Financial Freak Show

Man I’m glad I don’t have to deal with credit card companies any more. Sunday evening I was catching up on my laziness and decided to watch an old episode of Frontline titled the Secret History of the Credit Card. No, I don’t normally make a habit of relaxing to episodes of highly biased news programs from 2004 but I figured you FinancialFreaks might benefit from my pain – so I took one for the team!

The program itself started out by revealing the history of how credit card companies positioned themselves to take advantage of a lack of regulation in some states. They then went on to discuss how the companies then came to exploit the lack of regulation to take care advantage of the consumer/borrower (told you they were biased…but then again so am I).  I’m not going to suck the life out of you with the intricacies if the credit card business here today but I will say the more I pay attention to the business the more I wonder, aside from the stock holders, who is really benefiting from their practices. The one thing I found surprising was how many ex-credit card industry professionals came out to speak against industry practices.  

Now I’m not here to completely bad mouth these guys but it does reinforce to me why I choose to find other options than credit cards. Remember these consumers, including myself, signed up for this ride and if you don’t understand the contract maybe you shouldn’t be so quick to sign on the line. I am personally a share holder in several banks through my mutual funds so I love it that people several million people can’t control themselves almost to the point of bankruptcy then manage to fight their way back through 30% interest rates and late fees then immediately jump back on board for another trip. To that I say….YEEHAW boys! Let’s ride these hogs all the way to retirement on the backs of out of control consumers trying like hell to save the embarrassment of a low credit score! Keep it up suckers, daddy needs a new Maserati!   

So if you have 40-ish minutes of your life you won’t regret spending on the couch and you have an odd fascination with money, business & credit click here: FRONTLINE: Secret History of the Credit Card or even better read my Credit Card Debate page to learn how you don’t have to ever deal with them if you don’t want to.

I was talking to Mark (the proudly self proclaimed Financial Retard) about how he was getting by without using his credit cards over the past few weeks.  He said a funny thing happened when he pulled the cards out of his wallet, for the first time in many years he had the feeling that he needed to save more. As it turns out he was pretty freaked out by the fact that he didn’t have his “debt safety net” to fall back on. Mark was used to always having a $1,000 or so in available credit just in case something popped up. Now that he was no longer carting those cards he was only relying only on the money in his bank account.

Having a credit card to fall back on can dissuade you from building a proper emergency fund. I think this happens for a couple reasons. First, with credit you already have a safety net in place. That’s actually one of the reasons many people get credit cards in the first place. Though this can quickly blow up in your face because you could be taking on debt at the exact time it gets most difficult to pay it back. It amazes me how many people grab their credit cards right after a job loss and began using high interest cash advances for everyday life at the exact worse time to be borrowing money. I think having the cards as a safety net allows people to feel like they’re covered so the urgency to save really isn’t there.

Second, I think another reason people don’t build emergency savings when they use cards is because they’re constantly working to clear the debts. Instead of making savings a priority they make keeping up with the card balances a priority. The more debt they have on their cards the less they have available to save and the more likely they’ll need the cards to cover their butts again and so the cycle continues.  

At some point if you want to go with out credit cards you need to break the cycle of spending instead of saving. I personally stashed away a little dough to use for future “emergencies” then stopped using the cards. Once I stopped using the cards and had some real money in the bank to fall back on all I really had to do was eliminate the balances and at that point I was done with the credit card cycle. I had no use for them anymore. I now have an emergency fund with more money available to me than I ever had available on my credit cards…oh and it’s earning interest too.

The good news is Mark has decided, for the first time ever, to start saving. He’s now quickly building an emergency fund since this’ll be his only safety net going forward. It looks like with a little encouragement and some discipline our buddy Mark won’t be “financially retarded” too much longer…at least that’s the plan.

So what’s your plan for dealing with credit cards, do you want them gone, do you really need them around? Let me know how you feel about this.

Last night I received phone call from Military Wife about her Citibank credit card interest rate being raised from 13% to 29% interest. Actually if I remember correctly her exact words were…

the %!<&\# at Citi just jacked my interest rate right after I made the stupid payment

Her call sent Vinny Financio into action and prompted me to snoop around the inter-web a bit. Little did I know I would find out that Citigroup has also started charging annual fees to card holders who don’t put more than a specific amount on their cards, typically $2,400 per year. So let me get this straight…If I use a card you charge me, (I get that) If I don’t use my card you charge me (thats the part I don’t get!).

Okay that’s not really true, I do get it they are charging customers more fees. That’s what they do, that’s what their consumer business model is based on. The part I don’t get is why do they still have customers? You know the saying though…

you can lead an idiot to water but you can’t make him drown himself

It amazes me what people are willing to put up with. Luckily though Military Wife, due to her recent financial progress, was able to close the account and I doubt she was able to contain her ex-Marine Corp potty mouth when she told them what she thought about their new programs. I guess at this point for those that are willing to accept this treatment more power to them. Somebody has to get bent over the bar to keep those bank stocks in my mutual funds afloat for another 30 years. Personally I’ll take my own road on this one.

It’s pretty easy to pick some goals  then get off your butt and begin working towards them. It’s also just as easy to focus on too many goals at once. In a previous post Take Aim & Kill It I talk about focusing all your financial resources at your smallest debt and working to eliminate it as rapidly as possible. Here I want to talk about why focusing on your debts now is important to reaching those larger goals further in the distance.

A contractor friend once told me this quote:

When you come across an electrical problem and a plumbing problem…don’t try to fix them both at the same time!

In other words don’t try to do too many things at once. I decided I would be better served by focusing on debts now which has allowed me to focus more on financing my retirement and reaching those larger goals. I once heard a story about a apartment maintenance man that bought his employer’s apartment complex with cash and managed to retire with over $3 million in the bank years later (that story could be  total B.S. but I did hear it). Well the story goes like this…He saved his butt off and even though he wasn’t making a ton of money over time he managed to save up enough dough to buy the small apartment complex he worked at and began creating some wealth. That’s pretty much the story. Instead of spending his money he saved his money and as the story goes eventually had enough dough to make a big fat real estate purchase. My guess is this person was a pretty simple dude and probably kept himself out of debt (I don’ see any other way he could really save up a ton of money like this). The obvious advantage though is that he was able to use his income to build something instead of paying for crap he bought in the past + interest.

Even if the story I heard was total B.S. the theory’s still valid. Freeing up your income by clearing your debts will allow you to stash away more money and collect interest instead of paying interest. Do that long enough and large enough and you could eventually turn that stack of money into investments to replace your income and build some wealth.  In my post I Call a Do-over I talk about some other advantages to freeing yourself from your everyday debts. As long as your income keeps going towards interest payments on credit cards and cars its going to be hard to use this money for much of anything else (it’s hard to save it if you don’t really get to keep it). So by wiping out my debts I’m now able to save and invest money much more aggressively because I actually have more available money now. 

I’m a long way from paying cash for my an apartment building but I’m a whole lot closer now that my money stays with me at the end of the month.  Freeing up my income has now given me access to the one tool I need to begin building some wealth, my income. 

If you were able to free yourself up from monthly debt payments what would you do with all that money?

The reality is you only have the opportunity to make so much money during your life. No matter what career path you choose, no matter how much you get paid, not matter what your investments return, no matter what you inherit, no matter how totaly awesome your blog is!…there’s only so much money you’ll have access to during your lifetime.

I was thinking about this the other day when I heard two ladies complaining about their money issues while they were sitting in Starbucks drinking two $4-ish cups of coffee. You can‘t really complain about not having enough for retirement while you’re sucking down eight bucks worth of coffee (well you can but no one will really care). Even worse I went to lunch recently with a friend who was complaining about how he was broke. That’s not the annoying part though; the annoying part was that he was complaining about being broke while we were driving in his $46,000 Lexus GS350.

My point here is that in both of these cases these people were likely thinking more short term than long term or their problems really weren’t as much of a concern as they were saying it was. Either way I’m fine with it, it’s not my money they’re spending. Though this is something I think about from time to time when I’m making spending and saving decisions. Remember you only get so much money into your life. If you don’t believe me ask an older person I’m sure they’ll tell you what they think about it the idea of infinite money. Ask them if they’d take a do-over if they had the chance. Ask them if they would make spending and saving decisions differently if they could.   

So the next time you hit “4-bucks” to grab a mocha or stop by the Lexus dealer to browse think about the fact that you only get so much money between now and the end of this road trip and consider how your decisions today may fit in and affect your life a little further down the road. If you’re okay with it at that point so am I just don’t take me to Starbucks in your new Lexus and complain about how your broke because I likely won’t care too much at that point. Don’t worry though….I’ll still let you buy my coffee

A USA Today article reports that credit scores are dropping due to credit card limits being lowered by card issuers. Credit card companies are closing risky accounts and lowering borrower’s limits now that fees and fines will be more regulated (I can’t blame them for that, they have the same risky customers but less legal profits to cover the lending risk).

From October 2008 through April, an estimated 24 million U.S. card holders had their credit card limits reduced or accounts closed, even though they had no new “risk triggers” such as late payments in their credit reports, Fair Isaac says. Of that group, 8.5 million saw their credit scores fall.

Lenders are doing this to cover their butts, lower limits, and less risky accounts, to help ensure a predictable customer base with less loses in the future (thats the theory anyway.)

What people are whining about though is the fact that since their credit score is partially based one how much debt to available credit they have and how long these accounts have been open, they’re taking a hit to their credit scores when card issuers make these adjustments (BTW they’re allowed to make these changes according to the contracts the borrowers signed). In my post Zero Credit Score I talk a bit about how scores are calculated and how I feel about the formulas they use. The lower credit scores mean some folks may have trouble borrowing more money in the future, and if they are able to borrow they could receive less favorable rates (that could be the best thing that ever happened to some of these people!)

USA Today quotes some 62 year old lady named Reid to make their point. This is what they had to say:

Chase had closed two of her accounts, citing inactivity. Since then, four other lenders have closed or cut limits on eight accounts. One lender also more than doubled her credit card interest rate, prompting her to close the account.

Reid says the lenders’ moves have taken a toll on her credit scores.

Her FICO scores have dropped — each of the three major credit bureaus has its own FICO score — with her Experian score plunging the most, down 52 points to 722. She attributes the lower credit scores largely to lenders’ credit reductions. As multiple issuers closed or reduced her credit lines, Reid says, she borrowed from an inactive card to try to prevent it from being closed.

Wow! She sure showed them! My guess is with lenders making adjustments to six of her eight credit card accounts maybe…just maybe, she’s not as credit worthy as she thinks, just a thought Mrs. Reid.

Here is another great quote from this article:

Consumer advocates say regulators and Congress need to address lender actions that are unintentionally hurting credit scores. They say that as underwriting standards tighten, even a small change in a credit score could affect what rate consumers get on a loan — if they get one at all. Some analysts also say the fact that consumers’ credit scores can fall even if they’ve never missed a payment or exceeded their credit limits raises questions about the score’s usefulness.

Now here’s an even better plan, run to Congress to save you from the contract you signed up for! So to that I say if these folks (the companies) are making your life so darn difficult that you need to run to Congress to fix it maybe you should shut your whining pie hole and just stop doing business with companies you don’t agree with…just another thought Mrs. Reid, remember you signed the contracts. All eight of them! 

Then again maybe we can regulate the lenders out of business by taking away their ability to remain profitable, then throw an even bigger fit when they lay people off and we get to bail them out again.

It’s hard to dodge all the input and influence of people around you when you’re itching to drop some cash on a purchase (especially a big purchase). It’s even more difficult to ignore the marketing and sales pitches that come at you constantly telling you what normal people are doing with their money and how crazy you’d be to not take advantage of the same great offers.

Just ask any car dealer or mortgage broker (or sadly enough many politicians) how much they think you can afford and I bet they tell you it’s more than you thought you could. Case-in-point – Cash for Clunkers program and Adjustable rate mortgages. Both of these programs were designed to quickly and painlessly separate the consumer from their hard earned money. Though these deals sound like they’re out there to benefit the consumer that it really depends on if the consumer is signing up for deal that’s truly in their best interest considering their own situation. Cash for Clunkers is especially financially lethal because it has now encouraged over a million people to close their eyes to common sense and invest in a guaranteed depreciating asset while grabbing their share of the 3-billion dollar* government windfall. According to Kiplinger’s Magazine it’s estimated a new car looses an average of 20% of it’s value the day it’s purchased. That means for example a $40,000 Lexus ES300 you purchase on Saturday will only be worth $32,000 on Sunday – and this doesn’t even come close to the 65% loss in value over the next 5 years bringing your value down to a pathetic $14,000. Money guy Dave Ramsey has it right when he says “the worst car accidents happen on the showroom floor.”

I’m all for dropping some cash on your ride but do it because it makes sense for you and your family not because they can’t shut up about it on the news. Remember always, always, always think long term when making financial decisions and if somebody’s telling you it’s too good of a deal to pass up they may be right but make sure you’re the one making that call not them.    

Oh well, at least one good thing came out of this Cash for Clunkers program…there are now a lot less warn out cars on the road polluting our precious environment with their filthy disgusting “Election ’08” bumper stickers.