Minimum repayments = Maximum Pain!

Without a doubt, the biggest pitfall with using a credit card is how easy it is to run up debts. Since credit cards generally charge far higher interest rates than other forms of credit like a mortgage or car loan, debt on your card can quickly grow from a molehill into a mountain - particularly if you only repay the minimum amount every month.

Example: Mary, a 22 year old childcare worker has a $2000 credit card debt on a card with a typical 16% interest rate. Her card issuer requires she make minimum monthly repayments of 2.5% or $10, whichever is greater. Assuming she stops all spending on her card, how long does it take Mary to repay all her debt if she only repays the minimum every month?

Believe it or not, it will take Mary until her 38th birthday to fully pay off her credit card debt even though she isn’t using the card to make any more purchases. In the end, she will have also paid $2005 worth of interest charges -she will end up repaying over half her original debt. If these calculations included the annual fees most card issuers institute, Mary’s children and grand children would probably end up having to finish paying the debt for her!

Making only the minimum monthly repayment is attractive because it seems to free up your money for other things. This, however, is an illusion - whilst it may be true in the short term, you will end up losing big in the long term through interest charges and annual fees.

Many people also choose to make the minimum repayment because they feel that their debts are so massive that it would be pointless to start trying to pay them back. No matter how dire your situation may seem this is never the case. As a matter of fact, even paying slightly more than the minimum can make a huge difference. If Mary had made a flat repayment of $60 a month - that’s only $2 a day - she will have her debt paid off in less than 4 years and only wind up paying $662 in interest. A mere $2 a day will allow Mary to save $1343 in charges and repay her loan 12 years faster then if she only made the minimum monthly repayments.

Summary: As tempting as it might be, making the minimum repayments is never a good idea. With the comparatively high interest rate credit cards charge as well as annual and other miscellaneous fees your best bet is to get out of credit card debt as fast as possible - and repaying the minimum is the absolute worst way to do this. Although you’ll initially have less money to spend if you repay more than you have to, you’ll wind up saving big in the end.

Popularity: 3% [?]

Revolving consumer debt to hit $1,000,000,000,000

According to the newest data from the Federal Reserve, as of December last year revolving consumer credit card debt stood at 943 billion dollars. Revolving debt is set to reach one trillion dollars later this year. That’s *trillion* with a “tr”.

$1,000,000,000,000.00. One with twelve zeroes after it or – if you want to make it sound really massive - a thousand thousand thousand thousand.

That clears it up, right? Perhaps not. Most human beings have a difficult time comprehending just how large that figure is or how much money it actually represents.

Read the rest of this entry »

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How much is your loyalty worth?

Many credit cards offer reward programs because they entice customers to spend more on their card then they otherwise would. Usually in the form of a points system, every purchase made on the card earns a certain number of points that can be exchanged for different rewards. Airline miles, store discounts, concert tickets and accommodation are all common rewards you can exchange your points for. Some programs even allow you to name any reward you wish, quoting you the number of points you need to earn based on the practical cost of your desires. Others still, so called cash rebate cards, refund a percentage of the purchases you make on the card.

As attractive as some reward programs may initially seem, however, most will be of little real benefit to the average consumer. Why? Generally speaking, if you spend below a thousand dollars a month any reward points you accrue will be offset by annual fees, or worth the equivalent of at most 150$. Even if you spend upwards of 3,000$ a month (or about 750$ a week) on your credit card, the most generous program will barely earn you enough points for an economy-class flight from Sydney to Perth after a years worth of spending.

In addition, most programs have introduced points caps - whenever your monthly or annual spending exceeds a certain threshold you receive fewer points per dollar spent or no more reward points at all. Coupled with this, most reward points expire after several years which makes it even more difficult to acquire a significant number of points at any one time. Cash rebate cards aren’t any better, with refunds typically being no more than 1 or 2 percent. If you were to spend 1,000$ a month on your card you would receive in the area of 150$ in rebates a year - not even enough to offset many annual fees.

Nonetheless, if you make over or around 1,000$ a week of purchases on your card, looking carefully at reward programs is really worth your while. You should decide whether you would prefer frequent flyer points, gift certificates or cash rebates/fuel discounts as your primary reward as most programs tend to focus on one of these at the expense of the others. Many programs also offer you bonus points if you shop at certain stores. It’s obviously not worth going out of your way to patronize these places but try to make a mental note of them anyway - simply changing from Woolworths to Coles for the weekly grocery shopping may earn you thousands of extra points per year.

Summary: Those who don’t expect to use their card for purchases totalling more than 1000$ per month are probably better off opting for a card with a low annual fee. For those who plan to spend considerably more, however, a rewards program can end up proving very valuable indeed. Always remember to check whether your program comes with any point caps, and make a note of when your points are due to expire.

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6 ways to abuse your card

A credit card is a very powerful tool that can all too easily be misused. The following is a list of six financial habits that will get you into LOTS of trouble with your credit card in no time at all.

6. Disrespect your card: Just because its the size of a bus pass, don’t underestimate the impact this little sliver of plastic can have on your life. Whether it’s a positive or negative impact depends entirely on you.

5. Don’t pay your debts on time: You start being charged on your purchases as soon as the interest free period expires, but you are often charged interest from the date of purchase. That means as soon as you miss your payment date you are hit with up to 2 months of interest charges, not to mention additional late fees!

4. Use your card for cash advances: A cash advance is basically a cash loan. Whenever you withdraw money from your credit card using an ATM you are getting a cash advance. These are usually charged at even higher interest rates than purchases, and generally attract additional fees. You should only use your credit card for a cash advance as a last resort.

3. Don’t keep records of what you’ve been spending: Most people don’t realize how easy it is to lose track of their purchases - until their statement arrives in the mail. By then, of course, most of the damage has already been done. Whilst we all like spending money, most of us don’t particularly enjoy keeping track of our finances. Nonetheless, failure to do so almost always leads to severe difficulties down the road. Stick to a budget and always ask for receipts - as much of a hassle as it might seem now it will save you from a whole lot of pain in the future.

2. Be impulsive and self-indulgent: Sure everyone deserves to treat themselves sometimes, but how much of a treat would a horrendously large debt and a poor credit rating be? Learn to become financially disciplined and in time you will have the means to treat yourself a whole lot more often.

1. Only pay off the minimum each month: Undoubtedly the best way to end up with a massive and rapidly expanding credit card debt is to only repay the 2% minimum most cards require each month. Paying the minimum is very tempting because it allows you to spend your excess cash on other things. But by doing this, not only are you merely delaying the inevitable, you are making the eventual reckoning all the worse. Even if you are not increasing your debt, you may not be making any progress to actually repaying it - the minimum monthly amount is often not enough to offset annual fees and other miscellaneous charges.

Summary: Your credit card can be your best friend or your worst enemy - depending on how you choose to use it. Failure to treat your financial situation with the respect and attention it deserves could lead to lots of trouble in the not too distant future.

Popularity: 3% [?]

Watch out for the traps

Beneath the glossy advertising and loudly trumpeted features of every credit card lies enough small print to scare even the most seasoned consumer. As painful as it might be, however, looking at the small print is vital if you don’t want to find a nasty surprise in your next statement. Below are a few things many card companies do that you probably won’t see anywhere in the advertisements:

• Charging you through the nose for cash advances - Whenever you take money out of an ATM with your credit card you are getting a cash advance. You start paying interest on a cash advance immediately and on most cards you pay a higher rate of interest than you otherwise would. Rather than relying on credit, you’re far better off linking your card with a checking or savings account or even using a separate debit card entirely whenever you need cash.

• Changing the interest rate on you - Many card issuers now offer a special low introductory rate to entice consumers. Whilst the initial rate is often aggressively advertised, the interest rate you’ll have to pay once the honeymoon period expires is much higher and usually well hidden in the small print. Cards with a low introductory rate can be very useful, but make sure you know exactly when the card reverts to its regular rate. It is crucial that you eliminate or drastically reduce any debt before this happens.

You should also be aware that whilst some cards have a fixed-rate APR (annual percentage rate - the yearly interest rate on your card) which never changes (or at least changes very rarely), other cards have a variable-rate APR that can change fairly regularly, depending on the prevailing economic conditions.

• Charging you interest from the date of purchase if you don’t pay back the debt in the interest free period - You get an interest free grace period on your card, typically between 30 and 55 days, during which you may repay the purchase you made on your card without incurring any additional costs. However, should you not repay your debt within the interest free period you will probably start paying interest from the date you made the purchase, not from when your interest free period expired.

Example - John has a card with a 15% APR and a 30 day interest free period. John buys a stereo system for $4000 on the 1st November and hasn’t paid any of it back by the 1st December. On top of late fees, John is automatically charged over 50$ in interest fees. Even though his grace period has only just expired, he is charged interest from the date of purchase and so already owes a months worth of fees.

• Charging you interest on the whole purchase price if you leave even $1 unpaid - On many cards, if you leave any amount of a purchase unpaid you are charged interest on the full cost of the purchase. In other words: if you buy a couch for $1500 and repay $1200 on it shortly afterwards, you will still be charged interest on the full cost of the couch, even though you now only owe $300 on your card.

• Allocating your repayments so that you end up repaying debts with the lowest interest rate first - You might think that there is only one standard rate on your card, but in actual fact on most cards there are several. Cash advances, balance transfers and purchases are all usually charged at a different interest rate. Depending on the card your rates may also change if your outstanding debt passes a certain threshold or you are consistently late making payments. The bottom line is that if you have debt on your card, there is a good chance that some debt is costing you more and whenever you make a repayment you’ll most probably be paying back off your ‘cheapest’ debts first.

• Fees, fees, fees! - Set-up fees, transaction fees, missed payment fees, over your limit fees, currency conversion fees, foreign transfer fees, cash advance fees, dishonour fees, annual fees, reward program fees - it’s pretty safe to say that if you use a credit card, you’ll wind up paying fees somewhere along the line without even knowing why. Keep a close watch over your statement and do a little more reading - you’ll find that some companies are far more reasonable than others.

• Offering to increase your limit or getting pre-approval for a card in the mail - Consumers often feel that an offer from the bank to increase their credit limit (i.e the maximum credit you can use on your card) or automatic acceptance into the latest credit card program is a reward and should never be turned down. In actual fact, taking up these new ‘opportunities’ may prove costly in the long run. Before automatically upping your credit limit, ask yourself if you actually need to - always remember that the higher your credit limit is, the more potential trouble you could get yourself into. As for accepting that card in the mail - does it offer competitive rates? Would it be a major improvement on your current card? If the answer is no, you are better off throwing away the offer with the rest of the junk mail.

Summary: This is by no means a comprehensive list of the tricks the card companies play on consumers. The only way to fully protect yourself is to check your statements regularly and thoroughly and always read the product disclosure statement (i.e ‘the small print’) so you can pick the good cards from the bad.

Popularity: 3% [?]

5 Steps to a DIY LifeLock

“I’m Todd Davis and what I’m about to tell is absolutely true. My social security number is 457-55-5462.”

We’ve all heard the latest commercials featuring the president of Life Lock – a company that claims to have the most advanced identity theft protection anywhere – shouting his personal data from the rooftops. It’s attention-getting marketing for sure.

But how can he really get away with divulging such information? Is he crazy? And is it really worth $120 per year? I decided to take a spin of the LifeLock.com website to learn what their business is all about. As it turns out, every preventive service they offer is relatively easy, convenient and readily available for consumers to do themselves.

LifeLock: First, we ask the credit bureaus to set fraud alerts on your behalf.

This can easily be done on your own with thirty minutes worth of phone calls. Taking it one step further, thirty-five states currently allow consumers to “freeze” their credit reports, effectively blocking all access to credit requests in their name.

LifeLock: Second, unless your circumstances change and you tell us not to, every 90 days or so we ask the credit bureaus to do it again.

That’s awfully nice of them, but this is completely unnecessary, especially if you’ve placed a freeze on your credit report.

LifeLock: Third, we request that your name be removed from pre-approved credit card and junk mail lists and we keep making the requests as they expire.

You can do this yourself in five minutes. Visit OptOutPrescreen.com and follow the simple instructions to opt-out for either five years or permanently. Since personally registering for the site over two years ago, the quantity of mail I receive has dropped by approximately 90%!

LifeLock: Fourth, we order your free credit reports on your behalf from the major credit bureaus and they are sent directly to you. We do this every year. You can also do this yourself for free.

Exactly, so why pay someone else to do it? Visit AnnualCreditReport.com for more info. That’s it.

LifeLock: Fifth, … if your wallet goes missing, just give us a call and a specialist will help you contact each credit card, bank or document issuing company, cancel your affected accounts and complete the paperwork and steps necessary to replace your lost documents.

The key is “help you”. For various legal reasons, it’s not possible for them to actually complete this paperwork on your behalf. The brunt of the work here will ultimately fall upon you, the consumer, no matter who you have helping you.

Finally, the crux of their business is their $1,000,000 guarantee which, to be fair, sounds like solid, fall-back security for their customers. But let’s be honest: if the credit bureaus fail to alert you in the case of fraud or credit is granted on your behalf in spite of your having frozen your credit report – and any of this results in identity theft - you’re going to have one hell of a civil case against a whole host of businesses. I’d argue that’s comfort enough, so save your $120 per year.

Update: Howdy, Get Rich Slowly readers!

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15 ways to improve your Credit score (Part 2)

Don’t apply for a lot of new credit at once – Making lots of credit applications in a short period of time will severely dent your rating. Every time you apply for credit, the potential creditor will make an official ‘inquiry’ to check your credit history, and about your 10% of your Fico score is based on how many inquiries are made on your file. (Note that this doesn’t include inquiries you make yourself.)

Don’t apply for credit you have no chance of getting - Unfortunately, the expression ‘it never hurts to try’ doesn’t hold water when it comes to obtaining credit. Creditors tend to think alike, and when they see one (or more!) of their competitors has turned you down, it makes them think twice about approving your application. The best way to ensure you don’t get rejected is simply to call the issuer and ask them if you meet the eligibility requirements.

Credit begets Credit - While it’s vital that you never miss payments on your existing credit accounts, the fastest way of increasing your credit score is successfully applying for new credit and demonstrating you can use it responsibly. Even if you can only get secured credit cards, it’s well worth the trouble.

Beware of credit repair scams – As well as wasting your money, so called ‘credit repair’ agencies can often end up damaging your credit rating even further, or even get you into some legal trouble! Check out the Federal Trade Commission’s page on Credit Repair scams for more info here. 

Spread the love - I’ve already mentioned that your credit utilization is one of the key factors in determining your credit score. A high utilization makes potential creditors nervous and harms your score. By rearranging your debt, you can reduce the percentage of credit you have utilized on any single account, and thus improve your credit score without actually repaying any debt.

For example, let’s assume you have 2 credit cards - a Bluecard and a Redcard, both with credit limits of $1000. You currently owe $900 on your Bluecard and $100 on your Redcard, putting you at 90% and 10% credit utilization respectively. By transferring $400 from your Bluecard to your Redcard, you now owe $500 on both and are utilizing 50% of the credit on each card. Even though your TOTAL credit utilization never changes, you have brought down the utilization on your Bluecard down from a ‘danger level’ of 90%, making you seem like less of a risk to potential lenders.   

Stay tuned for part 3!

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RSS Feed - now actually working :)

Apologies for the screw-up with our RSS Feed - it now works perfectly. You can subscribe here.

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15 ways to improve your Credit score (Part 1)

Pay your bills on time – This is the single most important factor in determining your credit rating. Roughly 35% of your Fico score will be determined by your payment history, so any late payments, collections, charge-offs, bankruptcies or liens will bruise your rating pretty significantly. The good news is that the further back in time you go, the less of an impact on your score.

Pay down your debts – It sounds obvious because it is. If you were lending money to someone, the first thing you would look at is how much debt they’re currently carrying. 30% of your Fico score is determined by your utilization. Divide your total balance by your total credit limit and you’ll have your utilization.

Don’t close old accounts – Assuming that keeping an account open isn’t costing you anything (beyond a modest annual fee), leave it be. Why? Closing down an account lowers your total credit limit, and makes it seem like your total credit utilization is higher. Pulling the plug on your more elderly accounts can also shorten your reported credit history, making you seem like more of a risk to potential lenders.

Get rid of questionable accounts – Having said that, some accounts are better off dead. Many retail or gas cards can make you seem like more of a credit risk, particularly if they’re from no-name, relatively obscure companies. As a general rule, if you’re too embarrassed to admit you have it, scrap it.

Get copies of your credit report – By law, you’re entitled to one free credit report every 12 months from each of the big 3 agencies – Experian, Transunion and Equifax – from AnnualCreditReport.com. You might even want to consider paying for a service that allows you to check your score on a more regular basis. Personally, I recommend one of the myFico plans – make sure you check out this thread for the latest discount codes!

Dispute any and all items you think are inaccurate – Mistakes happen, so it really is worth going over your credit reports with a fine toothed comb. You’re looking for errors that could be negatively impacting your score, like accounts that aren’t yours, late payments that were actually paid on time, debts that shouldn’t be showing up anymore (negative entries should be deleted after 7 years, though bankruptcies can stick around for up to a decade) and debts that you’ve paid off but are still showing as outstanding.

The quickest method for filing a dispute is online - here are links to the Big 3’s dispute forms:

• Experian
• Transunion
• Equifax

Note that it does NOT impact your credit score when you make a dispute.

The remaining 9 tips will be up for your perusal tomorrow!

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Why FreeCreditReport.com Is a Scam

In 2004, the U.S. Congress ordered the three major credit bureaus – Experian, Equifax, and TransUnion – to craft a website to allow consumers to order their credit reports online for free, once per year.

Not long after, Experian realized the legislation presented a clever, untapped marketing opportunity. They launched FreeCreditReport.com with the (obvious) hope that unsuspecting consumers wouldn’t know the difference between their not-so-free site and Congress’ mandated, free alternative.

Consumers have since been inundated on television, in print and, of course, online with ads for the FreeCreditReport.com website. That sing-song jingle (“Freeeeee Credit Report … dot.com!”) alone should be a crime, but that’s another topic for another day.

Blame it on their need for a catchy website name, but Experian clearly hid the fact that their “free” credit reports were only offered with consumer enrollment in the agency’s paid Triple Advantage program. In fairness, “Twelve ninety-five per month credit report … dot.com!” just doesn’t have quite the same ring.

Evidently, the agency’s marketing and business tactics were a little overzealous and more than a little shady - enough so that state and federal governments took notice. In late 2006, Florida’s state attorney general’s office launched an investigation into Experian’s business practices, citing a “failure to adequately disclose negative option enrollment … deceptive advertising, misleading domain name, and failure to honor cancellations.”

A previous 2005 investigation had the Federal Trade Commission charging that Experian “misled consumers about their association with the annual free credit report program”. The agency flatly denied the claim, but agreed to settle and refund $1 million in “ill-gotten gains” to consumers anyway.

Fast-forward three years and clearly little has changed. As of February, 2008, Googling the search term “FreeCreditReport.com scam” reveals a disheartening 35,000 results. These results include a staggering number of blogs and forums wherein consumers offer comments with variations on a common theme:

FCR is a shady and dishonest venture from Experian. I found that I was billed for a year of their service after giving my information for a one-time “free” check. When I disputed the charge, I thought that I had just been careless in enrolling. What a SHAM! – Erik, NJ (MSNBC’s Red Tape Chronicles blog)

As a victim of Experian’s ploy, I too count myself among the unsuspecting. My “unsubscribing” to their Triple Advantage plan required countless phone calls, e-mails, filling out online forms - everything short of a Papal intervention.

Bottom line: the safest way to request your free annual credit report is through AnnualCreditReport.com. Period.

Popularity: 6% [?]