Financial Freak Show

I’m often asked how does someone function in our current world without the use of a stack of credit cards. Hopefully this page will help clarify why I feel the way I do and how it is possible to function in our society without using or relying on credit cards.

PART 1.

My lack of credit cards (the why)

Living without a credit card is actually not very complicated. In my opinion it’s actually more simple than living with one. I have now been without a credit card for over two years and have not had to change my lifestyle because of it – well atleast not in a negative way.

First I want to discuss the reasons why I don’t use credit cards. For many people who have “credit card problems” the reason is usually self control or a lack of financial knowledge. Credit cards are often used as a financial crutch to help people limp along when they don’t actually have the money to cover a purchase they can’t resist or truly need in the case of an emergency. Many people can manage credit cards without getting into any major trouble. This was the case for me personally, my credit cards and balances they carried were far from the point of blowing up our finances and we had no trouble handling the payments each month. I was even able to enjoy some of the “rewards” these cards offered to me.

So why did I decide to remove the cards from my wallet if they weren’t causing any problems and was reaping some rewards?  Well folks there were a few reasons…

I didn’t like the feeling of paying for last month’s expenses this month. I hated sending off  money I just received to pay for things I didn’t posses any longer. Even though I may have been able to pay the balances down to zero each month I still felt like my finances were a month behind. The weight of any debt no matter how small has a way wearing on me. The truth is carrying debt takes energy from your life even if it’s only the energy needed to check the statement and send the payment.

Overspending; a Dunn and Bradstreet study is often quoted in blogs, and the major media. The study reports on average you’ll spend 12-18% more when making a purchase with a credit card as opposed to cash. And to prove their point they noted the average McDonald’s transaction increased from $4.50 with cash to $7.00 when credit was used. When they looked at vending machines, the average transaction size nearly doubled. Now for me I don’t doubt that I unintentionally spent more using plastic at times (I’ve been guilty of supersizing my life a time or two!) I know for a fact I’ve done this with the thought that I’d be getting more perks by adding to what I charge. So even though this was not the key factor for dumping my cards it was defiantly a consideration.    

Paying interest; this is an easy one in my opinion. Why would you save money at low checking or saving account interest rates while carrying a high interest balance on unsecured debt? It just doesn’t make sense to me – why pay interest when with a bit of planning you could be receiving interest? I never quite understood why people will say “don’t pay off you mortgage because you can make more in the stock market” and then use credit cards with 10%-30% interest rates. But it works for you have at it

I also saw no benefit to using a credit card. I know they offered me points, and insurance, and extended warranties and cash back, but to me I realized I was putting up with the issues above and found myself never getting any real benefit from all the extras they were offering me in exchange for dealing with the negatives. And as far as the convenience factor, well to be honest my credit cards weren’t anymore convenient than my debit card.  This was the big reason I now have no credit cards in my wallet…they do nothing for me, I didn’t see the so called “benefits”

This was my biggest reason….Why spend your time trying to outsmart the credit card companies? This is what they do for a living and they are better at it than I will ever be. True some people can beat them at their own game, charge up the month on credit, pay it off on the 30^th, never pay fees, never pay interest, and collect the rewards points at the end of the month.  If that’s how you roll and how you want to spend your time and energy. I’d much rather spend my time chillaxin and not worrying about trying to outsmart them while they’re trying to outsmart me. I’m not saying you can’t outsmart these folks but I am saying it’s a lot of damn work! 

This was the big reason…. So to briefly summarize why I don’t use credit cards…I don’t like to pay interest, I don’t like to being tempted to over spend, I don’t like the hassle of making the payments on time, and finally I never really received any benefit from the incentives they offered. So basically it came down to multiple negatives and no real positives.

Let’s put it this way….Let’s say you were dating a credit card. She charged high fees when you used her and possibly charged you when you didn’t use her, then tempted you to do things that weren’t in your best interest like overspending, then she drove you crazy by making you pay her a 25 days after the fun was over or risk having to pay her even more, then she offered you restricted “benefits” and “rewards” that you didn’t really care to use and if at any point you fail to keep your promises in the relationship she will call incessantly, threaten you then ultimately drag you into court and win. Then after you and her work out all your monetary issues you realized she never really cared about you in the first place and was only after your money – I don’t think that’s a very healthy relationship. Sorry, no matter how good that hot little number looked being flaunted around town with me I’d have to break it off!

To reinforce my thoughts around credit cards but with a little less Vinny Financio I want to refer back to my post So When is Debt Okay?  In this post I lay out four things to consider when determining if a debt is okay. Rule 1: Common Sense Rule 2: A Guaranteed way to repay Rule 3: Peace of heart and mind Rule 4: Unity;

In my opinion credit cards do not satisfy the four rules outlining when it is okay to borrow. Well it could fit into rules #1, #3 & #4 Common Sense, Peace of Mind & Unity. Though this all depends on your household situation but in my household we came to “Unity” on the fact that we didn’t see the “Common Sense” in borrowing money day to day and coming to that agreement gave us “Peace of Mind” knowing we were always living on what we had. As for Rule #2 Guaranteed Way to Repay; most credit cards I know of don’t have this guarantee built into them. They are only guaranteed by your future income but your future income is only guaranteed to the point that you have sufficient income. Lose your income and you have no guarantee there for it’s not a “Guaranteed Way to Repay.” Credit Cards are not secured by any real property which is why credit cards are referred to as unsecured debt.

I only have one more point to make regarding using any form of debt in your day-to-day life. This one though is intangible and hard to quantify with numbers. The feelings & emotions people feel around having debt in general. In several of my posts I’ve shared the experience others have had with their own personal battles with debt. Here are a few of those quotes:

Being away from my family at night is one of most difficult things I’ve had to do.  When I look into my kids eyes though, I know it will be worth it.  - Jeff, Deliver Away Debt

and I think of all our family can do with our money when he comes home. Things like a family vacation paid for with actual money. Out of our checking account and not on credit cards. Amazing.  - Military Mom, Deployment Money

he called me the day after our discussion and let me know he cleaned out his wallet to make room for some cash instead. 8 days later he’s still on the wagon as he puts it. I told him he sounds like a recovering crack head, he said that’s about how he feels.  - Mark, 8-days Clean

Now that I’ve laid all this out there for you I want to finish with the thought that you’re all big boys and you can make your own big boy decisions about your finances but that’s my $.02

Part 2.

Living without credit cards (the how)

Once I decided I was no longer going to depend on credit cards as a way of making purchases I needed to come up with another option that would allow me to make all the purchases I needed to without cramping my style too much.

There were a couple issues I took consideration before I got rid of all my cards. How was I going to have access to my money anytime & anywhere?  Second how can you function without a credit card, especially since I travel a bit and my wife almost is never carrying much cash? Here is what I came up with and so far it has worked flawlessly for us.

The first thing I did was create a place to stash the money. Since I wanted to have access to this money with the same ease as using a credit card I went for an account with a debit card. I opened a high interest free checking account at a local credit union. This is not the same place we have our primary checking account we use for everyday expenses though. I chose a different bank for our emergency savings for two reasons. One, I wanted to make sure the debit cards we were issued were Mastercard card since our primary debit cards were Visa. Two, I wanted to be linked to a different banking system. Both of these reasons were to ensure that I always had access to money if either Mastercard or Visa had problems or if either of the banks were having technical problems for one reason or another. After working with a credit card fraud team for some time and on the back end of a couple e-commerce websites I realized how inconvenient those issues are and how easily they can arise through no actions of your own. So far to date I haven’t had any issues getting access to my money. 

Now that we had a place to stash the money it was time to actually put some money in there. I first opened the account with $1200 we had set aside in our regular savings account. Now that I was going to only rely on this money instead of relying on this money and credit to get by I know I needed to add to this account as quickly as possible. So for a few months any money we could manage to pull out of our budget went directly into that saving account. At the time I was also working a second job to help knock out our debts too, so any money I made there went into this account as soon as we got a hold of it. This all quickly added up to several thousand dollars and now there’s even more. The funny thing is there is more money in there now than I ever had available on my credit cards.   

This new account was only to be used for an emergency and we BOTH had to agree this was an emergency. Since our marriage is based on trust and shared goals there is no issue with us both having easy access to the money. We trusted each other not to let the other down. Plus if either of us was going to screw this up it was probably going to be me.       

So at this point the only thing left to do is stick to our plan. To date we’ve not had any issues that have made me second guess this plan. We’ve traveled, we’ve rented several cars, we’ve bought things over the internet, basically we’ve have done most everything everybody swears they need a credit card but have done it with a debit card. If somebody were to steal my money or I have to disagree with a transaction (both of which I’ve had happen btw) I just grab my other debit card and put gas in the car just like you would with a credit card but without needing to pay it back next month.

To sum it all up….

1. We have more money available; like I said we have more in the account than we ever had available on our cards.
2. We now earn interest, not a lot but it is adding up. True we didn’t set this money aside for growth but it is a nice bonus to the deal.
3. We’re never owe anybody at the end of the month and if something were to self destruct in our financial lives we won’t be borrowing money at the exact time it gets most difficult to pay it back.
4. We have no need to use credit cards and no need to deal with the card companies – I don’t have any personal credit card horror stories but I sure don’t want to start any

People wonder how I can function without a credit card….I wonder why they can’t?

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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?

I was out at a night spot sometime ago with some friends and some friends of friends, some I knew quite well and ac couple I had only met that night. Myself and a couple others bellied up to the bar to order the first round. As we grabbed our drinks one of the guys I just met said “I got this one” and waved us of. So being a gentleman and a budget minded FinancialFreak I decided to allow him the pleasure of paying for the drinks. He then reached in his pocket and pulled a roll of cash with a rubber band around it and proceeded to flip off a couple bills so fast he looked like Al Capone paying off the cops. Now I already knew this guy had some really nice shoes on but I never guessed him to have several grand rolled up in his front pocket!

Now, I always have some cash in my pocket, especially since I refuse to use credit cards anymore, but I sure as heck don’t have $3000 in my pocket very often. Since the thought of having my very own fist full of $100’s sounded so exhilerating I figured I’d give this big shot technique a try and see how it worked for me. This sounded like a logical experiment so shortly after meeting Fist-full-of-100’s Guy I withdrew my entire starter emergency fund of just over $1500.00 rolled it up and stuffed it in my front pocket. After leaving the ATM I headed over to Starbucks to meet up with a friend.  I was excited just thinking about the moment I’d get to whip that wad out of my pocket and say “I got this one.” Just like Fist-full-of-100’s Guy had done a few nights before.  So without hesitation as soon as he placed his order BAMM! The fat wad was out of my pocket and a smile was on my face. The only problem was I looked like a complete idiot bustin’ out $1500 to buy two cups of coffee. 

And sure enough the barista saw right through me. With a smirk on her face and a smart little attitude she said “Is that all you have?” Ouch! I was busted by a 17 year old coffee pusher! 

So I did my best to play it off all FinancialFreak cool and said “Why, how much do the other guys usually tip?”

All in all it was a lame experiment to roll like a big-shot but in the end I came out looking more like Al Bundy than Al Capone

How much cash do you usually carry in your pockets?

This is a quick shout out to my friend Mark. He, as of today is 8-days clean! He has managed to live the last 8 days of his life without using his credit cards. I know this may sound like no big deal but to him it is. He has been financially retarded (his words) for many years and has now decided to make some adjustments. 

After a lengthy discussion last week explaining how you can function in the world without needing a credit card Mark decided to toss out his 3 near the limit credit cards and instead replace them with cash (well as much cash as he has once he makes his credit card payments). It’s your call as to what will work best for you and your family but for myself I’ve decided that I really saw no benefit from carrying and using credit cards in my everyday consumer life. Apparently this idea sounded pretty appealing to Mark, he called me the day after our discussion and let me know he cleaned out his wallet to make room for some cash instead. 8 days later he’s still on the wagon as he puts it. I told him he sounds like a recovering crack head, he said thats about how he feels.    

 Now I don’t think everybody in the world necessarily needs to do this (I like making money on bank stocks too) but I do think most people should dump their cards. If you ever have a balance, ever pay interest, ever pay any fees or ever pay an annual fee on your card(s) then you should consider your options, otherwise it’s costing you money.

It’s your call how you handle your money but at least think about who’s really benefiting from your use of debt.

Congrats on being 8 Days Clean Mark! You’re still a financial retard (his words) but at least your one stop closer to climbing off the short bus. congrats!

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.

A survey for AmeriCredit for Market Facts asked 1000 consumers the order in which they pay their bills when they know they’re going to be late. The results were good to see (maybe there’s still some comon sense out there.) True most of this seems like common sense but it never hurts to chat about it. You never know when someone might ask you the question.

Here are some of the results: (this shows what they would pay first - last)

1. Mortgage or Rent 79%
2. Car Payment 41%
3. Auto Insurance 39%
4. Credit Cards and/or Cell Phones 38%
5. Cable and/or Satellite Television 32%

The survey results look good to me. If someone is in crisis mode the first thing they need to do is shore up their position as best they so they can hopefully “live to fight another day.” This means taking care of the essentials first. Food, Shelter, Clothing, & Transportation. If these four things are taken care of you can hopefully keep workong to address whatever your other issues are (and we know people got some issues!) Beyond the essentials look to cover your secured debts next. Things next like car payments or other property. Since these debts are secured by liens the lenders may be much faster to attempt a repossession of the property.  Next address your unsecured debts. Things like credit cards, phone bills, cable bills, old medical bills etc. Obviously all these debts need to be addressed but aside from questionable and sometimes illegal collection tactics these folks have little ability to retrieve their money with out taking you to court first. True, you do need to get these thing taken care of but the dentist can’t usually repo your dental work instead he’ll have to slap a lawsuit on you before he can legally take back the fat gold grill in your mouth.

Remember the unsecured debts (especially credit cards ad payday loans) will likely be the first to start yelling since they are in the first loser’s position if you file bankruptcy. They yell loud and they yell often hoping that you’ll become emotional and pay them before you feed your kids.  All the creditors obviously need to be addressed but if you or someone you know finds themselves in a seriously tight spot try to leave emotion (as much as you can anyway) out of the process and address the bills in a way that gives you the most flexibility to keep fighting.

In an earlier post titled To Whom the Accidents Happen I wrote about how some people always seem to have something “happening to them.”  The issue I want to discuss here is the money problems that always seem to “happen” to these folks. When I was deeply in debt and had no money except my paychecks it seemed that every week, or at least every month, there was some sort of an emergency in my broke crappy life. Emergencies suck and emergencies when you have no money suck even more.

I also noticed when something went wrong while I was your broke I didn’t have an emergency…I actually had two emergences. The first was the actual emergency itself and the second was the money emergency that arises from the initial emergency. In the one case of a couple I was counseling a recent accident was further compounded by several hundred dollars in overdraft and late fees that were applied by their bank. The additional expense drug the problems into the subsequent months amd magnifying the financial fun they were having. They actually incurred over $400 in late fees and overdraft fees and if I remember correctly this actually required almost as much money to clean up as the initial emergency required in the first place!

The Emergency fund is really the only way to prevent this from happening without going into some sort of debt. The Emergency fund though can only prevent problems from growing to the extent you actually have enough dough to fight the battle. True in most cases you could go into debt to resolve the problem and that’s what most people do – it seems like an easy enough answer. Since they rarely have access to much real money they pull out the plastic crutch and beg for mercy. This does work but you have now stretched this emergency into the subsequent months, and often times years, until the debt is paid. The big problem with this strategy is that now you have weakened your current financial position and will have to fight that much harder to survive the next emergency. This is especially true if the next emergency arises while you are still trying to pay for the last one(s). So now do you not only owe money (plus interest) but you still don’t have any money, I know this because if you did have any money you would have used it in the first place.

I feel building an emergency fund is crucial to any financial plan. To be honest I think it’s more important than paying your debts off completely. Though I think to build a solid financial foundation you need to do both. It’s also much easier to build your emergency fund once you have freed up the cash you were previously paying towards your debts. If you added up all the money you pay out in credit cards, student loans, and car payments how long would it really take you save up 3-6 months worth of expenses in an account? This was a major motivator for me to pay down my debts, I knew that would allow me to build a bigger financial cushion between me and life and paying away my debts would free up the money to accomplish this relatively quickly. 

The first thing I did to build to save for emergencies was create a place to keep the money I knew if I saved this money in the savings account that was tied to my checking it would wander away from me like Seahawks Super Bowl win never to be seen again! So I took steps to “idiot proof” our savings. This post tells how I worked around the issue of having the money available when needed without using debt 29% Interest? Are you Kidding Me?

Another option is a money market account. These are nice because they usually offer a higher interest rate than a typical bank checking or savings account. Many will also allow you the ability to write checks from these accounts (often 4-6 checks per month are allowed). Personally I liked having a back up debit card in my wallet in case something weird went wrong with our regular checking account and I was stranded without gas somewhere.

My plan is to use both a checking account and a money market fund for our emergency money. I know that sounds a little complicated but it gives me the best of both worlds. We can have immediate access to a couple thousand dollars to get us through a pinch which for us should cover most anything that we have to deal with on the spot (a dead car, an exploding septic tank, etc.). All the while we’re earning interest on the remaining balance. If we need access to more we can write a check or do a quick transfer and have access to more within 24 hours or so.

How much money do you feel you need to have access to sleep well at night? If you already have an Emergency fund in place what type of accounts do you use for its safe keeping?