Promotional Balance Transfer Checks are no Bargain

Posted on October 19, 2011 Written by Leave a Comment

You just skipped back into the house after visiting one of the more exciting locations on your residence, the mailbox, with what seems to be an amazing offer from your very own trusted financial institution thinking you just scored!

After all, how could you lose with an offer to cash a check for the low, low rate of only 2.9%.  In fact, as you recall, you have over $5,000 left on that credit card limit, and a few smaller credit cards charging you 7.99%.  Let’s see, 7.99% minus 2.9% is a 5.09% savings.  WOW!  What a deal!

Not so fast.

Read the terms and you’ll see that your credit card company charges you a fee when you make that transfer.  In fact, the piece of mail that I’m looking at right now charges me a minimum of $5.00 -OR- 4% of the amount of the check that I cash, whichever is larger.

If my bright idea was to combine two credit cards at 7.99% with balances totaling $5,000 to this one card at 2.9% then I’m about as dumb as a box of rocks, and I think that a low monthly payment is more important than the total cost (something that rich people don’t do.)

So let’s say I do the transfer.  The fee alone will be $200.00 just to move the money to this account.  Then, I’ll have a rate of 2.9% by which my monthly payment will be calculated.  Is the long term interest paid less?  Well, not really, because I just paid 4% of the total balance up front.  You think they haven’t figured you out?  You just agreed to take a one time hit of 4%.  Add that to the 2.9% and your actual rate is 6.9%.  Sure, the compounding rate will only be 2.9% but that only lasts for 9 months on this offer.  After that, the rate jumps to 14.99%.

Nice work.

Don’t think for a second that you can outsmart the credit card companies.  They pay billions of dollars per year to very smart people to determine how to get more money from you up front.  Balance transfers are a collection tactic to get your money in their pocket.  Not just money you already owe, but money you didn’t owe yet.

Think twice.

Filed Under: Credit Cards Demystified Tagged: , , ,

Explosive Retail Diarrhea

Posted on December 6, 2010 Written by 1 Comment

So, I saw this video today, and it made me think of a few things.  Firstly, it looks like the impatient consuming bowels of the economy simply let loose and flooded the stores with scores of idiots carrying credit cards.  Is it fair to assume they’re idiots?  No.  Is it fair to assume they’re purchasing everything on credit?  No.  Is it fair to assume anything in this video?  Probably not.  But I’m doing it anyway, because I’m stunned at the absolute mayhem that a single shopping day has resulted in.

Really?  What is so important in life that you have to be a part of this?

Filed Under: Hey! Wake Up! Tagged:

Credit Cards Demystified Part 1: Monthly Finance Charges

Posted on January 5, 2010 Written by Leave a Comment

Understanding Monthly Finance Charges

Part of your success managing your own finances involves understanding how money works for you and against you.  Credit card companies have intricate calculation methods that are usually confusing to most people.  For instance, how do they determine what your minimum payment is?

Understanding how you are billed is critical to building a plan for your money. You should be telling your money where to go every month, and if you stay on top of how they calculate your bill, you’ll be able to anticipate your monthly minimum and plan for it.

Also, how do they determine what your monthly finance charge is going to be?  Since you need to understand how to do one of these calculations before you’ll be able to do the other, we’ll start with the monthly finances.

How do they determine your monthly finance charge?

Not all credit card issuer agreements are the same. To verify this, have a late night chat with a 3rd shift employee at your card company right as their shift begins.

Somewhere on your statement, you should see a section similar to the one shown below, which outlines your Account Summary and your Rate Summary.

As you can see in this recent example of my actual statement (I don’t care if you know how much I owe), the standard information is shown, which typically includes your previous balance, a total of all of your purchases that month, a total of all payments and credits that month, your finance charge, and your new balance for both regular purchases and cash advances.

Advances are charged a higher rate because of the added risk to the bank in loaning cash. There’s no way to protect your purchase, and you could be gambling it away for all they know. Not only are they charged a higher rate, they are ALWAYS paid off last to maximize the banks profit. They are attempting to change legislation to prevent this seemingly criminal practice.

Below the Account Summary is the Rate Summary, which outlines the annual rate, the periodic rate, and the amount of the balance that is subject to finance charges that billing period.

Notice that the finance charge for this statement is $67.06.  So where do they get this number?  If you multiply $5,630.11 (the balance subject to finance charge) by the Nominal rate of 14.99%, you get $843.95.  Now that can’t possibly be right.  If you try again and multiply it by the Periodic Rate, you end up with $231.22.  Nope, that’s not right either.  At this point, scratching your head, you may think something is fishy.  I have news for you…nothing is fishy.  They calculate it in a totally different way.

What is the periodic rate? The periodic rate is your annual interest rate divided by 365 days of the year.  14.99% / 365 = .04107%

How is the periodic rate used? This is where it gets down right annoying, and they know this, and they bank on you never asking about it so you’ll always be one step behind the card company.

Monthly interest charges on your credit card are calculated daily based upon the daily balance on the account.  So for example, if on January 1, 2010, you charge $1000.00 on your brand new credit card that has a zero balance, you will be charged .04107% of $1000.00 for that first day.

$1000.00 X .04107% = $0.41.  So, on January 2, your balance will still be $1000.00, but your running total for your finance charges will be forty-one cents.  On day two, if no additional activity has occurred on your card, and your balance is still $1000.00, your daily finance charge will be calculated again, and added to your running total.  Only this time, even though your balance is $1000.00, the finance charge will be calculated based on the entire amount owed which is $1000.41, thereby compounding your interest daily.

$1000.41 X .04107% = $0.41 (at these small amounts, the exponential increase is not enough to change the $0.41 just yet.)

So, you wake up on the 3rd of January with a $1000.00 balance on your credit card, and a running finance charge total of $0.82.  Now, nobody is going to keep track of how much was on their credit card at the end of any given day, unless they have way too much time on their hands, and the card issuer counts on this, because they want us to remain in the dark about how much we’re going to owe at the end of the billing cycle.  They want us to feel out of control.

Here’s where it gets sneaky.  Let’s say you decide to use your credit card to run up a huge purchase of $10,000 that you intend to pay off two days later in hopes of using what you think is “free money.”  Since the interest is calculated based on a daily balance, while that balance survives each night, it contributes to the finance charge at the end of the month.  Remember that your balance is $1000.00 with a running total of $0.82 racked up on the finance charges.  The night you charge $10,000.00, you will be charged a periodic finance charge for the entire balance:

$10,000.00 + $1000.00 + $0.82 = $11,000.82 X .04107% = $4.52.

The following day you pay off the $10,000 purchase, and you’re back to a balance of $1000.00, but now you’ve got a pending finance charge of $4.52 + $0.82 = $5.34.

What was once a small forty-one cent daily finance charge has just been smacked in the face with a chunk from the large purchase.  That should explain in fairly good detail how monthly finance charges are calculated.  In summary, the finance charge is the sum of the periodic rate X the daily adjusted balance (charges and payments together) for the number of billing days in the billing period.

Stay tuned for Part 2 of this mini series: How Credit Card Companies Determine Your Minimum Payment

Filed Under: Credit Cards Demystified, Financial Basics Tagged: , , ,

Cash is King: Lower the Rate

Posted on February 13, 2009 Written by 2 Comments

(Note: I’ll preface this by letting you know that a credit card is the devil.)

Today, while using a credit card that I usually use, that I’ve had for over 10 years, which has a limit over $20,000, to pay an important bill, I was declined.

What?  Declined?  How can that be?  Here’s how.  My credit card company (AT&T Universal Card), in their infinite wisdom, made an executive decision to tighten my credit line to the balance on my account.  In a time when cash flow is king, and required to continue moving the parts of the machine that allow me to make an income, the last thing you want to have happen is this, as it completely eliminates your cashflow.  When I asked them why, they told me they ran a check on my credit report.  Why would they do that?  I don’t believe they did it.  I think they’re just telling us that and the real story is that they’re scared to death that they’re too exposed.  That’s fine and dandy and all, and they have every right to do so, but let’s be reasonable here!  No letter, no phone call, no notification at all.  Ask forgiveness instead of permission right?  Get this…I was paying my AT&T phone bill with my AT&T credit card!

As a 100% commissioned sales person, my income depends on the closing of the next sale.  Expenses that have a return on the investment, such as placing sign posts, sending out cards, subscriptions to various marketing services, and oh yeah, my monthly cost to the brokerage, are typically floated on my “business line of credit,” or, the credit card that I choose to use to fund my operations.  Whether it be a small monthly fee to DocuSign, or my brokerage fee, the credit card is a critical cashflow tool that makes it much easier to manage my monthly expenses.  One payment at the end of the month, easy to track, no problem.

Closing a sale results in me paying off the balance in its entirety at which point I realize my profits and recover my operating cash.  Due to the recent (pardon my french) banking bullshit that we the little guy have been forced to feel through the disgusting practices of some extremely greedy people at the top, many of us are no longer able to pay the very bills that we need to pay in order to continue making money.  How can a credit card company cut off my purchasing power…the very line of cashflow that I need to generate income?  Well, they can and they do.  But that’s just one part of the story.  The interest rates that credit card companies charge are yet another piece of this idiotic puzzle.

Interest Rates are Criminal

After a long phone call, I was able to get my rate reduced from a criminal 29.99% to 12%.  Others have not been so successful.  One colleague recently called the credit card company to have her rate reduced and instead, they eliminated 90% of her purchasing power.  They dropped her from $20,000 to $2,000, and didn’t even giver her a rate reduction.  I was rather shocked to find that I had been increased to a criminal rate.  I’m tempted to never pay them back at all, but that would not be the right thing to do.

I’m not sure how I managed to get the rate reduced, other than being good at sweet talking the operator, but I did get it reduced, and thankfully, they also went back 6 months and credited me the difference of 29.99% and 12% because I had overpaid unjustly.  Missing a payment by one day will screw you so hard your head will spin, and they usually just apologize at you and say there’s nothing we can do.  “You’ll have to contact Experian,” they say.  “They’ll be able to show you why we made the decision.”  No maam, they will not.  They will not be able to show me why your credit card company decided to limit my purchasing power.  They will not be able to show me why my rate cannot be reduced to retain my future business.  All they can do is show me my credit history.  They have no idea how to read your mind anymore than I do.  I have no idea what your executives were deciding when they made the call to cut off my cashflow.

$1000.00 at 30%

I’ve written about this before, but there’s no doubt that it needs to be known by all who use a credit card (which I will reiterate takes extreme financial discipline, which most people don’t have.)

A card with a balance of $1000.00 usually requires only a minimum payment of $15.00/month.  You can buy that new laptop for only $15.00/month right?  Not so fast.  Let’s assume you pay $25.00/month instead of the minimum of $15.00.  At 29.99% annually, you will be paying somewhere around $4300 for that $1000.00 laptop and it will take you 15 years to pay it off. CRIMINAL!  If you fall into this trap once, that’s okay, get yourself out as fast as you can.  If you fall into it more than once, you’re an idiot.

The real lesson to learn about finances is that when you owe someone money, you become enslaved to them and the freedom to experience life as you were designed to experience it is virtually eliminated.  If you can, at all costs, and all interest rates, avoid credit cards entirely.

Filed Under: Personal Finances Tagged: , , , ,