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Q&A: Credit Card Use (III)

Q: I can't afford to pay my basic bills, I'm nervous about eventually repaying my student loans and it seems perfectly logical that a credit card will help me have more of my money. What should I do?

A: Think twice. Credit cards seem especially easy to manage in the short term but they can become expensive and messy in the long-term if mismanaged.

Q&A: Credit Card Use (II)

Q: Should I use a credit card to build my credit?

A: Credit cards are a big responsibility and mismanagement carries great consequence. Using credit cards to build your credit can backfire and you can quickly do more harm than good to your credit report. Building credit takes time, an abililty to demonstrate positive money management skills, and it's really wise to wait to use credit cards until you understand exactly how they work.

Q: How much debt is too much debt?

A: $2,000 in debt is a lot of debt, no matter how much money you make.

Q&A: Credit Card Use (I)

Q: How many credit cards should I have?

A: The technically correct answer would be one or two. If you have more than one credit card, your obligated to interest and penalty fees on all credit cards in your name. Think of this: You have to pay five credit card bills late one month. A late pay fee = $30. Total = $150 in late fee charges that one month alone. Additionally, your late pays reflect on your credit report (remember late payments erode your credit). The expense of multiple cards can send your money spiralling out of control in little time.

It depends on why you are considering a credit card. If you're hoping a credit card will help build your credit, this strategy can quickly backfire.

Credit report (II)

Q: How do I get bad credit?

A: First thing's first. Credit score: FICO scores range from 400-800. If you have no credit, you're somewhere in the middle. Your job is to take responsible measures to increase your credit score. Timeliness is godliness in the world of credit and paying every loan (traditional or a credit card, for example) is imperative. Late payments erode your credit. When it comes to credit reports, there are 3 factors to consider: Good credit, debt to income ratio, bad credit.

The Minimum Payment

One common misconception about the minimum payment: Credit card companies do little in the way of encouraging consumers to pay more than the minimum. The minimum payment is a small percentage of your balance, typically 2-3% and is about 90% interest and 10% balance. Paying only the minimum little to decrease your balance and the overall balance you pay interest on. A higher balance costs you more money in interest. Paying only the minimum prolongs the life of your debt-load.

Paying your minimum on time is certainly critical (timeliness is godliness in the world of credit cards). If you're a chronic late payer or you pay bills haphazardly (every two months was once my strategy), you risk penalties in higher interest rates that cost hundreds or thousands of dollars. Higher interest rates added to your balance can double or triple your minimum payments. Unpredictable minimum payments make it difficult to budget and save money and increase the difficulty to get out of debt.

Cost of Credit Cards

Think of these costs for the simple privilege of using a credit card(s) (AKA: The cost of being in debt):

If $1,000 balance at 10% APR, $100/year.
If $2,000 balance at 10% APR, $200/year.
If $5,000 balance at 10% APR, $500/year.
If $20,000 balance at 10% APR, $2,000/year.

Typical interest rates range from 8% to 14.9%, with penalty increases that can send your APR into 23-26% range.

Let's double those costs:

If $1,000 balance at 20% APR, $200/year.
If $2,000 balance at 20% APR, $400/year.
If $5,000 balance at 20% APR, $1000/year.
If $20,000 balance at 20% APR, $4,000/year.

Imagine the cost of multiple credit cards. Pretty pricey food for thought.

Teaching Money

Jonathan Clements, personal finance columnist for the Wall Street Journal recently wrote an intriquing article about teaching wealth ("Teach Your Children Wealth: Why I Decided to Close Down the Bank of Dad"). He concludes the article with this: "Want to see how your children's attitude changes when they are spending their own money? Try one of my favorite tricks: Next time you go to the mall, give your kids $10 each to spend, but tell them you expect change. Trust me, you won't get much back. On a subsequent visit, give them $10 again. But this time, tell them they can keep the change. You will be amazed by how much less they spend."

Parents frequently ask me about this very subject. Teaching money is tough and believe it or not, young people pick up spending habits, skills and priorities from parents. When teaching money, give your child ownership, help them visualize and set simple short and long term goals for their money. Money should be a separate issue from others. Be consistent and predictable if giving allowance. But ownership and "keeping the change" are great strategies for helping a child understand value.

Love & money

Two years ago, I started a book of quotes. The quotes are from all over and cover a broad spectrum of topics. Quotes from a girls weekend in South Beach, quotes from overheard conversations, quotes from general conversations with people.

What does my quote book have to do with debt? I once asked a friend if he believed in true love? His response was yes and I quoted him saying this about the subject, "True love is about heart. Family, religion, money, beauty have to mesh." -Anonymous, Charlotte, NC

Point: Divorce is one of the leading causes of bankruptcy. Money problems are a leading cause of divorce. Why does money have to mesh? Here's are my thoughts:

Surviving Pressure Sales Tactics

Last night, a pressure-filled sales pitch almost left me the proud owner of a vacation time-share. I admit, I'm a sucker for a prize and I went to this appointment for just that. In this case? A digital camera. I was fully prepared to politely decline anything being sold. However, this was different. These people were unrelenting. They pulled out all stops and came at me full force. The sales pitch left me exhausted and, of course, thinking. If someone didn't know what I know, would they have given in and walked out $40,000 in debt? Just in case, I thought I'd pass along some tips to survive the utmost pressure filled sales pitch:

Credit Reports (I)

You've got questions about money, I've got answers.
Let me start with a brief Q&A on some basics:

Q: What's a credit report?

A: A credit report is a resume of your finances, if you will. It contains your name, address, social security number and some employment history. A credit report combines a mix of types of credit in use, new credit (and inquiries for new credit), length of credit history, amounts owed, and payment history to give you a "score". A high score on a credit report will result in lower costs to borrow money and other benefits. A low score will result in higher costs, and sometimes inability, to borrow money. A credit report contains all accounts open, closed or cancelled in your name. A credit report also reflects bankrupticies, liens, evictions and other delinquencies. Information appears on your credit report for seven years (except bankruptcy, which reflects for ten years). High debt to income or bad credit can be extremely detrimental in your future, yet, it's very simple to avoid this scenario.

Q: What's the big deal about your credit report?

A: A credit report is more influential than ever before.