The more transactions you put on your card per month (and especially the more dollars on the card per month) the more likely the store is to make extra profits when and if you don’t pay off the balance each month.  Now, hopefully most readers of this blog pay off the cards each month or, better yet, don’t use cards at all.   But if you are in the majority of consumers who do not pay their cards off each month, happy days for Kohl’s!  They also know the age-old Las Vegas secret that not seeing your actual green money leave your wallet drastically increases your odds of spending it.  Kohl’s isn’t stupid, folks.  I have not even read Kohl’s annual report to shareholders, but I guarantee the credit card division is among the most lucrative division of the whole company if not more profitable than the whole company itself.

So, the next time you consider opening a charge account just for the initial 10% off your first purchase remember….if you play with snakes, eventually you’ll get bitten.

• had more credit cards (we have none)
• had more balances on those credit cards (no cards = no balances)
• had any other consumer loans over the past recent years (we have none)
• had borrowed money more regularly

I completely understand how a FICO credit score works.  The lender needs to see some kind of track record showing how good you are paying back your loans.  Who wants to take a risk on an unknown quantity, right?  I guess what really sunk in for me was how completely obsessed society is with debt.  This credit score would have been higher had we swam with the sharks more often.  This in itself is almost a paradox.  Put more risk to your credit score by financing more purchases and it will go up assuming you pay them in full all the time.  However, if you put more spending on credit your actual risk of paying it back is higher.  So, by risking your credit score more it could go up…or down!  Sounds like gambling to me and that’s why I continue to strive to reach a FICO score of zero.

He filed for bankruptcy eight years ago and apparently has not learned any lessons from that ordeal.   Filing for bankruptcy is very similar to debt consolidation.  You are basically using your Get Out Jail Free card with little consequence or learning involved.  It’s like a grownup’s version of a “do over” from childhood.  With no pain involved what’s from stopping it from happening again?

On a more day-to-day note, he lives paycheck to paycheck.  Actually he does not quite make it to the next paycheck.  Once he told me how he writes himself a check for cash the day before payday.  He found an ATM that surprisingly allows funds to be withdrawn immediately after a deposit.  When money runs tight, he’ll withdraw the funds from this “deposit” to make ends meet before payday.   It gives him the much-needed cash infusion before he gets his paycheck.  Some of you might have heard another term for this act:  kiting checks.  It is classified as check fraud and playing the “float” between the time of the check being cashed and the deposit of the check itself is illegal.   In some instances, he did not make it in time and had to pay overdraft fees.  He was on the phone complaining with the bank so many times they almost knew him on a first-name basis.  If he just built up an emergency fund none of these cash shortages would have come into play.

Next,  I’ll discuss his car purchase fiasco.  He went to buy a minivan for around $20,000.  Unlike most car purchase stories, negotiating with the dealer does not even come into play here.  When he went to trade-in his old car, he learned that he was $5,000 in over his head on that one.  The dealer also somehow managed to tack on $8,000 more in an extended warranty, underbody rust protection and a bunch of other junk.  Bottom line:  he paid $33,000 for a $20,000 minivan.  This is quite remarkable.  Just on that deal alone he came out $13,000 more in the hole than needed.

If he woke up today and decided to fix his money problems where would he start?

• Make some big lifestyles changes quickly.  Sell both cars and pay cash for very cheap cars.  Or live with one car.  Driving a junker car is only temporary to get him back on the saddle.
• Cease to use credit cards – permanently.
• At each job change or pay raise, bank that money.  Do not change the lifestyle.
• Recognize that these changes today will make for a much happier tomorrow

I’ve oversimplified the remedy for his issues but the above items are great starting points for my friend to begin to enjoy that six-figure salary.

First of all, does Weight Watchers work over night? Do you just show up for the class and the next day you’re skinny? No, of course not. If I had to sum up Weight Watchers in one phrase it would be a lifestyle change. You are not going to be successful if you go for a “quick hit” to lose 10 lbs and then go back to your old eating habits. Debt consolidation ropes you in by tricking you into thinking “this is just what I need. A clean slate. A fresh start. One lender. One bill. Goodbye complicated life, hello simple one!” It sounds very similar to the feelings people get from filing bankruptcy. However, here’s the big question: What are the odds of you developing (or breaking) the bad habit of overspending in one fell swoop? Do you just wake up the next day and you’re cured? It’s not Nicorette gum for credit cards!

Now, let’s get a bit psychological about this. Why would a (supposed) financial company be able to help you cure your problem hundreds or thousands of miles away without ever seeing you face-to-face, teaching you good money habits or most importantly getting inside your head to fix your root problem – overspending! Your debt problems will not be cured by getting it down to one payment! Yes, they may lower the interest rates. Yes, they may get late fees waived. Yes, they may better at bullying the creditors better than you. But they won’t be getting inside your head to help you make a lifestyle change like Weight Watchers does.

A Lifestyle Change

It’s been said that to form a new habit (both good and bad) it takes approximately 21 days. That’s three weeks of exercising at 6am or reading pages from a good book daily or quitting smoking or controlling your sweet tooth daily or practicing disciplined financial habits or whatever your new habit you wish to form. A debt consolidator only helps with the debt, not the problems with the person in your mirror. Your problems with credit card debt will be gone when proper spending and saving habits have become part of your subconscious mind. You don’t even need to think NOT to buy that new, expensive electronic item at Circuit City.

Bottom line: attacking your debts, one by one, in snowball fashion, smallest to largest will accomplish far more psychologically than any debt consolidator who hasn’t even met you or seen you in person.

So we get the first (and will be the last) bill from Macy’s and it comes in two separate envelopes. So I think this is odd. Then I noticed something terrible. This card not only allows purchases in Macy’s stores like all department store cards, but is also functions as a full-fledged Visa (or in some cases Mastercard). My wife could probably recite the exact choice words I elicited from the dining room when I discovered this. Apparently this is a joint effort between Macy’s and Citibank. Others have reacted the same way I did when discovering this fact:

From Joe’s Journal:

Well, this summer Macy’s announced their plan to “flip” 3.5 million dormant store charge accounts to new Citibank MasterCard accounts. Apparently, this is legal under the fine print of the original Hecht’s and Macy’s store charge card agreements, though the agreements refer to this activity as “information sharing” between the store and the bank, rather than something more obvious like “giving you a seemingly unrelated all-purpose credit card many years from now when you least expect it.”

From a finance blog at the Washington Post a reader submits his similar story:

Looking for savings, Marc naturally took advantage of such an offer from Macy’s. But a few weeks later, he was surprised when he received a store-branded Visa card–not a private-label card that could only be used at the store–with a $10,000 line of credit. Since he had more credit cards than he needed, including one from Visa, he called to cancel and get what he wanted in the first place–a more limited store card.

Macy’s said it makes it clear in the credit application that the store will first consider you for a Macy’s Visa card and that’s what you’ll get unless you don’t qualify for it or you opt out at the cash register when you sign up for the card. But the credit card application is so full of fine print that you may not spot that caveat even if it is in bold capitalized letters. And in the haste to sign up for the discount, you also may not realize that you have a choice of a Macy’s Visa card or a more limited store card.

Does this sound sleazy? Does it sound like Citibank does not care about you? Well, hello!! They don’t. Keep in mind that most big-box retailers are doing everything in their power to make it easier to spend more money. A credit card does just that. Why limit your purchases to just Macy’s? Why not give everyone another card to add to the pile of potential consumer debt. Sears did this so well in the 80s with the Discover card that they ended up spinning off the whole division into another company.

The bottom line: getting the “added convenience” of your Macy’s card being a credit card also is neither convenient, nor a wise move.

1. When you pay cash for things, the chances of identity theft are zero. Now, I mean actual cold, hard, green cash not a debit card. If you are worried about a problem with your purchase be sure and keep the receipt. I’ve never once heard of a merchant basing the return policy on the method of purchase. All purchases by reputable retailers allows returns regardless of the purchase method.
2. Reward or loyalty points are a great deal from all the products I get from using my card. Wow, let me walk through all of the flaws in this arguement. First, if you are a person who carries a balance, those reward items are free! Your interest charges are paying for those “free” products. If you are someone who never carries a balance you may think the rewards are still a sweet deal. What if an Act of God happens one month and a bill does not get paid on time? Wham! Finance charge on that card with the “free” reward points. Also, what if the bank makes an error on your account? If you don’t have an account you won’t EVER get a bill or an error on that bill!
3. A credit card is good for emergencies. Well, I see two ways out of emergencies; your main checking account and a savings account/emergency fund. Do you want to know another saying for emergency credit card purchase? Poor planning. If you have a big enough emergency fund, how bad is the emergency that it will wipe out the account? A simple rule is that the bigger the emergency fund, the lower the chances of it being wiped out by any emergency.
   1. Home repair – maybe $2000 – $4000 if it’s really bad. Hopefully insurance covers something which is not your fault. Any other repair bigger than that may have been looming since you bought the house or you ignored the repair for too long.
   2. Car repair – maybe $2000 or so. Any more than that and it should be covered by insurance due to an accident or it’s time to look for another car.
   3. Health problem – maybe $500 – $30,000 for serious health problems. Any $30,000 medical bill may have been caused by no medical insurance or experimental treatment. These are certainly possible, but rare for most people.

   If you are like me, a credit card creates a false sense of security to help you out of financial jams. However, when paying that emergency expense with a credit card you now essentially created another emergency (albeit a long-term one) with a new, large, unexpected debt. An emergency fund can solve many emergency financial problems. Living without one is like an acrobat flying without a net.

4. I’m young and I want to build up my credit rating. As I detailed in The FICO Score Flaw a credit rating is basically a loser’s game. All it shows is how well you manage the revolving door of debt. A young person just entering the workforce likely has two major purchases on the horizon. A car and a house. Ideally you’d pay for both with cash, but that’s not in the cards for all of us. For the car purchase, most lenders will recognize that you have a steady income and approve you for a loan. For the home purchase, I’d strongly recommend the following: 20% down payment on a 15-year traditional (not adjustable rate or interest-only loans) mortgage. This shows the bank that you are a conservative borrower who takes this loan very seriously. Building up a 20% down payment and choosing a higher payment (the 15-year loan is a higher payment than the 30-year loan, but it’s paid off twice as fast) shows that you have commitment. If the bank balks at your loan application with no credit rating ask that the loan be manually underwritten.
5. Credit cards are safer online that debit cards. First of all, if your bank tries to pin the unauthorized charges on you for either kind of online fraud, credit or debit, mention to them that they are violating federal law. The Electronic Funds Transfer Act (EFTA), which applies to debit cards, specifies your liability for fraudulent transactions is $50 if you notify the bank within two days of a lost of stolen card and up to $500 if you notify after two days. The Fair Credit Billing Act, which applies to credit cards, specifies your liability for fraudulent charges is no liability if the unauthorized use involved just the credit card number, and only $50 in the case of a lost or stolen card. So, it literally would take an Act of Congress to occur before your bank rightfully holds you responsible for unauthorized charges.
6. I like paying only bill per month. I have many friends who put everything on the credit card and (claim) to write only one check for all their bills per month. Many times these are the same folks who use rewards loyalty points on their card. First of all, if you pay cash for all face-to-face transactions you pay no bills per month. For online purchases use a debit card only and either keep the receipt or record it in your checkbook. Now, back to the paying only one bill per month. Dunn and Bradstreet did a study that shows consumers spend 12-18% using credit cards than paying with cash. Exactly like poker chips, no emotional involvement occurs when swiping a plastic card. However, when you are pulling out ten $10 bills to pay for something, you feel the pain.
7. I travel and hotels/rental cars won’t take debit cards. Um, time to change hotels. Ask to speak to the manager on why this policy exists. If you are traveling with a company credit card, keep in mind this is affecting your credit rating, not your employers. Even if the card is in their name.
8. Credit cards are more convenient than cash. Smart personal finances are rarely about convenience. Convenience is what gets most people into debt over their heads. Impulse buys, payday loans, cash advances and credit cards are like everything else convenient….they’re expensive. It would be convenient for a limo driver to bring me to work everyday, but very expensive. It would be convenient to eat out for every meal, but expensive. You get my point.

The bottom line is that eliminating all of your credit cards is a trade-off. You may give up some convenience, but the peace of mind and better sleeping at night will make the trade far worth the effort.

A FICO score is between 300 and 850. According to Fair Isaac, the median score is 723 (half of scores above and below) whereas according to Experian (using the Fair Isaac risk model) the average credit score is 678 (lowest scores are farther from the median than the highest scores). The weighting of the score is broken down as follows:

• 35% — punctuality of payment in the past (only includes payments later than 30 days past due)
• 30% — the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
• 15% — length of credit history
• 10% — types of credit used (installment, revolving, consumer finance)
• 10% — recent search for credit and/or amount of credit obtained recently

You can see many components make up a FICO score. It can take six months or longer to improve or worsen a score. If you file for bankruptcy it can take seven or even ten years to wipe your FICO slate clean and even then it will often be asked on loan applications. The score is similar to a financial report card banks use to determine your risk of defaulting on a loan. The lower the score, the higher the risk of you falling behind on the loan.

So, what’s the flaw with the FICO score?

Before I answer that question, let me tell you about one of my goals. This goal pertains to my FICO score. My goal is for my FICO score to become zero. You may be saying WHAT? Is this guy nuts? Why would anyone want to ruin their credit rating? Plus, the rating only goes down to 300…why shoot for zero??!!

The flaw in the FICO score is that it’s a loser’s game. It is merely an indicator of how well you manage the revolving door of debt. Just like getting bad grades on a report card, you’d really prefer that no one has to see this private matter. If your score is high, you apparently don’t need to borrow money because you consistently pay it back promptly.

The flaw in the FICO score is that it shows you have debt. It might be well-managed or it may be poorly-managed. Either way, you have debt.

My goal is to have no debt. In the next month or two, my family will have no debt except the house and even the terms of that loan are being re-evaluated by me. My plan is to go as long as I possibly can without borrowing any money. Not from a friend, not from a relative and certainly not from a bank. If someone goes years and years and years without borrowing money eventually that person will have no no track record for a FICO score. Banks will have no clue about your ability to pay back a loan and that’s a good thing. I realize that this could be a decade away or more for me to get a FICO score of zero.

Here’s the ironic part: a millionaire who has not borrowed money for many years would also have a credit score of zero. Yes, a person with a net worth of millions of dollars cannot get a loan from a bank due to our financial culture based on that score. No track record, no loan.

The next time someone discusses the concept of the FICO score mention that this is a score you’d rather not even have.

Well, I have a tip that can save you even more time than trying to decipher the envelope. Check the return address. If it says Wilmington, DE then I can tell you with certainty that it’s from MBNA (now Bank of America). Other big offenders include Chase, Capital One, American Express and many other large financial institutions. I started the process of filing for an LLC for myself in 2003 (but never did) yet I still get direct mail and small business offers from American Express four years later.

This entry from Wikipedia explains when and why Wilmington, Delaware became a credit card behemoth.

Wilmington has become a national financial center for the credit card industry, largely due to regulations enacted by former governor Pierre S. du Pont, IV in 1981. The Financial Center Development Act of 1981, among other things, eliminated the usury laws enacted by most states, thereby removing the cap on interest rates that banks may legally charge customers. Many major credit card issuers, including Bank of America (formerly MBNA Corporation), Chase Card Services (part of JPMorgan Chase & Co., formerly Bank One/First USA), and Barclays (formerly Juniper Bank), are headquartered in Wilmington. The Dutch banking giant ING Groep N.V. headquartered its U.S. internet banking unit, ING Direct, in Wilmington. In 1988, the Delaware legislature enacted a law which required a would-be acquirer to capture 85 percent of a Delaware chartered corporation’s stock in a single transaction or wait three years before proceeding. This law strengthened Delaware’s position as a safe haven for corporate charters during an especially turbulent time filled with hostile takeovers.

Although the credit card industry has created an economic boon to this city of 72,000, that same industry has wasted millions of Americans time sifting through their junk mail.

Bottom line: If the envelope says Wilmington, DE on it place it in your circular file.

In another Sears incident, one blogger details her story at length about how she had extreme difficulty getting her money back from a Master Protection Agreement that failed to provide coverage for her digital camera. The long and the short of it is that she paid for part of the MPA with a gift card and part of it in cash. When she went to get it refunded (due to Sears not even servicing digital cameras after all!) the store manager required her refund be given in the form of a store credit.

A former Sears appliance salesman basically created a Master Agreement Manifesto detailing the dubious nature of these offerings. Among the highlights I found unbelievable:

• the company holds weekly meetings to discuss MA quotas and techniques to sell them
• the salesmen are told to not give up selling the MAs until the customer says “no” at least three times
• a mathematical diagram called the bathtub curve which display high failure rates for products either in the first days of use or many years later thus making a curve the shape of a bathtub. Sears uses this curve to maximize profits on the MA by making the warranty end right when failures become more likely (in many products after three years)
• for many people the MA ends up being a waste of money because they lose it or forget to use it

As many of my posts stress, remember the following tips when buying from a major retailer. First, using their in-store credit card significantly increases the chances of you getting taken to the cleaners on interest charge if you miss a payment. Second, the extended warranties are a rip-off that transport cash from your wallet to the retailer’s pocket and end up providing you little and the merchant a lot. Third, loss leaders will often get you into the store for a free or cheap deal, but often you are enticed to buy more once in the store. Remember these tips for maximum savings for you.

Let me just rattle off the stores in my area who have employees brainwashed to ask you at checkout to put your purchase on their 22% interest , God-forsaken, egotistically-driven, logo-emblazoned credit card. Well, they don’t use all those adjectives but I need to make this interesting. They are Sears, J.C. Penney’s, Kohls, Dicks Sporting Goods, Macy’s, The Gap, Old Navy and Ann Taylor. I’m not sure how the scheme operates but perhaps the employee gets a small commission for each sale put on a charge card or certainly a bonus for each new charge card opened. Any way you slice it, the odds are high that you well get hosed by putting your purchase on their card. Why is this?

• If you were going to pay cash at the checkout, they just talked you out of paying off that debt immediately. Well, duh! Now you have another bill on another separate credit card to remember to pay next month. Again, the score is now Kohls 1, you 0.
• I’ve said it before and here it is again. On average, a typical consumer spends 12% to 18% more when using plastic (debit cards included). Exactly the same philosophy as poker chips in Las Vegas. If you don’t see your hard-earned green bills in front of you, you’re more likely to spend it.
• You also just added yourself to their mailing and possibly phone list. DoNotCall.gov will remove you from their telemarketer list, but unfortunately there is no IAmHemorrhagingMoneyAt22Percent.gov to extinguish their confiscatory interest rates.
• Having all of those store department credit cards will eventually affect your credit rating. When my wife and I applied for our first mortgage in 1997 the loan officer asked “Why have you opened and canceled 12 credit cards in the past year?” and we truthfully admitted to doing it for the initial 20% discount when you open a new account at many merchants.

So before you put that Kohl’s or any other purchase on their store-branded card, think twice at how disciplined you will be at paying it off on-time, interest-free.

1. Stick the money in a shoebox, under the mattress or in a hole in your backyard – just do it though! Remember as a kid when you received an allowance? Wasn’t there a certain satisfaction in knowing you had waited many weeks or months to buy that new toy or game?
2. Eliminate impulse buys. Which are you more like to regret? Going out to a superstore to buy a $300 video game console or saving up, researching and shopping around for the $300 unit over six months?
3. When it’s YOUR money in YOUR shoebox there will NEVER be an interest rate charge on the money! Think about it; if you essentially are paying cash for most items you’ll never pay interest on those items because they are paid for. Put another way: a $300 purchase can quite easily end up costing $320, $340, $350 if you leave it on your credit card long enough.
4. Some sellers offer cash discounts. On average a car dealer makes $1500 profit on a customer who leases, $700 from someone who finances (through the dealer’s financier , of course) and $72 on a customer who pays cash. Knowing the cost of the car is the same regardless of how you pay, it makes you think twice about increasing the dealer’s profits doesn’t it?

Now, if you’ve already used the credit cards and have a balance you want to eliminate read How To Save Money On Credit Cards

In a survey conducted by the Public Interest Research Group (PIRG), 56 percent of those surveyed got their credit card rates lowered simply by asking their lenders to do so. In the current environment, if you have reasonably good credit, McKinley said, you should be able to get a rate between 10 percent and 11 percent.

My brother Mike can attest firsthand of how to get lower rates with creditors. When his credit card balances reached an all-time high of $14,000 he was in dire straits. He called each of the various credit companies just asking for a lower rate. It really is that simple. In this economy, many financial institutions know that the consumer wants the lowest prices for their hard-earned money. By making 4 four phone calls, my brother Mike saved $641 through the following four phone calls:

Card #1
Balance: $2800
Old Rate: 18%
New Rate: 12.9%
Savings/year: $81.60

Card #2
Balance: $5600
Old Rate: 22%
New Rate: 14%
Savings/year: $259.80

Card #3
Balance: $3100
Old Rate: 19%
New Rate: 11%
Savings/year: $141.48

Card #4
Balance: $2500
Old Rate: 22%
New Rate: 11%
Savings/year: $158.16

* assumes paying off the balance in two years. Savings are greater for longer payoff term.

If you merely have the average balance of most Americans, four phone calls could easily save you $641 per year or more if your balance is higher.

Let’s have some fun with this:

• 4 phone calls = savings of $641 per year
• Savings per phone call = $160.25
• Time spent on each phone call 15 minutes

For every phone call you gave yourself of raise of $13.35/month or $53.41/month for all four! How many of us can say that for every four phone calls we make it gives us a raise of $53.41/month?

Beating The Credit Card Companies At Their Own Game

If your credit card company plays hardball or will not give you a lower rate, here are some excellent comments for those belligerent customer service reps:

• “I just received an offer from your competitor for 9.9% fixed rate. Can you match that? If not, I will be taking my business elsewhere.”

• “Your rate on my card is currently XX%. What can you do for me on that rate?” Then STOP and don’t say a word. Let the silence scare them and know that you are serious.
  
• Use one of the temporarily low rate introductory offers for 6 months. These rates are usually REALLY competitive, but be careful. They often jump to a much higher rate after 6 months if the balance is not paid off.

Also, you want to ask yourself, “How bad does this credit card customer service rep want my business?” If the person you are dealing with is not acting motivated or enthusiastic about getting your business, you need to deal with someone else. Either politely hang up and call back to get another rep or if you at the store simply walk away for a few minutes and find a different Representative who really does want your business.

Do NOT be intimidated when dealing with these people. Yes, these banks that issue these credit cards are often $30-billion companies or bigger, but you aren’t trying to BUY THE COMPANY. Hello??!! This isn’t Warren Buffett or Bill Gates on the other end of the line….you are talking to a customer service rep for Pete’s Sake!!!!! He or she might be at the bottom rung of the company and HATE CREDIT CARDS AS MUCH AS YOU DO. Here’s my point: I will guarantee you that her boss at the credit card company would gladly lower your rate in a heartbeat than lose your business entirely! Think about it.