Monday, May 13, 2019

Pay Off Your Credit Card Daily

Once you get out of debt, you have to stay out of debt.

When I started this blog, I had an outstanding credit card balance largely due to an unexpected tax bill that occurred when I sold my office in Alexandria Virginia. My accountant unfortunately had a brain tumor and was unable to file our tax return on time.  When we finally filed the extended return in October, I owed nearly $40,000 in capital gains taxes.  Ouch.

The scary thing is I was able to put that on a credit card.  Back then I had credit cards with outrageously high limits on them.  But they also had high interest rates, and it took me a long time to pay down that balance.

The sad thing was, it was not the first time I was in trouble with credit card debt.  Years prior, I had a chronic credit card balance like most Americans and it never seemed to get paid off.  Each month, we would add new charges to the account, and each month it make a small payment on that staggering balance.

Even though it was a much smaller debt than say, my mortgages, it was very hard to pay off this debt because of the high interest rate on the credit card.  That, and we didn't have much money "left over" at the end of the month to make even the minimum payment.

And as I noted before, a majority of Americans end up in this pickle at one time in their lives or another.  For many Americans it's a chronic condition that lasts a lifetime. They're constantly in credit card debt, often at a very high interest rate.

Fortunately my credit rating was somewhat respectable back then, and I was able to roll over the debt to a lower interest rate credit card with 0% financing for 12 months.  I paid off that debt and learned a valuable lesson - that I should have learned years before.

Chasing after reward points is fine and all, but if you carry a balance, the interest you pay on that debt will more than offset any rewards you get in the process.  I got a lot of pushback on this from readers who said that I should investigate some of these frequent flyer mile cards or rewards points cards because, they said, you can really clean up on the deal.  One reader opined that I should "steal the cheese" and take advantage of these offers and not pay any interest by paying off my balance every month.

Other people over the years have told me similar things. One friend of mine opined that he would not pay his credit card until the last possible minute so he could "play the float" and get a free loan from the credit card company for 30 days.  He somehow felt that the trivial amount of money he was gaining through this technique was worth the incredible risk of paying interest on the overall balance if his payment arrived even one day late.  And bear in mind this was back in the days when we used to write checks and put them in the mail to pay our credit card bills. The risks of a late payment were much higher back then.

For the majority of Americans, the best advice is to find a low interest credit card and hang on to it. Even if you have an awful lot of money laying around, it's probably a good idea to keep such a credit card in your wallet and occasionally use it so they don't cancel it.   If an "emergency" arises, and you need to use this card, at least you have a shot at paying it off.   Rewards cards and "stealing the cheese" are things only people who have zero balances and money in the bank can go after - and even then, with great caution.

As I noted before, when surveyed, two-thirds of Americans claim they pay their credit card balance every month.  However the computers of the credit card companies tell us a two-thirds of Americans carry a balance on their credit cards.  Those, one-third of Americans are lying to themselves and another thirds are at least being honest, but are also mired in debt.

Since I clawed my way out of the debt trap, I've experimented with these reward cards and "stealing the cheese."   And quite frankly, these things make me nervous as hell.  Because as I noted before, the banks are a lot smarter than us and they expect to make money on these deals.  They know that they can throw pennies at us hoping we spend dollars. They give us a few bucks back every month in rewards points and hope that we run up $100 in interest payments which are then rolled over into interest payments next month and so on until it snowballs out of control.

Then that same bank helpfully offers to consolidate your credit card debt with a home equity loan.  As I noted before, Bank of America has a helpful video that suggests that sort of thing, showing a man shoveling his debt into a cement mixer labeled "debt consolidation."  Thus, you take the debt you incurred by buying a hamburger at McDonald's and amortize it over 30 years, pledging your home as collateral for something you pooped out months ago.

It makes no sense at all.  And yes, I've done it.  But I was fortunate or smart in that I was able to sell my house at a tidy profit and pay off these debts.  However, I would be much wealthier today if I simply did not incur these debts in the first place.

People act like debt is a natural thing and unavoidable.  However if I spend $5 on a fast food meal at McDonald's and put it on a credit card and then don't pay off the balance, I end up paying $5.50 with interest.  If I keep rolling over this debt every month, it could end up paying close to $10 with interest, when all is said and done.  It's almost as bad as payday loans.

The thing is, I had the $5 to pay for that fast food meal.  Indeed, I end up spending the $10 with interest for that fast food meal.  I had the money, why did I choose to pay twice for something?  Why was it necessary to borrow the money to do this?   It's the same argument that a lot of people make with regard to Payday Loans and other screwy financial deals.  They claim that the poor have no other choices in the matter.  But if you only have a few hundred dollars to spend on groceries, why is it better to pay 300% interest on that money?  It just leaves you with that much less money left to spend on groceries.

As consumers, we are not borrowing money to start financial enterprises to make us wealthier.  Yes, debt can be constructive when you're using it to do something that increases your net worth.  Borrowing money for a quality education is worthwhile if the education leads you to a better job.  Borrowing money for a house is worthwhile if, over time, your house appreciates value and you end up spending less on the house than you would on rent.  Sadly, even in these two exceptions to the debt rule, Americans fall down, buying worthless educations and overpriced houses.

Borrowing money to buy a jet ski, on the other hand, is just plain stupid.   It's not something that you need, it's just going to depreciate down to nothing, and with the interest payments you end up paying for that jet ski at least one and a half times, if not twice (with hospital bills and funeral arrangements, perhaps even more).

But once you get out of debt, you have to stay out of debt. And this means you have to be very proactive by not accumulating new debts and not letting credit card debt accumulate.   As I noted before, credit cards are powerful financial instruments and you should treat them with great respect and care.  I made the analogy of a credit card to a loaded handgun. They have their uses, but they can be very dangerous if they're aimed in the wrong direction.  More than one person has blown their brains out over credit card debt.

Fortunately, today, we have an awful lot more tools available to us. You can log onto your bank's website and check your credit card balance daily and balance your accounts. I know it sounds tedious, but I enter every credit card charge into QuickBooks and categorize it. This allows me later on to figure out where my money is going, by generating budget and spending reports.

It also makes me realize how much money I'm spending on things, as I see the bill when I sign the credit card slip* and see it once again when I entered into QuickBooks.   This forces me to think about how I'm spending my money.  Is this time-consuming and tedious?  You betcha.  But spending money should be something you spend time thinking about - before, during, and after.   It is hard for me to believe, in retrospect, but I never kept track of my spending for the first 2/3 of my life.  It was only when I was forced to "keep books" in my business that I started tracking expenses.  And it wasn't until years later that I started tracking personal expenses.   If only I had treated my personal life as a business, I would have saved myself an awful lot of grief!

It doesn't matter what financial software you use, but use something that requires you to manually enter your charges.   The pie-chart crap the banks and services like Mint offer, only tell you after-the-fact, in broad terms, what you are spending money on.   Make spending money a hassle - it will force you to think about money more.

The second thing I do, and again this is daily or nearly almost daily, is pay off the balance of my credit card.  Even if it's only a few dollars I click on "make payment now" and and pay off the entire balance. The idea of letting this balance accumulate until it's a huge amount at the end of the month and then paying it off minutes before the due date is foolish.  Maybe you're "playing the float" and getting an infinitesimal amount of "free interest" but really you're not coming out ahead in the long run. So long as you have a balance - even a penny - at the end of the billing cycle, you end up paying interest on the entire amount of charges for the previous 30 days.  It ain't worth the risk.

If you pay off this balance daily, you not only are thinking about your spending, you are putting the "safety" back on that loaded handgun, again and again.   You can't be too careful with loaded handguns or credit cards.

OK, so that's great advice, but what do you do if you are mired in credit card debt, and can't seem to pay off the balance every month?   Much of the same advice applies (although I don't give advice, and donchuforgetit!).   Log every entry into some sort of financial program, so you always know your bank balance, your savings balance, your credit card balance, and net worth to the penny on a moment-by-moment basis.   Once you start doing this, the reasons why your credit card balance never seems to get paid off will become abundantly clear.

Next, stop using your credit cards, period - until your balance is back down to zero.   This may mean the "hassle" of paying with cash or the risk of using a debit card (and debit cards do carry risks, as I have noted before).   But paying with cash is another way to force yourself to confront your brain with your spending habits.  You may start to notice, for the first time, how much money you are burning through with "convenience" items, such as fast-food meals, designer coffees and whatnot.

You also will have to cut spending, and this means making sacrifices.  Cutting something completely out of your budget is one fairly painless way to get ahead, and Cable television is a good first start.  People spend over $100 a month on cable TV and then moan about credit card debt.   That $100 would go a long way to paying down that debt.   And the time you save can be used to log your purchases.

Of course, other family members, including the spouse will howl about "not being able to watch their favorite programs!" or some such nonsense.  But television watching is bad for your physical and emotional health, and if you want to get out of debt, you have to make sacrifices.   And sacrifices mean doing without something.   It is human nature, but we all want to duck out on that part - "Can't I get out of debt without giving up cable, selling the hobby car, or doing without my morning Starbucks?"

No.   It would sort of be like Jesus saying, "Hey, maybe I don't need to die on the cross and all, but still sacrifice myself for your sins, right?"  That would have put a quick end to Christianity, for sure.

So the next step (or maybe the first step) is to talk with your spouse and family about money - a conversation most married couples or families never have.   I know my family didn't - money was a State Secret.  Dad would bitch about the bills, but never sit down with us and say, "Look, here's how much we have, how much we'll need for your college, how much your Mom and I need for retirement, and so on and so forth, so let's work out a budget on how to achieve these goals together as a family!"

No, my Dad never tracked his expenses, either.  And everyone in our family was in it to see how much they could get out of it.  No wonder my Dad felt as abused as an Army mule.   We rode him hard.  In our family, it was every man for themselves.   Sadly, many families are this way.

I know married couples that have separate checking accounts and "his" and "hers" possessions.  They split the bills every month.  Neither knows what the other has in the bank or what the other is spending money on.   Each has to fend for themselves, which is really unfair when one has a lot of money and the other has to struggle to pay for their half of things.   Yes, people actually live this way - and it is a sham marriage when they do.

As I noted, it is possible to pay off credit card debts with 0% or low-interest rollovers or home equity loans.   But if a credit card is a loaded handgun, these "solutions" are loaded machine guns with hair-triggers - and should only be contemplated as a last resort.   The 0% rollovers are usually loaded with a 3-4% transfer fee, which is a lot of money right up front (and where the credit card company makes their real dough).  Plus, these cards often have high interest rates, once the 0% or low-rate introduction ends.   The temptation is to use this breathing space to go out and spend yet even more money - and yes people do this.

Home equity loans are a similar problem.   The $1000-a-month credit card bill is now amortized over 30 years and comes to $200-a-month.  The credit card company, seeing you've "paid off" your credit card, sends you a letter "congratulating" you for your financial acumen and raising your credit limit by another $10,000.   So you figure they must know you are a financial genius and you go out and buy that big-screen TeeVee you always wanted and.... put it on the credit card.

Wash.  Rinse.  Repeat.  But eventually you run out of balance transfers, or home equity to tap into, and then it really blows up in a horrific way.   See, for example, the debacle of 2009, when everyone took equity out of their homes and then homes went down in value.

So rolling over debts is a last-resort kind of thing, and something that should be approached with great trepidation.  If you aren't fiscally responsible (and your spouse isn't either) you'll only not end up back where you started, but much worse off than before.  And I say this from experience.  We were closing on "cash-out" re-fi, and our mortgage broker, who was a friend of ours, pleaded for us to be more fiscally responsible - advice we ignored, because we were "making good money" and could afford to squander it.   Stupid!

It has been about a decade since I have had a balance on my credit cards - when I started this blog, in fact.   Today, I have no choice.  Since I am living on savings, borrowing money would be idiotic.  I would be trading every dollar I have for seventy-five cents.  And no, don't try "opportunity cost" arguments on me - that is just a post hoc justification for poor financial planning.

What is interesting about being debt-free are the unexpected advantages.  Since I no longer worry about bills, I am more relaxed, my blood pressure is lower, and overall I am a happier person.   Since we have cash, we get better deals on things - the best deals are offered to those who have money, not those begging to borrow it.

But the biggest change is that now we are off the money train, we realize how little you need in life to get by.  It was very easy to build up a lifestyle that required $100,000 a year to maintain.   And the more elaborate a lifestyle you create, the more it costs exponentially.   Because each dollar you have to earn to pay for all that debt and crap, has to be taxed at an increasing rate.  So you buy a fancy car and finance it, you pay for it at least one-and-a-half times with interest, and then another 25% thrown in for Uncle Sam for the money you have to make to make the payments.   Today, we can leave money in the bank, tax-free, and pay little or no taxes.  The snowball effect works in reverse, too.

Sadly,  some will never enjoy this aspect of life.  Many are retiring today in debt.  And many "old school" retirees with pension plans, end up squandering a lot of their income on interest payments for mortgages and car loans.  I know retirees with hefty pensions from the government and nothing in the bank, who have to borrow money if they need a new appliance for their home.  I guess that works out for them, but it seems kind of sad that for every dollar they get in their pension, they give 25 cents to a bank somewhere.  But then again, we all make choices. Or choices are thrust upon us, if we don't choose wisely.

* * *

*  Banks and Merchants are trying to go to receipt-less credit card sales, or sending receipts by e-mail.  I think this is to save money on printing receipts, of course, but also it makes it easier for you to forget about spending.   I always get a receipt, as it forces me to think about money I am spending.  It is already so much easier to over-spend with a credit card, versus cash.  Why make it even easier?