets a savvy businesses tool that offers some of the best features and terms in the industry (see details below), but you also gets the chance to help small Entrepreneurs across the globe, thanks to Advanta’s philanthropic twist.

Apply for the KIVA B4B BusinessCard

Kiva BusinessCard features:

Unbeatable APR - APR - 0% on balance transfers for 15 months, and 7.99% fixed APR thereafter*
Anytime a business owner makes a grant to Kiva.org using their Kiva BusinessCard, Advanta will match the grant - dollar for dollar - up to $200 per month per account. (Additional information on matching program available at KivaB4B.org.)
5% statement credit for grants to Kiva and other charitable donations, as well as up to 1% on purchases*
No Annual Fee and No Limit on Earnings
$0 Fraud Liability

*see Terms & Conditions for important information, benefits and limitations

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Photo Credits: The Wandering Angel (cc)

September 12, 2008 | Filed Under Advanta, Business Credit Cards, Credit Cards, Good Credit, MasterCard, Reward Credit Cards | Leave a Comment

Wordwide acceptance of Credit Cards no longer true for U.S. Credit Cards

If you’ve been to Europe recently, you know that the majority of vending machines like kiosks or public telephones only take Credit Cards with the security chip in it.

While all of the credit cards issued in Europe have this security chip in them, only a handful of U.S. Credit Card issuers use such a feature. When traveling it can result in a waste of time, since it is a lot faster to get tickets at Museums, Train Stations, Subways, Airports using kiosks that also have English language menus, than to wait in the long lines and having to experience the language barrier.
But it’s getting worse. In order to counteract credit card fraud due to identity theft, credit card cloning and stolen cards, Europe is switching to a “Chip-and-PIN” system. The “Chip-and-PIN”system has extra protection since only credit cards with the security chip are accepted, either at vending machines or in person (like in a restaurant), and the point of sale machine will ask the consumer to enter the PIN, a procedure similar to what happens today when you use your ATM card.

Boston.com is reporting that “Nearly all the credit-card terminals in Britain, Ireland, Denmark, France, and Spain have been changed. Canada is scheduled to convert in 2010. And as many as 50 other countries around the world are converting.”

Unfortunately U.S. credit cards issuers have no plans to adopt the “Chip-and-PIN” system, not even for Business Cards. This is going to be a major inconvenience for international travelers, especially frequent business travelers. Until then, if you are planning a trip abroad, your best bet is to call your credit card company and ask when they are going to adopt such a system, the more people signal their feedback the sooner the credit card companies will get their act together and do the right thing.

We are going to be on the lookout for the first enlightened credit card companies that will understand this issue, and will add such a feature on their cards. As soon as we spot one, we’ll report promptly. If you spot a credit card company that offers such a feature, do not hesitate to email us at our tipline: MojoTipLine (at) gmail (dot) com.

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Photo Credits: travellingtamas (cc), DeclanTM (cc)

September 11, 2008 | Filed Under Articles about Credit Cards, Credit Cards, News | Leave a Comment

The Future of the Credit Card, might be no Card at all

As our friends at CERN fire up the Large Hadron Collider, playing around with protons, black holes , quarks, in search for the ever elusive Higgs boson; a quick glance at our most recent Credit Card statement confirms that there’s no fuzzy math involved here, the bill is due when it says it’s due, in the amount stated, or else late fees and increased interest rate will burn a deep whole into our finances.

And we at Credit Cards Mojo can’t help but wonder what the future holds for credit cards. Connecting the dots of what are the usual steps in the path of innovation, we see that things always get smaller, simpler, easier, more convenient and pervasive. We believe that Michael Capellas, CEO of First Data, might be on to something when he says that the next iteration of credit cards might be no credit card at all. Instead he advocates to embed a personalized chip, called GO-tag, in some of the portable electronics that we use every day like the cell phone or the iPod, so that when we need to pay for gas, clothing, or even sodas at a vending machine, just putting the cell phone over the proper sensor will finalize the transaction.

If you look around the idea is not that far fetched. Some issuers already have shrunk the size of the card to fit comfortably on your keychain, and some others have embedded RFID technology into conventional cards so that you only need to “tap” your card at the point of sale to pay for your purchase, and if the bill is less than $25.00 there’s no signature needed.

So, what will it mean to you and I?
For one it will increase security, embedded into a cell phone, in case of loss the chip-card can be suspended in real time, you could even do it yourself from the web.
Greater adoption rate will drive transaction costs down.
And those two factors above will result into lower costs to you and I in the form of lower fees and lower interest rates.

Great convenience: if the card can be used for smaller transactions like vending machines, will there be a need to carry a wallet anymore when just a skinny document holder for driver’s license and library card will do? Going to the office or going on vacation just taking your phone with you will do.

It’s true, the future is not what it used to be!

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Photo Credits: Image Editor (cc)

September 10, 2008 | Filed Under News | Leave a Comment

A Beginner’s Guide to Credit Cards. Part I: An inside look into Interest Rates

Credit Cards: love them, hate them; when used properly they are wonderful tools for Personal Finance, but just like any other tools when misused and abused, credit cards can come back and bite you where it hurts the most: in your wallet.

Proper use of credit cards starts with understanding how they work, inside and out. Today we’ll start taking a look at how interest rates work, from the inside out.

Interest rate is nothing else than the price of money. Money is bought and sold every day, and it’s paid for with interest. When you get a loan you are buying money, and the price is the interest on the loan. When you make a deposit into your savings account, you are selling money to the bank (the bank is buying money from you) and the price is the interest rate that the bank gives you on your deposit.
I know what you are thinking: why is it that I have to pay 18% interest on my credit card, when the bank gives me 3% on my 12-month CD? Good question. It’s called Profit, and fuel the American Way: you buy low, you sell high. Of course it’s more complex than that, the bank has associated expenses with marketing their products and services, the bank pays employees, rent on their facilities, has to write off some loans here and there while they guarantee that when you want money from your account with them it will be there. (It is more complex than that, but let’s keep it simple and go over this in principle).
Buying and selling money: credit card companies, like all other companies that lend money, don’t have huge vaults full of money waiting for people to charge something on their credit cards, they “borrow” money wholesale, and they resell that money to you at retail. In principle it’s no different than selling fruits and vegetables: buy wholesale in bulk at low prices, divide up and sell retail in small quantities at a higher price. But there are a couple of twists: Duration and Risk.
Duration: the longer the duration of the loan, the higher the interest rate. Look at rates for CD (Certificates of Deposit) where the bank borrows money from you, the shorter the duration of the CD the lower the interest rate. Longer terms demand higher rates. Again, there are exceptions to the rules; these exceptions are determined by what the forecast of the expected interest rate in the future; let’s stick to a normal scenario in order to understand the principle.
Risk: No matter what anyone tells you, credit cards companies and other lender tell you, they are in the game for making money, not to do you a favor. Treasuries, the bonds issued by the U.S. Government are by definition the risk-free securities because they are backed by the government of the United States (insert your own joke here for your own amusement: ____________ ). These securities too have a duration factor, longer term Treasuries carry a higher yield.
The investors behind credit cards or any other lenders, look at the yield of these securities (the Treasuries) and then add what they deem is a reasonable factor (reasonable in their eyes, for the benefit of their wallets) for the higher risk that they undertake. That’s why generally speaking conventional mortgages have low interest rate (secured by the real estate asset) while unsecured loan like a credit card have higher interest rates.
1+2=3. So in principle, when you are facing a loan, any loan, the interest rate is the result of an mathematical addition:
interest free rate + compensation for duration of the loan + compensation for risk = your interest rate
That’s why different FICO score leads to different interest rates, and that’s why it is a common practice from credit card companies that if you are late on your payment with anyone, not only with them, they assume their risk is now higher and they increase your interest rate.