Don't Do Debt.com

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.

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.

Debt Over Lunch

Today's lunch with a dear friend led to conversation about everything under the sun and eventually wound around to my favorite subject: money. She recently switched jobs and and now earns substantially more money than her last job. In spite of the increase in salary, she says she and her fiance can't seem to save money. "Money just seems to go and we still live paycheck to paycheck with nothing saved," she confessed.

Their situation is not unusaul and many people identify with this very struggle. She's at a prescious crossroad: she can either take control of her money now and start planning how to get ahead or she can continue along the same broken path.

Spending Craving Cure: Garage Sales

Streets of Decatur, GA are lined with garage sales galore. Gotta admit, I'm ready to shop and spend some money. Bring some cash and you can have anything you want for less than what you'd pay retail. "Powell," my friends scream with child-like enthusiasm, "You can get a Mexican blanket just like the one you wrapped up in on the way down". (They won't give up the blanket, it officially belongs to the dogs). I address the garage sale topic for this reason: We all need and want (okay, sometimes crave) certain things. Spending money can sometimes be it's own romance- it's seductive and feels good and you get to take something home with you.

Credit Score Ingredients: Mix of Success

If you your credit was pulled today, do you know how you'd stand? Good credit? Bad credit? How's your debt to income ratio? Do you know what's bringing your credit down or pushing it up? A report recently across my radar suggests that a FICO score is comprised of the following:

10% Type of credit in use
10% New Credit
15% Length of Credit History
30% Amounts Owed
35% Payment History

Payment history is highest in the mix: Late payments erode your credit score. Period.

Credit Cards & the Big Picture

Here's how credit card debt depletes a paycheck and prevents someone from saving money:

Junior opens a credit card with a 0% introductory rate. He charges $300 to this new credit card and only has to pay $15. He thinks, "Wow, I paid $15 to spend $300. This is easy. A few more credit cards won't hurt." What typically turns out to be a short-lived moment in time, Junior believes he can pay a little extra every month (minimum payments) to buy and do what he otherwise couldn't (by charging it). The real interest rates kick in on his handful of cards.

Simple basics in the big picture of money

As I continue blogging away about my thoughts on debt and today's young people, you'll frequently notice that I refer to "the big picture of money". What is this big picture I am talking about? Here goes...I believe that to truly help a person handle the short term temptation of credit cards and avoid the long term consequences of credit card debt, a young person needs incentive to avoid to avoid financial complications early on. They need to understand the big picture of money. Consider this: