credit cards how to master the credit card game Updated.

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)
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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