Cut up those credit cards?

One of my goals for this year, that I have partly accomplished, is raising my credit score. I need to get my score above 740, at minimum, so that when I apply for a mortgage loan, I’ll be able to get the best rate. I still need to raise my score about 40 points (this is an average as all 3 credit bureaus are reporting slightly different scores). One thing I’ve learned about improving my credit score, is keeping my debt to credit ratio low. Since I’ve paid off all of my credit cards, I’m looking pretty good here. However, another factor that affects a credit score is how much total credit banks are willing to loan you. Since I’ve been on a mission to improve my poor credit history, I haven’t had much credit extended to me these past few years leaving me with very low credit limits.

So, here is my dilemma: I have two credit cards with low credit limits that are charging me monthly fees and/or annual fees (totaling approx. $155 for the year) . I don’t use these cards at all anymore. However, there is a catch with these two cards: they were originally a way to pay off old collection debt. These cards were offered to me about 6 years ago to pay off two other credit cards that had gone into collections. Once I paid the old debt off in full, they extended a limited amount of credit to me. I’m now thinking of canceling these two credit cards now that they are paid in full, but then my overall total available credit limit will be reduced by almost $1,000. How will this affect my credit score? Will it ding my score by a few points? Since I’m hoping to apply for a mortgage loan with in the next year or so, I’m trying very hard to keep the activity on my credit report to a minimum.

After doing some research, canceling my two credit cards would probably affect my credit score a little bit. By how much, I don’t know exactly. I have two options; A.) I cancel these cards and save $155 annually, with the potential of losing a few points off my credit score, or B.) I keep these cards until I am able to purchase a home.  That could be up to 18 – 24 months meaning I would have to spend up to $310 on fees, but I’d be saving my credit score.

For now, I think I will keep the cards. If purchasing a house becomes ever more elusive and my time frame extends to more than 24 months, I might just go ahead and cancel these two cards. I do know that when I obtain that mortgage loan, these two cards are getting the ax!

What do you think? Would canceling these cards now be beneficial? Am I making the right choice by keeping these cards a little longer?

Hi – this is Mr Credit Card from www.askmrcreditcard.com. Little House has written about credit on this blog and I’d thought I’d share some thoughts on how the cheap credit that became in the 2000s has led to our current financial situation. If you are looking a for credit card, please check out my best credit cards list.

Little House mentioned in her post about life before credit, how credit became more available to folks after the eighties. I would like to take this opportunity to expand on this phenomenon, especially after 2000, when the real estate market seems to have taken off. And how this easy cheap money has nearly ruined us. At the end of the day, I think there are lessons to be learned when things are cheap and come too easy for us. It almost always ends in tears.

The 90s was a decade best remembered for President Bill Clinton actually balancing the budget and having a budget surplus. It was also a decade of boom in the stock market as low commodity prices allowed big blue chip stocks to outperform earlier in the decade. It was also a decade where then Federal Reserve Chairperson Alan Greenspan made reputation for himself for having the Midas Touch. In reality (and on hindsight), what Greenspan did was simply to lower interest rates and print money wherever the first sign of economic trouble was in sight.

In 1998, after the Asian crisis and the Russian Default, Mr Greenspan lowered interest rates on fear that the US economy will slow down. Well, it slowed down a little, but the effect of low rates was a bubble created in the internet stocks and NASDAQ in particular. He then raised rates when the economy was overheating, and when 9/11 happened, Greenspan slashed rates to unprecedented levels. Rates stayed so low for so long that access to credit became really easy. There were some unintended consequences.

Firstly, it was the beginning of a housing boom that would devastate us years later. Cheap money and easy credit meant even that folks who should never have bought a home could get a mortgage. Everyone knows now that this was really the root cause of today’s financial crisis. But even folks like General Motors began their famous 0% financing. “Buy America” was deemed to be patriotic. That was also the beginning of 0% balance transfer credit cards. “Transfer your balances over because we want to make money of your interest!” – was what the credit card companies were saying. Even college students could get multiple student credit cards even with no income! Even if you had bad credit, there were cards available. Want to buy a furniture but have not saved up, there is always 0% no interest payment for 24 months financing! So rather than saving money, consumers were “encouraged to take credit”. (Note: Thank goodness Little House had very little access to credit!)

Proliferation of real estate related jobs!

One of the most damaging aspects of the easy credit of the 2000s was that the real estate boom led to all sorts of job creation, but in the wrong sectors. We had obviously a proliferation of real estate brokers, mortgage brokers, contractors, construction workers. Do not get me wrong, there is nothing wrong with job creation. But the jobs created by these “easy and cheap money” did not create products. These folks were mere middlemen whose earnings were really a tax on transactions. They did not really add value to the economy.

Next came the proliferation of real estate investment books and seminars, get rich quick schemes. All of a sudden, every one became a real estate “investor”. Everyone wanted to get a “second property” as an investment! As credit became easy, I know folks who took out second mortgages and tried to be like the big boys and invested in “commercial property”.

But almost all the jobs that were created by easy credit conditions were not manufacturing sector. In fact, we are steadily losing our manufacturing capacity to other “cheaper lower cost countries”. Therein lies the problem. We have a trade deficit (we export less than we import). We have a federal budget deficit (and Obama is proposing a budget that has a one trillion deficit this year). Listen again : ONE TRILLION DEFICIT. Can you imagine if you propose a budget to your spouse with a deficit! Put in this context, the jobs that we have created amount to nothing more than “internal wealth transfer” and did not make us richer as a nation.

I think there is a lesson here to be learned. And that is when something comes too easy, there are always unintended consequences. And if you do not understand the root causes, you will get into trouble. Let’s use a few examples.

1. Easy Money In Your Job – Many folks who got to be mortgage brokers or brokers got lucky during boom times and made lots of money. The problem when you “by chance” entered an industry that is booming is that you run the risk thinking that the good times will last forever. I know folks in Silicon Valley that made good six figures in the late 90s and have not been able to find a job that pays anywhere near since!

2. Your kids get good grades too easily – I’ve seen this a few times. Young kid does very well in math in elementary school. It comes easy for the kid. So he never learns to work hard because he or she does not have to. But there comes a time in middle and high school when the subject gets tougher and all of a sudden, they cannot cope because they never to fight through adversity in studies.

3. Large home equity line of credit and credit cards in your wallet – Many folks have gotten into this trap. Back a couple of years ago, getting a home equity line of credit and credit cards came super easy. Hence, many folks assumed that that they could be used for silly purposes without saving money – like renovating their kitchen, taking vacations!

5. Kids who excel in sports early in life – Ever seen a kid who is eight years old and you think will become the next baseball star only to see him fade away. When things come too easy, the kid forgets that to get ahead, you always have to keep improving.

Is your job merely involve a transfer of wealth in the economy?

Perhaps the biggest question we are all asking ourselves if how safe is our jobs. One good insight is to find out if the job you have adds value to the economy or are you simply a toll taker like a real estate agent. Because we as a nation had debt up to our eyeballs, it is very unlikely that consumer spending will recover anytime soon. I think you have to ask yourself if you are working for someone with a unique product that people around the world would want. For example, if you work for Microsoft or Apple or an equipment company that sells products worldwide, then at least you know that you are helping to contribute to the wealth accumulation of this nation. But if you are in any sector that depends on “consumer spending”, I think tough times lie ahead.

If you have been laid off, or are considering a career switch, kindly consider what I have said. Don’t be fooled by easy “network marketing” or any other “easy money makers”. There is no such thing as easy money. If there is, the good times never last. And we should all have learned that by now.

This may seem like a strange topic..When to Give Advice, especially considering I just finished a credit eBook that gives advice on improving credit scores. However, because I have learned many things about how credit works along the way to my own financial freedom, I’ve been asked to give advice to a friend or two recently.

Just yesterday, an older woman who I’ve helped over the years, asked me what she should do about her credit card debt. Now granted, this particular case is unusual and interesting, so my answer wasn’t complete because there are so many variables affecting her life of debt. Some background on this woman to put things in perspective:  She is nearing 65 years of age and has accumulated $120,000 of credit card debt over the years. Her excuses for this behavior are plenty: her mom died (10 years ago), her husband left her (12 years ago), her dad died (4 years ago). Her excuses go on and on. Her income is generated from her family’s businesses and her ex-husband’s social security and residual income, it comes out to about $80,000 annually. On top of this income, she also has investment accounts that her parent’s left her. Basically, she hasn’t really had to earn much of her income over the past 25 years, it just sort of accumulated from relatives. Her grasp on finances has dwindled due to this and other factors.

She asked my advice about calling and asking a credit card company to increase her credit limit or reduce her APR. The reason being was that Chase reduced her credit limits on two of her cards. She has stellar payment history, but her credit to debt ratio is well over 30%. I explained this to her, as it was one of reasons listed on the Chase letter she had received. She didn’t understand why they were looking at her overall debt including all of her credit cards. Once I explained that they see her as a risk because she is using much more than her 30%, she sort of understood, but felt it was unfair. My advice to her was to call Chase and ask them to either reinstate her original credit limit or reduce her APR. My thought on this was that it doesn’t hurt to ask, the worst they can say is no. Obviously the better option is to reduce the APR.

She then asked if she should pay more towards that card, thinking it might act as an incentive to change their minds. My advice to her was that she needed to figure out what the goal was: Was she thinking she wanted to pay off the card quicker? Her answer was no. Was she thinking of paying a large portion of debt off this year due to some additional income coming her way? Her answer was she wasn’t sure. I then explained to her that if she receives this additional income she is expecting, she might want to put a large portion of it towards her debt. However, by the end of the conversation it was clear she just wanted to reinstate her original credit limit of the card.

After I hung up with her, my husband who had overheard the entire conversation chimed in that she really needs to speak to a financial consultant. She did that two years ago, but didn’t like their answers: 1) Pay off the entire debt and save up to $20,000 a year on finance charges, or 2) file for bankruptcy. But I realized what the underlying problem is that’s causing her to be indecisive: She doesn’t realize that by paying off her debt, she will be saving the money she spends on finance charges.

There are some great calculators out there, like CreditKarma’s Debt Repayment calculator. I think my next strategy with her will be to show her how long it will take her to pay off her debt with the online calculator. Maybe then she’ll realize the sooner she pays it off, the better!

What are your thoughts? Obviously, this is an unusual scenario. She makes plenty of money, but just can’t seem to see the big picture. How would my credit eBook helped someone like this 25 years ago?

Okay, so I finished my credit eBook and am now looking for constructive criticism. My pamphlet is based on personal experience as well as sound advice that I have learned over the past few years. I’m trying to decide if I should offer my eBook for free, offer it for a nominal fee, or throw it in the recycle bin! All comments are welcome. Just remember that I am a sensitive human being.

P.S. I am temporarily hosting it on the adobe site for now. Once I receive feedback and figure out how I want to offer it, I will have a downloadable link from my site to my eBook.

I’m writing an eBook to follow up, and combine, an article I wrote on WiseBread.com and my credit score post. I will most likely have it up within the next couple of days (I’m ahead of schedule!) and will be open to constructive criticism. Please check back this weekend, or early next week and download it. My goal is to eventually offer it for a minimum price. However, I will want to make sure it’s as helpful as possible, and pertinent.

Stay tuned….

This is a follow up, and somewhat contrasting, post to my most recent post, Life Before Credit. Thanks to Susan Tiner at Financial Organizing for sending me a link that described life in American throughout most of our 200 years of democracy, much of which has been created on borrowed money or credit. American Radio Works wrote a whole series on the American Dream and the fundamentals of what that stands for, mostly something different to everyone. But fundamentally it’s the idea of self improvement through hard work.

From the Pilgrims, to the New Deal,  to current American’s, in order for the majority of people to get ahead, credit is a necessity. As a country, there is this “can-do” attitude that with hard work and a willingness to better ourselves each individual can obtain their goal. However, for most of us that means having to borrow money to achieve it. Here are just a few examples of how credit can be beneficial, including some historical examples:

• The Pilgrims sail to the “New World” : They funded their trip through an installment plan (according to ARW). Merchants backed them by giving them loans and the Pilgrims made payments, simple enough. And this was almost 400 years ago!
• FDR’s New Deal: Government incentives gave WWII veteran’s free college tuition and affordable home mortgages to boost the economy. New homes meant new appliances that could easily be added to the monthly mortgage payment.
• Opening a business (timeless – meaning past, present, or future): Most people can’t start a business without a small loan. Of course there are always people who start businesses out of their homes on their own, but there are far more businesses that obtain loans in order to build or grow their business.
• Purchasing a house: According to ARW, prior to the New Deal, it was an uncommon practice to obtain a mortgage. Only wealthy people could afford homes by paying cash for them.

Credit in and of itself is not a bad thing. It can help people get ahead, start businesses, purchase homes. Building a good credit score is near impossible without some form of obtaining credit, whether it be a revolving or installment account. A good credit score can help people obtain those things that were once only possible for the top 1% of the population. Credit has basically created the American middle class.

Yet, the cycle of debt that once may have been manageable for most, seems to have spun out of control over the last few years. Gluttony seems to have set in. The American middle class is shrinking, or so it seems. With each decade, American’s redefine themselves. Perhaps that redefinition will be more clear in the coming years.

On a side note: A shout out and thanks to those sites driving traffic to mine-

• WiseBread
• Financial Organizing
• The Simple Dollar
• Get Rich Slowly
• Financial Samurai
• Cute as Pie Cottage
• Ultimate Money Blog
• One Income Dollar

When I was a young adult, my life was financially simple: Work, make money, pay the bills. It was a simple 3-step cycle. I did have a couple of credit cards, cards that I received the month I graduated high school. But I was terrified to use them. A little voice inside my head told me that if I couldn’t afford it at that moment, then I wouldn’t be able to afford it a month from now. For many years, that little voice stayed with me and kept me firmly grounded to my 3-step cycle.

After many years of seeping in credit, I’ve learned the hard way how having access to credit can financially doom you (maybe that’s a little harsh)  if you’re not careful. But, it has also made me think about the psyche behind borrowing money on credit. When did this become the “norm” for the typical American? How did so many of us buy into the “American Dream” by borrowing to get there?

First, I think I need to define the “American Dream.” To me, that means owning a home on a mortgage and having a car or two. Maybe it even means having some luxury items that are wants but not needs. This American Dream prior to the 1950’s wasn’t the norm. It became more normal after World War II when the government began offering low payment mortgage’s to WWII veteran’s and their families. Throughout the 1950’s and ’60’s, life was pretty good for the majority of Americans, or what was being defined as the Middle Class. Of course, I need to make a side note here, this “middle class” was mostly made up of white families.

This middle class was gaining buying power. And some of this buying power was based on credit. Of course the idea of credit wasn’t new. Even dating back to “The Ole’ General Store” of the Wild West days, stores would extend credit to their good customers. The idea was built on good faith. In the 1950’s, the Diners Club card was the popular charge card of the day. Charge cards were cards that had to be paid in full at the end of the billing cycle, or month.

• Side Note: Here’s a great story about the history of the credit card. It goes more into depth on the actual history than my glossed over version.

By the 1960’s, consumers had the option of revolving credit accounts. They could pay off the charges in monthly payments over time. Here is where the beginning of the debt cycle starts. As a population, most of the people with access to these cards would have been around the age of 20 years of age, or older. These people would have been born during World War II or earlier, a time of scrimping and saving for the most part (aside from the roaring ’20’s, but we all know how that ended). It makes sense that these people, as a group, would have been a little leery of racking up a bunch of debt.

It also makes sense that this generation, as parents, would have instilled their values on their children, who would have been adults around the 1970’s. Again, as a population, the amount of credit card debt in the 1970’s to early 1980’s wasn’t obscene. It only began to grow exponentially around 1982, or the Regan Years.

• Another side note: Here is a very in depth article on the rising debt of  the 1980’s.

What made the population of the early- to mid-1980’s begin charging everything, or living beyond our means? Was it Nancy Regan’s dresses? She never wore a dress more than once. Was it that Ronald Regan and Nancy Regan were from tinsel town and everything was opulent? Or, was it more media based? More often than not, the answers to complex questions are never black and white. The answers are usually based on a cause and effect relationship with multiple factors involved. Possible reasons why we became  mega-consumers: (I’m not a financial analyst, but these things seem to make logical sense.)

• Credit card companies began extending credit at a low minimum payment, allowing users to spend with the idea of paying it back in the future. (a very blurry future)
• Our current president and his wife had panache. They were celebrities and dressed nice.
• The advent of MTV opened up a whole new avenue of media.
• Debt to gross national product fell.
• Mortgages increased with home prices.

There are a flurry of other causes that lead us down the debt path, including the Savings and Loan scandal. However, with the our most recent economic melt down that seemed to affect the majority of our population, we may be realizing our mistakes and learning from them. A recent article I read said that the average American’s savings rate has increased to levels not seen in decades. There may be hope for us yet!

I couldn’t really think of a catchy title for this post, however I wanted to touch upon why I use my debit card as a credit card most of the time. There are just as many pros as there are cons to using a debit card versus an actual credit card, but I use my debit card the majority of the time because it’s just easier for me in the long run. One reason I use my debit card is that I earn reward points when I press the “credit” button instead of entering my PIN at a store register. Then, I enter the withdrawl into my Quickbooks program and can usually see the charge appear on my online bank account with a day or two. This is where using a debit card can become a con, if I forget to enter my transaction, I might not be able to view it immediately on my bank’s website. Here are just a couple debit as credit basics that I’ve learned:

• PRO: I use my debit card as a credit card by pushing the “credit button” at a store’s card swiper-thingy. By pressing ‘credit’ I earn reward points that I use towards gas cards. I can usually acquire 4 or 5 $25 gas cards in a year, well worth the $25 annual fee I pay for my rewards program.
• PRO: I pay for the item within a day or two, so I don’t have to worry about having to pay for it at the end of the month. With this said, however…
• CON: Many times the ‘credit’ transaction doesn’t appear immediately on my bank’s website. This means if I am close to my bank balance, I could possibly overdraw because the bank still thinks I have that money in there. I have to be on top of my finances, to the penny. I also have made sure to keep a little extra in my account and have set up an overdraft account in case of emergency.
• CON: I do have a limit to the amount I can spend in a day. Even if I have the money in the bank, most debit cards have a limit to “protect” the customer.

Why don’t I just use a rewards credit card instead? Discipline mainly. I’ve been really good at using my credit cards lightly, then paying them off before they accrue finance charges. However, because I am not a cash-carrying type of gal, I have to use plastic to pay for even small charges. If I had to put all of my charges on a credit card, I just think I’d be leaving myself open to trouble. Since I recently paid off all of my credit cards, I really don’t want to go back to having any kind of balance. I know there are plenty of people who put all of their expenses on their credit cards, only to pay them off at the end of the month. But being a debt-free newbie (or at least with my credit cards), this is dangerous territory for me!

Perhaps in the future, when I become more financially stable, I may use credit cards for my everyday purchases instead. I know that most  credit cards have more protection against fraud than a debit card.  Yet, my bank has been pretty good about reversing any suspicious charges I’ve encountered.

What do you prefer, cash, credit, or debit? Are there some glaring cons to debit cards that I’ve left out? How many of you use your credit card for everyday charges, then pay it off at the end of the month?

While browsing articles on MSN.com, I came across a startling fact; a particular credit card company will be offering some of their cards at a 79.9% interest rates. This new rate is in response to the new credit card laws going into effect next year. As appalling as a 79.9% interest rate credit card may seem, I wasn’t as flabbergasted by the rate when I found out who was offering it: First Premier Bank. First, let me begin by saying that I’ve known about First Premier Bank for a while now. They target people with crappy credit, and I should know first hand that their credit cards aren’t a great deal. Many years ago, when my credit was in the dumpster, I was offered a First Premier card with an annual fee and a ridiculously high initial fee. The credit line offered was really low, $250. Over the past few years, an occasional application would show up in the mail. I would immediately shred it, knowing that their rates, fees, and limited credit line was probably the worst credit offer in history.

However, they are now offering this new rate to “select customers.” Maybe these “select customers” are on a mailing list with people who have IQ’s below 80. Because, who in their right mind would sign up for a card with a 79.9% interest rate and credit line of $250? Or, maybe they are targeting people who they know are desperate for a credit card to help them  “rebuild” their credit? I’m using the word “help” loosely here, because this company is definitely not helping anyone.

This astonishing rate got me thinking about who really would agree to these terms, and could it work in their favor? I’ve outlined scenarios that have been presented to me during the horrible credit phase of my life. Using my experience to build off of, here is my analysis:

• Rebuilding credit through payment history: Credit cards help build credit, that’s a fact. But they only help if the person is dedicated to using it wisely, meaning charging an amount they know they can pay off before acquiring finance charges. In the case of First Premier Bank, the annual fee would need to be paid off immediately. Then, the card holder could charge a small item and pay it off right away. A person could build a payment history using this card.
• Rebuilding credit through total amount available: The low credit line this card offers isn’t terrific at all, since a portion of  your score is based on how much credit is available to you at any given time – or how trustworthy you appear. In this case, this card really isn’t doing anything at all. It might be better to look into a secured credit card through a reputable bank like Wells Fargo.
• Rebuilding credit through various types of credit accounts: Another element of your credit score is the type of credit a person has: revolving, installment, or charge card. If one were rebuilding their credit and already had an installment loan that was in good standing, for example a student loan,  they may want to secure a revolving line to boost their credit score. If they had been turned down recently through a mainstream credit card, this might be an option. But I would add, this First Premier Bank card  should be a final option after all others had been exhausted.

In summary, this First Premier Bank card looks like a lump of coal. My guess is that their 79.9% card won’t go over well, even on their “select customers.” Since the new credit card law doesn’t cap interest rates, I fear that consumers may be overwhelmed with horrible rates. Our best defense: pay off credit cards in full before interest rates accrue, that’ll show’em!

Suze Orman is known as a financial guru within the credit industry. I don’t know much about her except that she owns, or sponsors, MyFico.com, a great place to order an in-depth credit report. I love their little charts and graphs. However, yesterday I read an article on MSN.com that says she recently told her viewers to stop using their credit cards. What’s this advice I hear? Doesn’t this contradict her original view of credit usage? The answer is yes.

Within the past year, she has completely changed her outlook on credit card use. First, she told people to only pay the minimum on their cards if their jobs were in jeopardy. I can understand this view point. However I think there are too many people out there who may have listened to this advice whether their jobs were in jeopardy or not. The better strategy is to pay down as much debt as possible, and also make sure you save some money towards an emergency fund. Even if you loose your job, at least you won’t have as much debt to deal with.

Now, she is advising people to stop using their credit cards. The reason she has changed her tune is that credit card companies are doing some really nasty things, like raising APR’s on card holders with excellent credit, slapping on annual fees and additional charges, and changing terms before the July 2010 deadline in which the new credit card laws take effect. Her tactic is an effort to make credit card companies realize we are unhappy with them with the hopes that they will shape up and begin to care about their customers. In essence, her advice is like a boycott. Again, I can see where rallying the masses to send a message to credit card companies may help them change their sneaky ways.

However, this advice doesn’t apply to everyone. In my opinion, there are some good reasons to continue using your credit cards, even if you really dislike the credit card companies and their shady money-making tactics:

• You are repairing your credit. My husband and I are just coming out of many years of crappy credit. We need to continue to build up our credit score, and maintaining a good credit history is one way to do this. This means we still have to use our cards, very lightly, then pay them off to show we are diligent and responsible card users.
• You are just beginning to build credit. As a young adult, no one tells you much about how to build a good credit score, or the effects of completely messing one up. More importantly, no one explains why you need a good credit score. If you are just starting out, being a responsible card holder helps to build a good credit score, and this will benefit you by qualifying you for the best rate auto or house loan. (Finance charges really add up exponentially!)
• You use those rewards points for necessities, like gas. My Wells Fargo debit and credit card earn reward points that I use towards purchasing gas cards. These points add up to real savings over time.
• You find it easier to keep track of expenses and only pay one bill a month. Since credit card statements breakdown each charge, for some people this may make more sense and take less work when it comes to balancing your checkbook.

I don’t completely disagree with Suze Orman’s current stance on boycotting the credit card industry.  I just think each individual needs to weigh the pros and cons to their own individual needs.