I was having coffee with a friend this weekend and at some point during our conversation she mentioned how frustrated she was with the interest rate she was paying on an existing credit card from Chase. Now Rebecca is aware of CatholicPF and knew I would not be able to resist digging a little further into her comment regarding her frustration with her credit card. So after asking a few questions here is what I found out:
Rebecca’s Credit Card information –
Credit Limit – $5,000
Current Balance – $3,150
Interest Rate – 24.24%
Interest Charged Last Month – nearly $50 (and she had been paying $50 or more interest the last 3 months!)
I nearly fell out of my chair! Rebecca is a close friend of mine and prior to this conversation I had always assumed she had a solid grasp of personal finance basics. And this was definitely a situation that contained quite a few financial no-no’s. Here was a smart woman with a doctorate degree in a healthcare field, a wife/mother successfully managing the financial challenges of running a household, and from previous conversations I had had with her a prudent retirement planner who’s portfolio includes IRA’s, investment properties and fully funded 401K’s. Yet here was this otherwise seemingly financially savvy friend of mine telling me that she was regularly using (or at least regularly enough to cause her some frustration) a credit card with an interest rate of over 24%. And Rebecca absolutely should be frustrated – her situation with this particular credit card is symptomatic of credit card issues many of us unnecessarily deal with on a regular basis.
First, Rebecca’s credit utilization ratio on this particular card is far too high – she was using over 60% of her available limit. While the objective for all of us should be to work towards maintaining $0 balances (also known as credit card Nirvana), carrying balances over 20% is a definite no-no. While I was most concerned with Rebecca’s APR of 24.24%, I encouraged her to call her card immediately and request a higher credit limit. I encourage any of you who are holding and using credit cards responsibly to do the same thing. Increasing your credit limits on individual cards will not only improve your credit utilization ratio on each of those cards, but the overall ratio of your cumulative credit card balance versus your total available credit card limit. This is a fairly simple step to take and one of those rare requests that most credit card companies are willing to respond positively to.
After Rebecca made this call – I insisted she do so during our lunch – I asked why she was carrying a balance on a credit card with such a high APR. She explained that when she first got the card it had a rate of over 12.99% but that over the past year or two, the company had gradually increased the rate (with a dramatic increase just prior to the credit card reform legislation). Not knowing what to do and intimidated by confronting her credit card company, Rebeccas admitted she had simply tried to ignore the problem. For many of us, this is most likely a very relatable situation. But what I stressed to my friend, and what I want to stress in this post, is that there are always financially smart steps that can be taken when it comes to addressing most personal finance challenges.
In Rebecca’s case the first step that should have been taken is to contact the credit card company and request (or insist for those of you willing to be more bold on the phone) that her interest rate not be increased. In fact, prior to the last few years, I was in the regular habit of calling my credit card companies every 6 months and requesting a lower rate. And you know what, most of the time it worked. I know this seems like such a simple step, but it’s a simple step that most people never take. Rebecca didn’t believe me that her APR was absolutely a negotiable component of her account with this lender.
An important note – credit card companies train their customer service staff and the people answering your phone calls to be experts in the art of “NO”. The scripts that these employees use and are trained with are filled with all sorts of ways to tell you “NO”, keep you frustrated, and encourage you to accept your 24.24% fate or whatever other terms the credit card company deems essential. However, it is your responsibility to not accept “NO” as answer, to not get discouraged/frustrated, and to continue to act as the strongest advocate for your personal financial well being that you can (unless you happen to think somebody else will do this for). Frequently, this means calling multiple times or asking to speak to a manager (or that manager’s manager) – do not be intimidated by this process.
The next step I recommended to Rebecca was to immediately explore 0% balance transfer options. Many balance transfer offers (even today) will provide consumers with the opportunity to transfer an existing balance at a 0% APR for 6-12 months. The catch: there is typically a balance transfer fee of 3-5% of the total balance transferred. In Rebecca’s case this would mean a fee of $94.50 – $157.50 on her current balance of $3,150. And as savvy readers you’ve already done the math and concluded correctly:
With Rebecca’s most recent monthly interest charge of nearly $50, it won’t take too many more months before the monthly interest charges on her 24.24% credit card will surpass what it would cost her to transfer her entire balance to one of the many 0% balance transfer offers available. And for most of us – including Rebecca – these balance transfer offers are likely already available on one or more of our other credit cards.
After we had reviewed the balance transfer offer on her existing accounts, Rebecca chose to transfer her entire balance of $3150 (a very easy process that she completed online in a few minutes) to her existing Citibank card at 0% interest for the next 12 months. Her fee for the transfer was 3% and even better, she also requested a credit line increase on this account and maintained a credit utilization ratio under 20% (even with the transfer).
Three important caveats regarding the 0% balance transfer:
1) Be very leery of utilizing 0% balance transfer offers unless you are certain that you will be able to pay off the entire balance during the promotional period. It is possible that you will find yourself with a higher APR on your new card after the promotional period expires – which of course is not the objective.
2) Be diligent about paying this account (and all of your accounts) on time. These offers typically include clauses that allow credit card companies to dismiss the promotional 0% APR if you are late/miss a payment. Again, the subsequent APR imposed on your account as the result of a late/missed payment might be just as bad or worse than the account you transferred the balance from.
3) Do the math. If you can pay off a high interest rate balance in a relatively short period of time, it may not make sense to pay the balance transfer fees associated with 0% APR promotional offers. In Rebecca’s example, if she were able to pay of the entire balance in two months or less it likely would not have made sense to transfer her balance.
The take away of this post: there are many occasions when it makes sense to utilize a 0% balance transfer offer. And as we have seen with my friend Rebecca, it is important to be proactive in addressing challenges that arise with your personal finances. I’m consistently surprised by the unwillingness of many people to take a few small and manageable steps to save themselves money and improve their financial situation. How many people like Rebecca put off addressing a high interest credit card problem (or any financial difficulty for that matter) for months before they decide to take control of the situation? Are you one of those people?
While Rebecca was able to utilize an existing account to take advantage of a balance transfer offer that made sense, here are links to a few of the best 0% balance transfer offers we found:
Discover More Card – 0% balance transfer offer for 15 months, and 0% APR interest offer on purchases for 6 months. There is a 4% balance transfer fee. You can also earn 5% cash back bonus rewards on quarterly changing purchase categories like travel, home, apparel, gas restaurants, movies, and more. There is no annual fee.
The Citi® Platinum Select® MasterCard® offers a 0% Intro APR Period: 18 months on Balance Transfers*, 12 months on Purchases*. This makes it a great card for people who want the longest balance transfer term or wish to continue making purchases while paying off their current debt at a 0% interest rate. However this card does not offer any specific rewards programs
Chase Freedom Card – No annual fee, Intro 0% APR on balance transfers for 12 months, Intro 0% APR on purchases for 6 months. 5% balance transfer fee, $10 minimum.
“Dear CatholicPF … I recently read your post “Understanding your Credit Score” … great post. Anyways it got me motivated to request a copy of my credit report from Experian. I’m in my late 30’s and honestly can’t remember the last time I actually reviewed my own credit report …Long story short, I was totally shocked to find a number of errors in my credit report – everything from incorrect balances, to old accounts that were listed as open, and even an account that didn’t belong to me! …It made me wonder how many times I had applied for credit (mortgage, car, etc) over the last decade and lenders were possibly being given an inaccurate look at my financial history by the credit bureaus! Anyway, how do you recommend I go about getting these mistakes corrected? Thanks for the help!” – Lindsey
The excerpt above is part of an email I received over the weekend from a visitor to CatholicPF and sadly, Lindsey’s situation is far too common. Given the passive approach most of us take when it comes to monitoring not only our credit score, but the content of our actual credit reports, it is not surprising that the three credit bureaus routinely include errors and inaccuracies in our credit reports.
In fact –
Forty percent of Americans have never obtained their score, according to a survey commissioned by the Consumer Federation of America and Washington Mutual. That means a lot of consumers don’t know anything about the number that affects their ability to get a mortgage, a low interest rate on a credit card, and even a job. – US News & World Report
Given the fact that a significant portion of the country (even 40% seems optimistic) has never obtained a credit score, I again suspect that an even higher percentage of us have never gone as far as actually reviewing our credit reports from each of the three credit agencies: Experian, Equifax, and TransUnion.
All that said, here are the steps that I would recommend Lindsey take in order to correct the errors in her credit report.
Train up a child in the way he should go; and when he is old he will not depart from it.
– Proverbs 22:6
Does it strike anybody else as strange that there is an unspoken assumption that parents ought to pay (in part or in full) for their children’s college education? And not only are parents expected to pay for this cost, they are apparently expected to start saving for it the day after conception! As parents we are sold on a variety of financial tools and products designed to help us fulfill this mandate: 529 College Savings Plans, Coverdell ESA, UGMA/UTMA, IRA’s, Savings Bonds, a second job, or selling a kidney.
Where did this expectation that our children are entitled to a fully funded college education begin? Is this financial expectation an appropriate addition to our parental obligation to train up our children to the best of our ability? And let me be clear, by no means am I calling into question the importance/necessity of a college education or pointing a disapproving finger at parents that have made the decision to provide their children with this opportunity.
But I do have difficulty understanding the fact that a fully funded college education for our children has become an EXPECTATION of parents. One need only to review any Personal Finance guru’s latest book or chat with a financial advisor to get the message loud and clear: your children’s college education fund has made it onto the same page as your mortgage, retirement, and savings efforts. In fact, there is a whole industry – departments of financial companies, sales personnel, marketing efforts – designed to perpetuate the expectation that parents commit to this huge financial expense. And I struggle with this expectation; the expectation that the financial well being of the whole (your ability to retire comfortably, pay off your mortgage early, establish an effective emergency fund, etc) should be weakened by any of its individual parts.
It’s for the children Daniel! And the children are the future! You sound like an anti-education zealot! Shouldn’t we try to provide are children with every advantage?!
Despite the threat of a potential ‘double dip’ in the economy and housing market, within the last few months I have strongly encouraged my youngest son to consider becoming a homeowner. While unemployment rates remain high and there is no shortage of uncertainty regarding the strength of the current ‘recovery’ (consumer confidence shrinking, businesses holding capital, lending remaining difficult), there are a number of factors that I think favor the first time homebuyer. Namely, mortgage interest rates are at record lows, there is an influx of inventory in the housing market, and there continues to be a significant number of motivated sellers eager to downsize, get out of an upside-down mortgage, and/or avoid foreclosure.
This set of circumstances offers an attractive opportunity to the prospective first time homebuyer. During multiple conversations with my son, I found that many of our talks revolved around a few overarching topics; these are the topics I chose to emphasize in this post. And while I realize that my son’s situation might be very different from yours and that each one of these suggestions could be expanded into its own post and discussed in significantly more detail, my intention (as it was with my son) is to provide a broad overview of topics that I think it is easy for first time homebuyers to overlook.
Current Mortgage Rates
With 30 year fixed mortgage rates hovering around 4.6%, first time home buyers with their financial houses in order (ie, low consumer debt, credit scores above 700, and a 3.5-5% down payment saved up) are in a position to take advantage of historically low mortgage rates. To put this in perspective lets take a look at 30 year fixed rates over the last few decades:
To further outline the advantage of these record low rates on a 30 year fixed lets look at a $200,000 mortgage and the monthly payment (principal + interest) at a few different points since 1983.
1984 @ 14% – $2370
1997 @ 8% – $1467
2010 @ 4.6% – $1025
What I’ve said to my son is this – “Right now you are betting on the fact that over the next thirty years you are not going to see rates lower than 4.6%.” And despite all of the economic uncertainty, I feel much more comfortable in suggesting that in thirty years, when we look back at 2010 interest rates on a 30 year fixed mortgage, they will be among the lowest available over that thirty year time frame.
The Drivers Seat
In the current housing market, a pre-approved first time homebuyer has a tremendous amount of leverage available when purchasing a home. While two of the biggest factors currently providing this position of leverage to the new home buyer are the tremendous amount of unsold inventory on the market and a large pool of motivated sellers, both of these factors are made even stronger by the fact that the potential first time home buyer does NOT have to worry about selling an existing home. Whether purchasing from a motivated seller, a bank REO (Real Estate Owned), or a short sale, the fact that a first time homebuyer does not have to make his/her offer contingent on the sale of another home is a HUGE advantage. This fact, combined with a bank pre-approval on a historically low 30-year fixed mortgage, puts the first time home buyer in the driver’s seat when it comes to locating and negotiating a potentially great deal on a home. Sellers (whether individuals or banks) prefer as few contingencies as possible and typically the two biggest road blocks to successfully completing a potential home purchase are financing challenges and coordinating the sale of two homes (the buyer and the seller).
Like any tool, Credit Cards have a proper and an improper use. In the wrong hands, a useful tool can be a destructive force. But that same tool, in the hands of somebody that knows how to use it properly, can be wielded in a very positive way.
And while there are experts out there that will tell you to ceremoniously discard your current collection of plastic, the fact remains that credit cards can be very useful tools when used properly (establishing credit, convenience, etc).
In fact, when it comes to the “to use or not to use” credit card debate among personal finance experts, I find it useful to reference the popular saying “Guns don’t kill people. People kill people”. Does the same logic apply to credit cards? Will irresponsible people find a destructive use for guns, credit cards, as well as a host of other items?
As part of CatholicPF‘s ongoing effort to promote healthy personal finance habits and courtesy of the Council for Common Sense, I am publishing the following public service announcement:
“For which of you, intending to build a tower, does not sit down first and count the cost, whether he may have enough to finish it; lest perhaps, after he has laid the foundation and is not able to finish, all those seeing begin to mock him, saying, This man began to build and was not able to finish.”
– Luke 14:28-30
If you have already visited CatholicPF, hopefully you’ve had a chance to read my post “Baby Steps – Track Your Spending“, if not, or if you are new to this website, I suggest that you read that post prior to putting together a monthly budget.
As I indicated in “Track Your Spending“, keeping track of where your current financial resources are being directed will give you insight into your spending habits and patterns; the process I suggest will provide you with a financial barometer that will allow you to put together a monthly household budget that is based on your actual spending. Personal finance is exactly that … personal. So you need to take a look at what is going on financially in your home and not the one size fits all box of “40% of spending should go towards housing, 15% towards debt repayment, blah blah blah” that some personal finance gurus may suggest.
< And to quickly review the top three reasons for tracking your expenses (I recommend at least 3-6 months):
1) You’ll know exactly where your money is going and they’ll be no more looking at your bank account online with a blank stare wondering where your paycheck went
2) You’ll be more conscience of how and where you spend your money and this can be an eye opener. Forcing yourself to keep track of your spending forces you to become more conscience about your spending
3) You’ll be able to identify areas where you are obviously overspending and can redirect those ‘savings’ to more needed areas – paying off debt, establishing an emergency fund, giving, etc.
Five Steps to Creating Your Monthly Budget: the foundation for your Personal Finance Tower)
1. Raise your Insurance Deductible – call your car insurance company and ask to raise the deductible on your auto insurance policy. Your deductible is the amount of money that you will have to spend out of pocket before your insurance company’s coverage begins. Raising your deductible will save you money on your monthly premiums – in some instances as much as a 15-40% reduction in your monthly bill. And DON’T pay in installments! Pay for a full 6 or 12 months at a time.
2. Compare Insurers – I know this sounds like a no-brainer but I am consistently surprised at the number of friends and family that I talk to that have had the same insurance company for the last decade and haven’t shopped around to see if there are more competitive options out there. We’ve all seen the GEICO, AllState and Progressive commercials and these are obvious indicators that these companies are actively competing for your business. That said – shop around (and be sure to look to combing policies: housing, auto, life, etc.)
3. Buy Used – there is a reason why any and all personal finance professionals, books, and websites recommend buying used. It is because buying a used car is hands down a financially savvy move. A car loses 15-20% of its value each year: meaning you suffer the most significant depreciation in the first few years of owning a new car. You can be a prodigious cutter of coupons, a prolific preparer of frugal meals and a fanatical deal finder – but financially speaking you are far better off being a prudent purchaser of reliable used vehicles.
4. Pay Your Loan off Sooner – many of us get caught up in what I’ve referred to as “minimum monthly payment syndrome”. Sadly, this condition affects 9 out of 10 people in this country. And even that used car that you got a great deal on won’t turn out to be so great if you spend the next 72 months paying it off at an interest rate of 8%. If you can’t pay it off in 12-24 months, you spent too much!
5. Look for Maintenance Deals – whether it’s a tire rotation, an oil change, transmission service or a break job, there is NEVER a reason to pay full price. Whether you take your car to Valvoline, Jiffy Lube, or your local repair station, chances are they offer coupons either online or in local publications. And using that “$10 off your next oil change” and “Free tire rotation with your next brake job” coupons add up over the lifetime of your car. Another under-utilized resource that I have regularly used: local community colleges. Many communities have one or more technical college and these technical colleges often have programs in Automotive Repair. Frequently they are looking for opportunities to provide students with relevant experience and will offer maintenance services for the cost of parts/fluids (no labor!).
“Love is patient, love is kind. It does not envy, it does not boast, it is not proud …” – I’m certain most of us have heard this often referenced passage from Corinthians while attending the wedding ceremony of a family member or close friend. Love, of course, is the multi-faceted foundation of any marriage and the popularity of citing this passage during wedding ceremonies is undoubtedly a result of the light that this passage shines upon the true meaning and nature of Love (physical love, emotional love, and spiritual love).
Now – If you can, I want you to try and reconcile the meaning of this popular biblical passage – the idea of Love it outlines and the celebration of marriage – with the financial reality of today’s average wedding. Here is a look at the average wedding cost since 1945.
Stumped? Me too.
Never mind the downward trend in wedding spending the last few years – the average wedding at the end of 2009 still cost over $22,000 !?!? And according to the good folks at The Wedding Report that doesn’t take into account the cost of either the engagement ring or the honeymoon.
And in an effort to dissuade you from jumping to the “another old man stuck in the good old days, disconnected with today’s reality and rattling on about kids these days” conclusion, let me say that I’ve been fortunate enough to have four married children – each of whom has filled me in at length about the importance of a ‘proper’ wedding celebration.
“Why spend money on what is not bread, and your labor on what does not satisfy? Listen, listen to Me and eat what is good, and your soul will delight in the richest of fare.” Isaiah 55:2
There is a disease that haunts the lives of many Americans – an underreported disease affecting millions of individuals, couples and households. While the symptoms are easy to detect if you know what to look for, this curious sickness is as common as the cold and viewed with as little seriousness. That said, leading researchers have labeled this highly contagious condition – MMPS – or Minimum Monthly Payment Syndrome – and have suggested that is a leading factor in the declining spiritual, physical and economic health of American households.
Courtesy of the Council for Common Sense, CatholicPF has obtained a previously unreleased copy of common symptoms associated with MMPS (the mainstream media has a vested interested in the continued and rampant spread of MMPS as it supports the agenda of mismanaged big banks, out of control government spending, and interest group financed politicians):
I’m sure many of you are familiar with the well known biblical story of the “Loaves and Fishes”. In this parable, Jesus takes 5 loaves of bread and two fishes, blesses them and in short, is able to feed (with leftovers) a crowd of five thousand of his followers! While the story has much deeper messages of faith and our relationship with God, I can’t help but wonder if there is also a much simpler message – a message that shows us it’s possible to get much more out of what each one of us has been given than we might initially think possible.
In an economy that has seen heavy job losses, pay freezes, high unemployment, and a host of other economic stressors, isn’t this a particularly relevant message? In fact, I would argue that a fiscally conservative household should stress the importance of stretching its dollars and getting the most out of its finances in both bad AND good economic times.
And one of those ‘low hanging fruit’ areas where our dollars can be stretched further and our loaves/fishes multiplied is the monthly grocery budget. According to the US Bureau of Labor Statistics (BLS)*, in 2009 the average American household spent 12.4% of its expendable income on a food (a decrease from 15% in 1984). To put this into further perspective lets look at a couple of other numbers from this same survey:
- 7% of our food expenditure is “food at home”, the other 5.4% is “food away from home”
- Average annual expenditures for 2.5 unit household – $49,638
- Average income before taxes – $63,091
How do these compare to the numbers in your household?