Ten Rules for Credit Cards

For many, a credit card is a necessary evil in our culture.  If you have to have a Credit Card, you have to be very careful with it!

The following are ten simple rules for having a Credit Card.  These are rules that I learned - often the hard way - over the years.  Every "mistake" I made profited VISA and MASTERCARD enormously.  But of course, these were not really "mistakes" but rather expected outcomes - the credit card companies are hoping you fall into these well-laid traps.

Anyway, here's the Rules:

1.  Lowest Interest Rate:  Get the lowest rate card possible, period.  A credit card is a debt instrument, and getting a higher rate card on the premise you will get "rewards" is nothing but a trap.  A bear trap, waiting for you to step in it.   And no, there are no exceptions to this rule, so please don't try to debate me on this.

2.  Low Balance Limit:  Pick a limit that you can realistically pay off within a month or two, based on your income level.  The credit card companies will want to offer you more than this - often $10,000, $20,000 or more (at one time, I had three cards with $20,000 limits - enough to buy a brand new BMW!).  $5,000 or less is a good idea, if you make $100,000 a year.  $2000 or less is even better, if you make $50,000 a year.  Less than $50,000 a year?  Maybe you don't need a credit card!

2.  No Annual Fee:  It goes without saying that you should not pay for the privilege of having a credit card.  They make a lot of money on your purchases - a lot.  Cards with annual fees often have bonus miles or cash back rewards.  Usually, the annual fee is equal to the reward you receive.  Just walk away from any card with an annual fee.

3.  Set up Auto Pay:  You may have to call to do this, but increasingly, Credit Card companies are offering to do this online.  If you set up autopay, the minimum payment will be made, on time, from your checking account, even if you "forget".   This is important, as the penalty for missing even one payment can be the "penalty" interest rate - often 25-30%.  They don't call it a "penalty" rate for nothing - it is like being kneecapped.

4.  Opt Out of Cash Advance: You may have to call to do this as well.   The credit card company will send you little checks, hoping you are desperate for money one month, and will cash them.  They come with the highest interest rates possible - near payday loan levels.  And if they are stolen from your mail, you will have a nightmare of a time trying to unwind it all.  Call and say, "NO" to cash advance checks.  Note that the better credit card companies do not send these at all.

5.  Opt Out of Automatic Credit Limit Increases:   You may have to call to do this as well.  You make regular payments on your credit card and they send you a letter saying "Congratulations!  We've raised your credit limit!"  This is a trap in two ways.  First, they are hoping you will spend more - spend until you are stuck with a high balance at a high rate, and no way to pay it off.  Second, by raising your credit limit, they damage your credit score (in terms of available credit) so you can't borrow from someone else.   Thus, if you later want to refinance your house or rollover your balance to a lower card, you can't - they have your credit blocked out with their high limit.

6.  Know Your Statement Date:  Mark this on your calendar, so you know when your statement comes out.  Check it carefully.  You should be checking it online (see below) anyway. 

7.  Get Your Statements Electronically:  Opt for online statements, so you don't have to worry about lost or stolen mail, or traveling.

8.  Know Your Payment Due Date:  Again, mark this on your calendar.  You need to make a payment before that date, or the "penalty" interest will kick in.  Make sure you make a payment before the due date to avoid penalties - or pay off the balance to avoid interest altogether.

9.  Pay Online:  Probably no one writes checks anymore, but a surprising number of old people tell me they like to "feel the paper check".  Bad idea.  Your check may get lost in the mail, and as a result, the "penalty" interest rate will kick in.

10.  Check Your Balance Often:  Setup your account with the Credit Card provider's website so you can log in every day and balance the account, if you want to.  Bookmark the page.  I log in to my credit card account nearly every day, check recent purchases and the overall balance, and make payments.  I never let the balance be a "surprise" at the end of the month.

* * *

This all may seem like a lot of hassle, but you have to treat a credit card like it is nitroglycerine and ready to "go off" in your wallet at any time.

No one intentionally sets out to get into Credit Card Debt.  No one says, "Gee, I think I will run up $20,000 in debts at 25% interest, that sounds swell!"

On the contrary - everyone, and I mean everyone starts off saying, "Oh, I'll just pay off the balance every month!"  But that never works out - 70% of the time, according to the Credit Card industry itself.

What happens is, people get a card, think they can "handle it" and their spending creeps up.  They start charging everything in their lives, and as a consequence, stop looking at how much things cost.   And at the end of the month, the balance due on the card is always more than they think.

"Gee, I forgot about that charge at the restaurant!" they say, and "I didn't realize I spent so much on gas!"

If you don't check the balance weekly - or more often - it can sneak up on you like that, and at the end of the month, well, you've got an unpleasant surprise:  A balance that you can't pay off in one month.

And that starts the snowball rolling.  Because you make a partial payment and promise to catch up "next month".  But next month never comes, as you can't pay that balance either.  And now interest charges are kicking in - high interest charges because you opted for "rewards" rather than a low interest rate.

There is no way to avoid personal weakness, just as there is no way to avoid economic downturns or job layoffs.   Rather than to structure your finances on best case scenarios happening, it is a better idea to structure your finances expecting bad things to happen so that your financial situation is robust.

Taking on a credit card with the idea that you will never succumb to weakness or make a mistake - ever - is just idiotic.   You are better off taking on a credit card that - in a worst case scenario - can't hurt you.

A $20,000-limit 'miles' card with a 25% interest rate and a 30% penalty rate can bankrupt you, literally.  On the other hand, a 7.15% Capital One card with a $1500 limit will do little more than nick you for a few dollars in interest.   One is a loaded handgun, the other a toy popgun.   Both are pointed at your head when they go off.

Which do you prefer?

Will The Economy Sag? Do You Care?

Will the economy falter in 2013?  Should you Care?

The Greek Debt Crises.  The looming Fiscal Cliff.  Lingering unemployment.  Slow growth.  Rising inflation.   There are a lot of things to worry about, in the financial markets, and the Nooze organizations spend most of their day making you anxious about these things.

Should you be worried?   After all, the networks and media say you should - just as they say you should care whether General Petraeus got a blowjob or not.   They tell you it is important because they said it was important.   And that is no reason to believe them.

But if you have structured your finances properly, you should expect occasional economic downturns, whether personal (laid off) or national (recession) and you should be prepared for them.  Few are.

As I noted in an earlier posting, most Americans live the cash-flow lifestyle, spending every penny they have and borrowing more.  Their financial lives are a house of cards, ready to collapse on a moment's notice.   One blip in the cash-flow and it all falls apart - in a hurry.

A friend of mine stopped by the other day.  He was refinancing his house.   With only a few years left in the loan, he owes $50,000 on a house worth possibly a half-million dollars.  At this stage in the game, even with a high-interest loan, most of every payment was going toward principal, and in five years, the balance would be paid off.

Yet he felt he needed to refinance the place, adding $5000 in closing costs and fees to the balance and stretching out the payments for another 15 years, in order to get his monthly costs down so he would have more money to spend.   I looked over at his house, with its brand-new satellite dish mounted on the side, the sprinkler system, and all the lawn ornaments, and wondered why he couldn't find a little more cash-savings in other things.

But instead of cutting back on bad television and cement yard donkeys, he decided to get more debt instead.  Because having debt was "normal" and not having 500 channels of Cable TeeVee wasn't.

Of course, the problem with the re-fi is that while it solved his short-term cash-flow problem, it did so at a staggering overall cost to his net worth.  It leaves him with 15 years of mortgage payments to make now, and adds to the balance on the loan.    And even though he is refinancing at all-time low rates, he will end up paying more interest, over the balance of the loan, than he would have just paying off the balance normally.

Or as I put it, "$50,000?  Why not just write a check?"  Because as his age and station in life, he should have that much money in the bank.

People put themselves in peril this way - and then worry themselves to death as a result.   And when I was younger, I did the same thing.   I bought cars, a house, and "stuff" and then loaded up on monthly subscription services and credit card debt, until one day I woke up and realized that if I lost my job - even for a week - I would be screwed royally.

I had no savings, no safety net, no real wealth.  I had a huge monkey on my back, though, in terms of a high-buck lifestyle that I had to pay for every month, whether I wanted to or not.  And like most Americans, I started to resent my job, instead of enjoying it, as I had to go to work every day, instead of wanting to go to work every day.   And there is a big difference, let me tell you.

When we lived in Washington, DC (Virginia, actually) people put humorous bumper stickers on their cars that said, "I owe, I owe, so it's off to work I go!" as if being in debt and chained to a desk was funny.  And it reminded me of my Dad, who was angry all the time and apparently didn't like his job, as he constantly reminded us that life was full of stuff "you didn't want to do" and we all had to buckle down and do our jobs.   "Do you think I like going off to work every day?" he would say, "I have to - I have to support you kids!"

And with that kind of attitude, one can end up resenting your job - and your kids.   And let's face it, your kids won't like you, either.

But getting back to Mayan Calendar end-of-times nonsense, if your economic house is in order, you won't have much to worry about, in terms of a "double-dip" recession or a tax increase.   On the other hand, if you are living hand-to-mouth, then chances are, stuff like this keeps you up at night.

And there is the choice, right there.  Anxiety and depression, offset by a new iPhone and Cable TeeVee, or low stress and relaxation - and no electronic junk in your life.

Most Americans choose the former, and it is not hard to figure out why.   TeeVee is the gateway drug in all of this - the marketing tool that gets you to believe that you "need" an iPhone and you "need" a larger TeeVee, as well as a leased car and a platinum "rewards" card.   And it gets you to think this is all normal and moreover, being up to your eyeballs in debt is normal as well (and being stressed all the time about it is, well, that's just normal life).   But no worries, the man on the TeeVee says you can refinance, right?

I am not worried about the fiscal cliff, a double-dip recession, or Greece leaving the Eurozone.  Bring it on!   While I might lose some money in my investments, temporarily, I am not at risk of losing my house, my car, or whatever, as they are all paid for.   And since I have stripped-down my lifestyle to the minimum, I can get by on very little money, as the past three years have demonstrated.

And that is a very relaxing feeling - the knowledge that you can survive and prosper, even in a down economy, simply because you got off the money-train and have your financial house in order.

And frankly, this is the way we all should live - prepared for the worst, but hoping for the best.   Instead it seems, we live precariously these days, requiring a best case scenario just to make ends meet.

Shopping Health Insurance - Yet Again

It pays to shop your health insurance now and then.

I have written before about insurance.   It can be hugely expensive, and most folks buy far too much of it.  People are paranoid about having a dent in their car, a broken window, or a broken leg.  They are scared of car repairs, even.   They insure and warranty everything in their lives, and if you see how most people live, you can understand why.

The average "salary slave" gets a paycheck and when he gets home, he has pretty much spent every last penny of it on crap.   They divide up the paycheck into little pie-sliced wedges, with some going to housing (as much as they can afford) and some to car payments, and some to utilities, and some to food, and some to cable TeeVee, and so on.   There is nothing left when they are done, as every bit of the paycheck has been sliced and diced up into little pie wedges.

And some folks think this is financial acumen.   They go on websites like Mint, and see little pie-charts of their spending and assume this is how you manage finances - by figuring out how to spend money.  It ain't so.

And you can see why folks are paranoid about "unexpected expenses" such as a car repair, a broken leg, or a broken window on their house.   Their finances are so stresses - living "paycheck to paycheck" this way, that any tiny disruption in the flow of cash can cause a nightmarish breakdown of the whole system.  Even an unexpected expense of $1000 or so can throw them into bankruptcy, as bills remain unpaid, and credit card balances creep up and climb, until this small event causes a catastrophic meltdown.

In chaos theory, this is called the "butterfly effect".

So, as I noted before, a friend of mine pays $12,000 a year for health insurance with a $250 deductible.  I told him I have a $10,000 a year deductible, and he said "You're crazy!  Suppose you get sick!  Where will you get the $10,000 for the deductible!"

To which I replied, "the same place you get the $10,000 a year that you pay in excess premiums!"

My original Blue Cross plan cost me about $99 a month when I was in my 40's.  Mark had a similar plan for $79 a month.   It was a cheap plan with a high deductible.   We only wanted to cover catastrophic events, not Band-Aids and Asprins.  But even then, the plan covered two doctor's visits a year (with a $40 co-pay) and had some prescription coverage.

And - and this is the big deal - if you do get sick, you are billed at the pre-negotiated Blue Cross rates, not the staggering "retail" rates that Hospitals charge.  So, for example, a Colonscopy which retails for $3000 is billed at $1200.   That's a savings of $1800 over having no insurance, and you can see that even a $99 a month policy is better than none - far better.

But of course, over time, premiums creep up.  $99 morphed to $125, and then to $150.  And it finally broke $200 when I was about 48.  By age 50 it was $250 and this year, I received a notice that the premiums would top $350 a month - just for me.  Ouch.

They helpfully included a note that I could call and look at a different policy that might be more cost-effective.   I was on a "group" policy, and with these policies, the costs are based on how many people are in the group and what the group experience is, in terms of costs.   As any group ages, more people get sick and prices go up.   The healthier people leave the policy and the group gets smaller and sicker - and premiums skyrocket.

It is one of those sick things I just don't get about insurance, and one that I hope the Obamacare plan will address.   If we just make one group out of everyone then the costs won't go up as much, and moreover, it will not incentivize people to leave the group.

Instead, we have this system where the insurance companies chase after healthy people and offer them low rates.  A great system, if you are healthy.  A sucky system, if you are not.  And while you do have a lot of control over your health care costs (yes, you do), there are some folks who get cancer or get hit by a bus and get sick through no fault of their own.

A sucky system, but one we are stuck with, unless Obamacare changes it - and I am skeptical that it will change it much.

So anyway, I call in and the fellow says that they can put me in a new plan with the same deductible, for about $240 a month - for two people.   This represents a cost savings of over 50%.

So needless to say, I signed on to it.

The savings should neatly offset the increase in the payroll tax that kicks in next year.  ;)

Can You Live on the Median Income? Well, Duh!

 Some folks have trouble understanding basic math.

On MSNBC back in 2011 was a series of articles chronicling how the unfortunate "little people" in America are struggling to get by on "only" $50,000 a year.   It was one of those whiny series where they made it out like someone living on $50,000 a year had to resort to home-dentistry to get by.   It was an odd idea for a series, as $50,000 is the median income in America, which means that half of us are living on that or less, every day.

So yea, it is possible to live on $50,000 a year - people do it all the time.  But the media is run by and hires people who live in major metropolitan areas.  And they are all very highly paid, even on NPR, where executives rake in millions every year - and even reporters take in hundreds of thousands of dollars.

And of course, these sorts of folks spend even more - on fancy cars, houses in Herndon or Larchmont, and iPhones, private schools, and child support payments, and they wonder, how could anyone possibly live on less than $100,000 a year?  After all, their Starbucks bill is more than that!

But of course, the problem is, the media has a skewed view of reality, as the people running it are all from the upper classes.  So they look in horror at the idea of making "only" $50,000 a year as if it was some starvation salary.

But of course, of you are careful with money and don't fall into the trap of buying everything that the media touts (the folks ON TeeVee can afford this, you and I can't!) then yea, you can live quite comfortably on $50,000 or less.

Which is good news to most of us, because half us have to live on this - or less - anyway.  Mathematically that is certain.  And if you throw in people making a little more than $50,000 - say, up to $100,000, well you are talking about 83% of the population, which is to say, most of us.

Yes, there is a remarkable spread between the hyper-rich, making millions of dollars a year, and the super-poor, scraping by on assistance.  But the interesting thing is, the spread between the top 90% or so and the median is only about 2x or 3x income.

And the difference between making $50,000 a year and $100,000 a year, while it may seem large to the guy making $50,000 a year, isn't as great as you'd think.   To begin with, that 25% bracket kicks in for household income over $70,700.  And of course, the higher earner usually squanders his advantage by spending more.  So all that excess income gets sucked up into consumer goods and luxury cars in short order.  Both the $50,000 a year person and the $100,000 a year person can claim they are living "paycheck to paycheck" - the latter, however, does it mostly as a matter of choice, not necessity.

From the point of view of the media, however, we are all just poor white trash.  Remember that, whenever you watch television.  Everyone you see on the TeeVee is making far and above the average income in America.  And yet they tout, as normative cues, all sorts of poor spending habits.

I mentioned this before, once, how in the movies and on TeeVee, that they depict us "little people" as living fantastic lives.  In a spy thriller, some GS-7 Secretary is shown living in a fabulous Georgetown row house, for example.  This is, of course, laughable, as even the Kennedy's can't afford these anymore.  But to a movie producer or a Television presenter, well, this would seem to be the norm.  Doesn't everyone live as they do?

The long and the short of it is this:  You have to live on the income you earn.  You can protest Wall Street and the 99% whatever, but in the next six months, unless you win the lottery, your income will likely remain about the same.  In fact, for your lifetime, your income potential is pretty well established by your educational level and career choices.  Get used to living on your income, rather than railing about the unfairness of it all.

And if you stop and think about it, we have very good incomes in this country - and goods are very attractively priced.  If you doubt this, spend a few weeks in Canada - where goods are all 50% higher in price, and people's expectations are far lower.  Canada is a fine place and all, but even Canadians cross the border to get the bargains in the USA.

The secret, of course is not necessarily living on Raman noodles and recycling pocket lint, but to carefully choose what you want to spend your money on, rather than trying to "have it all".  And the things most people spend money on, are really rather foolish and unnecessary - and often detract from their lives rather than add to it.

Cable TeeVee sounds cheap at "only" $100 a month, but over time, it adds up to a ton of money.  Worse yet, it programs your brain to want more and more consumer goods, and turns you into a fat turd of a human being who spends 8 hours a day on the couch.  Doing without this "necessity" not only saves you money - it makes your life better.

Similarly, obsessively yakking on cell phones or obsessively texting on them isn't enhancing anyone's life.  But it is costing you real money and it will cause you to wreck your car.

The list goes on and on.  A lot of the things we think we "need" we not only don't "need" but in fact are killing us, slowly, over time.  Walking away from these things is not privation, but rather an enhancement.

Can you live on $50,000 a year?  Well, duh.  The odds are that you already do.   The trick is to live well on $50,000 a year.  And it is not a difficult trick - spend less than you make.  Few chose to do it.

Too Much Technology?

Tech toys are lots of fun when they are new, but as they age, they can be problematic.  A car with a lot of technology built into it - unnecessary technology - can be a nightmare to repair when it gets older.

A reader recently wrote to express his concerns with owning a BMW that was about to exit warranty.  He confided that while it is a nice car, perhaps it was more car than he should have bought.  And I hear this a lot from BMW owners, although not as honestly.

Many folks buy these technologically complex cars (and Mercedes, Audis, Porches, Cadillacs, whatever) on the basis they can "afford the payments" and that they deserve a status car, as they are doing well in life.

But of course, with the race only half-won, it is a little premature to start breaking out the champagne.   But that doesn't stop most of us.   And it is only five years later, when the last car payment is made, that the owner realizes that (a) they paid $60,000 for a car, and (b) it is worth maybe $30,000 at this point, if that, and (c) it is out of warranty, and every trip to the dealer for repair results in a bill with a comma in it.

They realize, consciously or unconsciously, that they could have bought a simpler and cheaper $30,000 car, and had $30,000 more in their retirement account.  And being five years closer to retirement, they suddenly realize they would have preferred that.

And since these cars are complex, they are hard to service yourself, and even finding independent mechanics to work on the electrical bits, is hard to do.  And the dealer wants a ton of money for any repair.   Extended warranties are one option, but they are very expensive and often don't cover much.  Anything other than a factory extended warranty, in my opinion, is worthless - those con artists just go bankrupt and you warranty is void.

So the purchaser is left with a lot of anxiety and a conundrum.   Does he trade in the car, thus spending more money in transaction costs and signing up for five more years of payments, or does he keep driving it and hope it doesn't break?  Does he buy an extended warranty and spend more money that way?

And what ends up happening, and I see this all the time, is that these expensive toys do break and the owner takes them to the dealer and gets a huge bill, and suddenly his "dream car" is a nightmare.   And legions of these folks go on discussion boards and say was pieces of crap these cars are and how we should all sue the manufacturer because they broke out of warranty and they had to pay to fix it.

What they are really saying is what my reader was honest enough to say, "Maybe I bought more car than I needed or could really afford."

But again, no one wants do admit to that - it is easier to externalize your problems and blame others, in this case, the car manufacturer.

Of course, cars like this do soldier on and are sold to people like me, who have the tools and inclination to repair them on the cheap.  And this is how I owed four BMWs at one time, by doing all the repairs myself.   It was fun, but it was also a lot of work.

And today, I am not sure I would want to buy another one.   While I was able to remove the malfunctioning navigation system from my X5 and replace it with an aftermarket unit (and actually make money on the deal) today, this would be very hard to do.    Integrated controller systems like BMW's idrive tie in the HVAC controls, lighting controls, and radio and navigation controls, into one central control panel and monitor.   Removing such a system and installing an aftermarket one is just not an option - or not an easy option, anyway.

And of course, this is not by accident.   Since the 1990's car makers have been trying to integrate radios and other components into a car so as to make it hard to go aftermarket.   In the 1980's, no one bought a "factory radio" with their car, if they had any common sense.  You would get the stock AM radio or go with a "radio delete" option and then take the car to the stereo store and have a real radio put in. 

Why?  Because factory radios were overpriced crap.  That's why.

Today, they are far better than in those days.  Harmon-Kardon Amplifiers, Bose sound systems, you-name-it.   But they are built into the car and often difficult to modify or change.

And this is a problem, as the design life of electronics is about 1-2 years before they are obsolete, whereas a car can last a decade or more - or should.

So you end up in a situation like I was in, with a 10-year-old car, with a busted and outdated navigation system.  The car is good for 100,000 more miles, but the electronics are just a joke (I mean, a cassette deck?  What was BMW thinking?).  Fortunately, I was able to retrofit a more modern navigation system with bluetooth and a DVD player and all that crap.  But that was one of the last cars BMW made without idrive.

Today, more and more cars are coming from the factory with built-in nav systems, and even a Pandora interface.   To use most of this stuff, you have to pay extra for a monthly service, unless it can interface with your smart phone.   But sure as the sun rises, in five years, whatever is in your dashboard will not interface with the iPhone 20, and when this stuff breaks, well, replacing it will be nightmarishly expensive (the display in my X5 retailed for $3000 at the dealer.  And that is only one of five components that make up the audio/nav system!).

So what choice does the consumer have?   Well, one option is to not buy more technology than you need or can afford.    All that built-in consumer electronic crap is fine and all, but it does make your car a candidate for premature obsolesce.    Finding a simpler car with fewer electronic frills on it might be a better idea.

And this is not a new trend, either.   When I was a kid, Cadilliacs were real pieces of shit.   They came from the factory with all the electronic toys - power windows, locks, seats, antenna, and silly stuff like "twilight sentinel" and the "autronic eye".  They even had a little thermometer mounted on the rear view mirror, so you could look outside and see what the temperature was.  And they came with a primitive "climate control" systems, with a knob to adjust temperature.

Within five years, most of this crap was broken.   Your typical used Caddy would have one busted power door lock, an antenna that was up all the time (or stuck down) and the little thermometer was stuck on 50 degrees.    Repairing any of it was a nightmare, and the resale value of the cars were so low than few bothered to do so.  And as the vinyl roof started to peel off, well, it looked like holy hell in short order.  So much for the "Standard of the World".

But a basic Chevy, with manual windows and doors would soldier on far longer.  Without all that plastic trim to fall off, the car looked better, longer.  And the simpler construction meant it was easier to service and repair.  For long-term ownership, a simple vehicle is a better proposition.

And this is true today as well.   I read a recent article in the Roundel, the magazine of the BMW Car Club of America.  A man wrote in about his aging 7-series, 740iL, which was the top of the line car back in the day.   It was starting to have more and more mechanical problems, and the cost of parts and labor was very dear.   The author of the column wrote back that in his experience, what happens to such cars is that the mechanic buys them, puts his tool box in the trunk, and drives them home.   He is the only one who can really contend with all those aging and failing systems, in any sort of economical manner.

And that is how I have been able to own these older, complex cars.   It is not something I would suggest for others, of course.   A good used Camry is a better choice for most folks.   And as I get older and less inclined to disassemble navigation systems, power seat motors, suspension components, and al;l that crap, I think a very simple car is in store for me as well.

Technology sings its siren song to consumers - promising them enriching experiences and of course, status, if only they upgrade to the next level, or buy the latest thing.    However, technology isn't an end in and of itself, and it can be a trap - a financial trap - for the unwary.

The secret to getting ahead isn't spending up to your level of income, but rather living below your level of income, and banking the difference.