Credit Cards
Implementing PAYGO Rules For Personal Finances
Last week, Sen. Jim Bunning of Kentucky created quite a stir when holding out his vote for extending unemployment benefits. His contention was that it violated the self-imposed PAYGO (pay-as-you-go) rules that Congress and the President reinstated just a month earlier. Bunning eventually caved and the benefits were extended, but just because the government can’t operate under PAYGO doesn’t mean we the people can’t.
Photo by robson2313
PAYGO requires new federal spending to be offset by budgetary cuts or tax hikes. Makes sense; without paying as you go you will surely wind up deep in debt, which is exactly how we find our country. As most things political go, PAYGO seems to be more for show, as politicians on both sides have ignored their own rules, or taken advantage of lapses in PAYGO, to spend like maniacs.
Since the idea of debt first came along, people have opted to borrow versus saving for a variety of reasons. Farmers often needed to borrow money for seeds and tools to produce their first crop. Many business were started with loans, because they had significant upfront costs that owners were unwilling or unable to cough up. Homeowners cannot usually afford to buy a house for cash, so we choose to take out a mortgage.
These examples all seem relatively easy to justify, but then a little tool came along called the credit card, which made it much easier for households to borrow money for everyday items. With credit cards, the idea of paying as you go became nearly obsolete.
Every now and then I hear stories of someone who built their own home. They often saved up to buy some land, then the materials, then completed as much as they could on their own while saving to pay someone to finish up those things they lacked the expertise or physical ability to do themselves. I’ve always admired these types; not only for their self-reliance, but because they understood the pay as you go way of managing your money.
My wife and have implemented PAYGO in our own household, on a smaller scale. A few months ago we agreed not to sign up for any new subscriptions, or add to our recurring monthly expenses, without canceling something equivalent.
For instance, after living for more than a year without cable television to speed up our get out of debt plan, we decided to sign back up for basic programming. Doing so would add about $30 to our monthly budget. To pay for it, we scaled back our Netflix membership (a $10 savings), canceled a weekend newspaper subscription (I can read it online – $10 saved), and I canceled a forums membership I no longer participated in (at $9.99/month).
In our example, we eliminated two things that were no longer useful to us, or that we no longer enjoyed, so it wasn’t too big a deal. However, we have had times where we wanted to add a new service or subscription, and couldn’t identify we were willing to eliminate. Enter the other side of the PAYGO equation: Increasing income.
The government can increase income by raising taxes. Fortunately, we don’t have the ability to levy a tax on others and collect their money, so we have to raise the funds ourselves through work. If you receive a raise at work, you may want to allocate a small percentage of your new income to adding something to your household that would add value.
Perhaps you’d like to listen to audio books on the road to increase knowledge on a particular subject. Or maybe there is a cooking class you’d like to attend, or a gym membership could help relieve stress. Whatever it is, use a small percentage of your new, monthly income to reward yourself. Notice I said “small percentage.” There is a risk here of lifestyle creep – inflating your lifestyle to meet or exceed your new income. Tread carefully.
By implementing a pay-as-you-go system in your personal finances, you will not only avoid debt, but you will be able to take pride in the things you own because you really own them, they don’t own you. And yes, that’s right out of Tyler Durden’s Guide to Personal Finances.
Post by Frugal Dad
The Frugal Web: Food Labels, Decode Coupons and Big Charts
With people stuck indoors on the weekend and the spending for Superbowl Sunday done with, now is a good to surf the web and see what other people’s ideas are about frugal living.
First, time to get the bad new out of the way, 9 food label lies. I read through this and found it both enlightening and a little bit depressing. All the more reason to read the ingredient labels thoroughly. Also, serving sizes today aren’t what they used to be (though that may change) - have you measured out what a cup of cold cereal is and compared it to what is usually poured into a cereal bowl? There’s usually a big difference.
Two things jumped out to me while I was reading through SmartSpending’s Learn how to decode coupons - That expiration dates are ending sooner than they used to and that the prevalence of counterfeit coupons that are out there.
We don’t think anything about popping in a dollar into the vending machine or into a money changer - but back in 1929 a money changing machine invention was a big deal and made the pages of Modern Mechanics
The best way for me to learn is to do it as I learn it, the second best way to learn for me are really BIG charts with pictures and lines and all kinds of fun.
Recently Mint.com blog, Lifehacker and Billshrink had some really cool BIG charts that are actually kinda handy.
? Lifehacker has their Best Time to Buy Anything chart and corresponding detailed post on buying times all year around.
? BillShrink has a chart on the best Cell Phone Plans. Of course this is probably the first one to expire of all the charts, but handy still.
? Mint.com Blogs with many charts and this one in particular caught my attention, How Some Companies Prey on Poor People and the chart covers payday loans, credit cards and rent-to-own places.
Speaking of credit and buying stuff - I noticed that Credit Info Center has pulled together the facts on what makes up our FICO scores
I finally got my final W-2 form in the mail on February 5th and I was worried because it is rare that they reach me after January 31st. However, on Walletpop came to my rescue in case I didn’t haven’t all my W-2 forms with help on getting all the tax documents - most important piece of advice, “The IRS instructions specifically request that you wait until Feb. 15 before calling about a missing form“
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We Owe $80,000 On Credit Cards – Where To Start?
Laura writes in with the following plea for help with getting out of credit card debt:
I came across your web site today and I love it! My husband was out of work for nearly 2 years. We always had enough money to pay our bills so our credit line was very high. Well, I used it, all of it. I paid the phone, the car, taxes, one credit card paid another and so on. I know I broke every cardinal rule but I did what I had to survive.
My husband is now working. We are paying the mortgage company every week $500.00 to catch up. My credit cards are over $80,000.00.
Here is my question…Now that we are getting back on our feet, how do we square up with the credit cards with out ending up in the same position? I can give them each (all ten of them) 40.00 a month, but that won’t make a dent and I don’t even think they will take that low of an amount.
Laura, thank you for taking the time to share your story. It sounds like you and your husband have had a rough couple years, financially, but there will be brighter days ahead. My first piece of advice has little to do with finances, and more with your relationship with your husband.
I want to encourage you to fully disclose your financial situation to your husband. Perhaps you have already done so, but in your email you indicated “I used it, all of it. I paid the phone, the car, taxes…” I just want to make sure you and your husband understand the situation fully, and understand that while you did what you had to survive, we must now work together to clean it up.
Kudos to you for working to get the mortgage caught up, and for making that a top priority. So many times people in your situation make payments to credit cards before the mortgage payment because some obnoxious credit card collector is breathing down their neck. Prioritize the income you now have coming in putting things like food, shelter, lights, and transportation at the top. You’ll work around to the credit cards when you can, but those things must be paid first.
Consolidate Your Accounts
With ten credit cards you do have an uphill battle, but paying them off is not impossible. You didn’t share exact numbers/balances with me, but I understand your current budget only allows for $400 to go towards repaying the credit cards (hopefully you’ll have even more once the mortgage is caught up).
Spread across 10 cards, that $400 budget only leaves $40 per card. You might consider a consolidation loan with Lending Club to reduce the number of accounts (and minimum payments) you are required to pay each month. If you can successfully consolidate your accounts, but sure to close or tear up the cards of those that are paid off. Else you may revert back to old habits and begin using them again.
Sell Stuff to Raise Cash for an Emergency Fund
It would be great if you could build up a small emergency fund of a couple thousand dollars before starting your debt repayment plan. I worry the next emergency will lead you back to credit cards, and zap any progress you’ve made towards paying them off.
Do you have anything you could sell to fund this emergency fund? An extra vehicle? Old jewelry you no longer wear, but may have cash value? Appliances? Electronics? Consider hosting a yard sale or two. I’m not advocating you sell all the contents of your home, but this step will require an extreme measure or two to get an emergency fund in place.
The Debt Snowball
Here’s my advice for handling the remaining credit cards. Start with the traditional debt snowball. List your cards smallest to largest according to their current balance. The standard advice here is to pay the minimums on all accounts to keep them current, and pay anything extra on the smallest debt. In your situation, I’m not sure that’s possible, considering the sum of all minimum payments is likely much higher than $400.
I’d advise you to consider making a substantial payment – at least a couple hundred dollars – on the account with the lowest balance. Use any remaining funds to pay minimums on the next card or two. Hopefully, that card with the lowest balance can be paid off within a couple months, and when it is, walk that money right up the debt snowball to the account with the next lowest debt, and so on. The guys at the end of the list will probably be kicking and screaming for payments, but if you can’t get to them, you just can’t get to them.
Increase Your Income
While working this debt snowball, it would be great if you could find creative ways to increase your income. Perhaps you or your husband could work some overtime or a part-time job, or work from home in off hours. As you acknowledged, you are in a pretty big hole, so increasing the size of your shovel would certainly help get out of credit card debt that much faster!
I wish you and your husband the best on your journey to debt freedom. It will be a long road, but as someone who has just recently experienced debt freedom, I can tell you that every sacrifice is completely worth it!
Ask the Readers: Do you have any additional advice for Laura? Words of encouragement?
Post by Frugal Dad
MyFICO Promotional Code Offers Chance To Check Credit Report
Over the weekend I completed one of my year-end financial checkup tasks. I visited MyFICO.com and pulled a current copy of my credit report. This exercise was even easier this year considering the MyFICO promotional code that gives 26% off of their standard score report between now and the end of the year (just provide the promotion code “26UNTIL2010“ when ordering your FICO score report.
I was pleasantly surprised at the bump in my credit score since the last time I checked it. Since paying off all our credit cards, our FICO score has increased about 40 points. It wasn’t bad to start with, but was in the “average” range, and has now moved to “very good.”
Getting our updated credit score was nice, but the real reason I request a credit report at the end of the year (and again in the summer) is to check for any suspicious account activity – new accounts that I didn’t open, balances or personal information that I don’t recognize, etc.
If it has been a while since you last pulled you credit bureau report, I suggest taking advantage of this opportunity offered by MyFICO.com.
How to Save 26% On Your FICO Standard Score Report
1. Visit MyFICO.com
2. Choose “FICO® Standard” in the right sidebar
3. Click the “Buy Now” button
4. Select the credit bureau(s) you’d like to receive a report from
5. Log in or create an account
6. On the “Customer Agreement” page, enter the promotional code “26UNTIL2010″
7. Verify your discounted order and finalize the purchase.
Simply click the button above to take advantage of this promotional offer from MyFICO.com.
Post by Frugal Dad
Santa’s Workshop: A Kids and Money Lesson Even Adults Could Benefit From
Last week my kids participated in a unique budgeting exercise at their school, carefully disguised as a Santa’s Workshop. The idea was the kids were to visit the workshop a few days in advance of its official opening to develop a shopping list for friends and family, along with a Christmas shopping budget.
Our daughter came home with a pretty good estimate of what she’d need to complete her shopping. $32, to be exact. Most impressive? That included gifts for five or six family members – even her little brother! We negotiated a small advance allowance along with a few extra chores to work on over the weekend and handed over some of the shopping cash.
That morning, the kids were allowed to visit Santa’s Workshop before classes started and were allowed to select a number of gifts up to their budgeted amount – not a penny more. Imagine if we shopped under such strict guidelines. Spend the cash you have available for Christmas and leave the store. No credit cards; no layaways; no 90 days same as cash.
As parents, we don’t have to wait for Santa’s Workshop to teach these same lessons. Rather than buying gifts for your kids to give to siblings and friends, give them a budget and allow them to do their own shopping (with your assistance, of course). Here are a few ideas to reinforce with kids around the Christmas shopping season:
- Start saving for Christmas way before the decorations are going up. We save for Christmas all year around, in a dedicated online savings account at ING Direct. Simply divide your annual Christmas budget by 12 months and move that amount to savings. The ultimate budgeting challenge for kids would be for them to set aside a little allowance each month throughout the year for this very purpose.
- Have a list, check it twice! Whether you are shopping for groceries or toys for kids, it’s always a good idea to have a list. Stick close to the list and you improve your chances of staying close to your budget.
- We don’t shop with money we don’t have. In my roundup post the other day I mentioned seeing customers in front of me charging Christmas presents on credit cards. My daughter is also old enough to notice this, and often gives me a knowing look when we witness it together. Remind your kids that buying stuff on credit cards is a bad idea, because you usually wind up spending more up front, and paying more for each item when interest charges are tacked on.
- Don’t forget giving. We do not give gifts with the anticipation we will receive them. To reinforce this idea, have your kids give a little of their own money to a cause they are interested in, or a local church or shelter. The more personal, the better.
Post by Frugal Dad
We’re In Debt: $150,679 In Debt, To Be Exact
Let me introduce myself. My name is Chris and I am a twenty-something male married to an amazing twenty-something woman. I work in the health care industry and my wife works in education. We currently live in northern New Jersey and have a combined income right around $90,000. Over the past few years, we have racked up an astonishing amount of debt. Granted, most of the debt is in student loans but that is no excuse for our lack of sound financial discipline.
Here is how our debt breaks down:
- His Car Loan: $7,279.19
- Her Car Loan: $8,673.10
- His Student Loan: $66,070.88
- Her Student Loan: $48,763.88
- Best Buy Credit Card: $1,468.90 (0% until August 2010)
- Family Loan: $16,500 (used to pay off credit cards)
- Personal Loan: $1,922.68
GRAND TOTAL: $150,679 (I updated our debt numbers at the end of October and will be doing it again for November soon)
The car loans are at pretty low rates because they are at our credit union. If I had to guess, I would say that our cars are worth a little bit more than we owe on them. The student loans are also at very good rates. About $40,000 of the loans are private loans. Since general interest rates are low right now, they are too. The personal loan is also at our credit union and it is at 12.9%. That is our highest interest rate on our debt.
The loan that bothers us the most is the family loan. A family member offered to pay off our credit cards as long as we agreed to pay them back. It just makes us feel bad that we owe them this money and we cannot wait to pay it off.
So, there you have it. Our debt story is unique but I can imagine that there are people out there in the same type of position we are. We look forward to giving you an inside look into our struggles with debt and how it affects our lives.
From Frugal Dad: I’m looking forward to Chris’ contributions here. We both agreed the timing was perfect since the Frugal family recently completed our journey out of debt, to highlight another family going through the same challenges. I can’t wait to watch those debt balances fall as Chris and his wife dedicate themselves to a frugal lifestyle. It takes a lot of guts to admit that number, even on a blog, and I know readers will appreciate Chris’ candor.
Post by Frugal Dad
Credit Cards To Charge Good Behavior Fees
In what could ultimately be a game-changer in the credit card industry, it appears credit card companies are considering charging customers a new sort of annual fee – for paying off your balance each month. The information is coming slow, but I did find a good article by USA Today, Latest Bank Fee is for Paying Off Credit Card On Time Every Month, that runs down a few of the cards and their new tactics.
Credit card companies, and their defenders, will of course point to the new Credit CARD Act, which will limit revenue opportunities for credit card companies. However, in my mind, this is yet another customer-losing reaction to the impending legislation. You can blame the law of unintended consequences and thank the government, or you can blame the credit card issuers and close your accounts.
In the past, any time I’ve mentioned closing all my credit cards and living on cash, I get dozens of comments extolling the benefits of using a credit card. There are reward programs, and added consumer protection policies, and of course the convenience factor. To sell their position, fans of credit cards always pointed out that you could simply pay off the balance every month to avoid interest and fees. What if that isn’t true in the very near future? Does that change their opinion? Does it change yours?
Just when I start to get comfortable using my one remaining credit card (I use it to run through gas and utility payments and pay it off at the end of the month), news like this comes out and makes me skeptical of credit card companies all over again.
At what point do we just make ourselves immune to the whims of bank CEOs and government officials and say to heck with credit cards? Just shred ‘em! Well, I am getting pretty close to that point. If the issuer of my last card decides to play these fee games I’ll take a pair of sharp shears to it and live on cash. Come to think of it, I doubt I’d miss them.
Post by Frugal Dad
Avoid spending money you don’t have
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This is a guest post by Owen Smith, a finance writer with over 10 years of experience. The arrticle will look at 3 ways in which you can avoid spending money you don’t have.
1. Chop up your credit cards
Using your credit cards to pay for things is a good way of spreading your costs - providing you can pay it off at the end of the month. However, you might find you are unable to repay your debts, and this is when they become a problem.
To avoid this problem, the simplest solution (and the best) is to chop up your credit cards. If they aren’t there, you can’t spend on them! If you have outstanding debts on your credit cards then try your best to repay these as soon as you can - and don’t be tempted to spend any more on them. (You might want to keep one credit card for emergencies.)
As you are probably aware, credit cards come with high interest rates, so that $60 petrol you put on your credit card won’t cost you $60 if you fail to repay it, it will be more like $70, and then $70 if you fail to repay it again….and so on.
2. Don’t be tempted by store cards
Store cards often come with ‘introductory gifts’ to entice you into signing up - but don’t let this tempt you, unless you are certain that you will be able to repay the outstanding balance.
Store cards are known for coming with high interest rates (higher than credit cards), and can also come with serious consequences if you fail to repay them.
The rule here is that store cards should be avoided - unless you can easily clear the balance.
3. Create a budget
Finally, to make sure you avoid spending money you don’t have, you should create a budget.
Write down all the money you earn/receive each month, and then write down all the money you spend each month - this should give you an indication of how much money you will have left over after you have paid all your bills, etc. And will also give you a greater control of your finances - which should help you see if you are spending money you don’t have.
If you find that you don’t have enough money each month, you could look for areas where you are able to make cut backs to save yourself money.
Budgeting should let you see how much money you have available to spend each week - so you can draw this out of the bank and keep it with you, again making sure you don’t spend more money than you actually have. If you find that you need to lend money short term for that car or house repair, try lending from family or consider a cheap loan before heading straight for the credit card.
Hope you have found this post useful. If you would like to do a guest post on FrugalNYC on the subjects of NYC, Finance or Frugal Living, please send us an email.
Relevant and Related Posts:
- How to talk yourself out of any purchase
- Five Awesome Tips To Putting Your Credit Card On A Diet
- Our Weekly Frugal Friday Post on The 405 Club - 6 Frugal Benefits To Being Unemployed
FrugalNYC Reminders:
- Today is the last day for Bryant Park Fall Festival
- Last weekend to enjoy a relaxing time on Governor’s Island FREE
For additional links to frugal tips and tricks follow me on Twitter. If you would like to contribute to FrugalNYC in any way feel free to contact me via email. Click here to add FrugalNYC to your RSS reader or Subscribe to FrugalNYC by Email.
Photo by Refracted Moments
Credit Cards: To Close Or Not To Close
Melissa writes in with the following question about closing credit cards:
I have an old credit card account where my charging privileges were revoked because I was having trouble making my payments. I have since then paid off the card and it is at a zero balance. Do I now close the account? Would it help my credit more if I left it open? I am trying to rebuild after years of bad credit decisions.
Deciding to close a credit card or leave it open is a tough decision. Unfortunately, it sounds like the credit card issuer beat you to the punch. Chances are they closed your account due to past due activity, which is a major blow to your credit score because it reflects that the account was closed by the issuer, rather than by you, voluntarily.
Now that the card is paid off, you might try contacting the issuer to ask if they can update the account to reflect it was closed voluntarily. They probably won’t change the account’s status, but it’s worth asking. The very fact you paid it off will help heal your credit score, as will time since the last activity (negative information should drop off your report in seven years after the last activity).
If in fact your account still reflects “Open” on your credit card, you may want to consider leaving it open to help rebuild your credit. To do so, charge something you buy every single month, and don’t have a lot of discretion in the amount spent (gasoline, or a utility bill, comes to mind). When your credit card bill arrives, pay it off promptly. This continued, responsible use of credit will help boost your credit score over time.
There is, of course, another side to this argument. Some would argue to close it and leave it closed. Don’t play with snakes. I used to feel this way myself, but since turning around my own finances over the course of a couple years, I’m now empowered by the fact that I can buy something on my credit card for purchase protections (particularly when shopping online), and simply pay it off in full later in the month. I’m in control now; not the credit card.
It sounds like you’ve made a lot of progress in your own financial turnaround, and I applaud you. Whatever you decide to do, don’t repeat those same mistakes from the past that led to problems paying your bill. The road back to responsible credit use can be a slippery slope, so if you feel yourself start to slip, put that credit card away and go back to spending cash.
Post by Frugal Dad
Honesty in the Checkout Line
When a cashier rings up an item incorrectly do you inform him or her of the mistake?
The other day a cashier at the grocery store failed to ring up a few of my items. As she was wrestling with my reusable bags she accidentally moved a few items to the left of the register without scanning them. I knew I had a choice, I could let her continue ringing up items or I could inform her of the error. I decided to let her know.
The cashier was young and new on the job. When she initially greeted me in the checkout line she told me it was only her second day. I wanted to make her aware of the error so she wouldn’t do something similar in the future or get in trouble.
Sometimes I am certainly more honest than others. A few months back I waited forever in the checkout line at a Food Lion in North Carolina. The woman in front of me was paying with three different credit cards or debit cards or food stamps or something. In order to process the entire transaction all of the items had to be divided into $50 increments. It took forever for the cashier to figure out how to divide up the transactions and although the line continued to grow she never called a manager over to assist her.
Eventually I picked all of my items off of the conveyor belt, put them back into the cart and moved over to a different cashier. When that cashier forgot to ring up the reusable bags I purchased I didn’t say a word. I know the customer was primarily at fault for the failed transaction, but I was angry that the cashier didn’t call for help or inform us that it might be awhile. Even after I left the store the other customer was still trying to correct the transaction with that same cashier.
In the past I didn’t pay much attention to the register. Now that I do it seems that more often than not the mistake favors the store. I cannot tell you how many times a cashier has forgotten to take money off for my reusable bags or an item has rung up full price rather than on sale. It is certainly rare for a cashier to make a mistake in my favor. Still I wonder how often I catch the mistake and how often I actually inform the cashier. I consider myself to be an honest person, but I will admit that I do not always inform the cashier of the error.
