Article: 8 signs you're flirting with financial ruin

Posted By Paul

A cool little article. It listed 8 signs of financial ruin.

I thought the 8 signs they listed were good ones and I was happy to see that none applied to me.

I especially liked the signs that they listed like paying late fees on your bills or having bounced checks. The signs that aren't disastrous in themselves but serve as early warning signals of big problems to come.

Here is the article:

8 signs you're flirting with financial ruin

Store Credit Cards: Know What You're Signing Up For

We have a guest post from Matt's wife Leah today. Enjoy!

-------------------------------------Posted by Leah

One of the major department stores (who shall remain nameless) recently hooked us with a “save 15% right now if you apply for a store credit card” offer. Normally we wouldn’t even consider it, but we were making a pretty large purchase and the savings totaled about $30, so my frugal nature won out and I convinced Matt to go for it.

There were several people waiting in line behind us, so I was feeling rushed during the application process. It was very quick, though, and only required a few taps on the buttons of the credit card swiper. Voila! We were approved in about one minute, and I walked out feeling pretty smug about my $30 in savings.

Fast forward to about a week later. We got a letter from the store thanking us for purchasing an additional plan that would help us pay off our balance should hard financial times strike. This plan would cost us $1.60 per $100 of our balance each month. That adds up to an extra 1.6%, added on to an already sky-high interest rate (Matt and I never carry a balance, so we don’t worry too much about interest rates on credit cards).

The letter stated that we could cancel this plan within the first 30 days and wouldn’t be assessed any charges. Of course I did this immediately, and filed a complaint with the company about this automatic enrollment. The representative informed me that I had agreed to this additional charge during my rushed application process, although I had no memory of doing so.

Ok, so it was my bad. I shouldn’t have applied for the card without reading all the small print, but what makes me mad is that the store knows that nobody is going to stand there, holding up the line, while they read through all the terms of use on that tiny screen. They also know that the majority of people, for various reasons, won’t get around to cancelling their membership in the plan within the first 30 days. I believe this is the store’s sneaky way of sticking it to the customer and squeezing that little bit extra out of us.

So what’s the moral of this story? Don’t apply for credit cards? No. Used wisely, credit cards have all sorts of benefits. Don’t apply for a store credit card while being rushed through a checkout line? Maybe…although most people don’t take the time to read the fine print even if they have the time. Be aware that this kind of stuff is happening, ask questions, and read your mail? Definitely!

No money down, no interest, NO WAY

Posted by Matt

Let me share a brief story about a family member who asked me for input on the purchase of a new laptop computer. She found a no down payment, no interest deal from a major electronics store in our area and wanted to know if I thought it was a good deal. I checked it out and it was a nice machine for a great price, but I had to take issue with the deferred payment plan.

First of all, I couldn't determine the exact rules of the deal, even after reading the fine print. The ad banner said no interest, but sometimes this actually means "no interest if you pay the debt off by a set deadline, otherwise a ridiculously high interest rate is retroactively applied for the interval between the purchase date and the deadline." I'm paraphrasing here.

I asked "If you don't have the money to buy the computer right now, but you think you'll have it by the deadline, why not wait and save up?" The answer was along the lines of "why wait, when I can have it right now?" I could only caution about unexpected financial emergencies.

My wife Leah added a final argument against the deferred payment plan that she heard about when listening to Clark Howard on the radio: they can drag down your credit score! If you're not familiar with credit scores, one of the big criteria used is how much credit a person is using compared to how much they have available, and deferred payment plans show up as accounts with 100% utilization (aka "maxed out"). Clark warns:

You may find you'll get higher interest rates when insurers check credit scores or even lose job offers if employers check scores.

Ideally, I think people should keep cash on hand in savings accounts for purchases like these. I'd even consider taking money out of an emergency savings account for an expense like this (rather than a deferred payment plan), as long as the withdrawal would be a relatively small in comparison to the savings balance and I felt I would be able to replace it quickly.

I also encouraged my family member to consider what other options were available. I suggested that she share her spouse's laptop for a while, start saving, and watch for even better sales after the holidays. I think she is going to give this a shot and who knows, sharing a laptop might end up being the best solution for the long term.

If you find yourself contemplating a deferred payment plan, ask yourself these three questions:

1. Do I have to make this purchase right now?
2. Is it worth the extra financial risk and the negative effect on my credit score?
3. Do I have any better options?

If you ask me, the answer to #3 is always yes.

Article: Ex-bankers on pushing customers to rack up debt.

Posted By Paul

In case you ever thought that credit card companies were worried about your financial well being, here is an article describing the sad but not surprising fact that they will be happy to lend you money that you can't affort:

Ex-bankers on pushing customers to rack up debt

The upside of paying two mortgage payments

Posted by Matt

I felt bad about posting the bad news about falling interest rates on a Friday, so let me redeem myself with a positive story about falling interest rates.

My wife and I have been making two mortgage payments each month for the last five months. No, that's NOT the good news. It's painful, no doubt, but could get worse...I spoke to a friend of mine who paid double mortgage payments for almost a year before he was able to sell his last house. He's smart with his finances and so he's always had good credit scores, but making double payments on time paid off by pushing him past the 800 mark! As a result, he is refinancing his mortgage and expects to drop his interest rate by between 1.5 and 2 percent.

I was already looking forward to selling the house and rerouting that mortgage payment into my savings account, but suddenly the light at the end of the tunnel just got a tiny bit brighter.

Credit just got tighter - FICO 2008

Posted by Matt

If you enjoyed my latest post about credit scores, you'll probably also be interested in what I learned about upcoming changes to the Fair Isaac scoring algorithm. The algorithm is proprietary and exact details about the changes aren't available, but here's what I was able to learn in general:

• Updated FICO scores should start appearing within a few months
• The score range is the same (300 to 850)
• The same input criteria are used (indebtedness, payment history, number of recently opened credit accounts, type of credit used). See Credit Mantra's nice pie chart.
• The model will more accurately identify risky credit behavior and is projected to reduce credit default rates by between 5 and 15 percent.

Another interesting fact that I learned (and that many people may not realize) is that income is NOT a factor in determining the score. In other words, borrowers are judged on their willingness to repay (as determined by their past behaviors) and not their ability. I can validate this with our recent experience in trying to rent out our last house; we've encountered several applicants who were scored as untrustworthy, despite having very large incomes. It was surprising and a bit depressing.

Bottom line: An improved scoring model is great for everyone. Borrowers will have less opportunity to get themselves into trouble, and scores for people with good credit behavior are expected to go up! Good news for Frugalizers!

The perfect (credit) score

Posted by Matt

You've seen the ads with the annoyingly smug guy who asks, "Do you know your FICO score?" right?

So, do you? Most people probably have a general idea of whether they have a relatively good or bad credit rating, but knowing your score is even better. If you are applying for a car loan or mortgage, the lender will probably have to access the information and can let you know, or you can buy a report.

Even more important than getting that number, though, is understanding how it is determined and structuring your financial activities accordingly. The exact algorithm has long been a closely guarded secret, but I read an article in the local paper that describes the factors that influence scores.

• Payment history
• Amounts owed and relationship to credit limits
• How many years you have used credit
• How often you apply for credit and open new accounts
• Types of credit, such as a mortgage, auto loan, finance company accounts or retail accounts. Bank cards can help your score more than those from a department store or gas station. Some consumers try to help their score by closing unused accounts. But that can backfire because reducing credit lines and eliminating a long-term account can be seen as negatives.

The second point is the most interesting point to me. I remember that when I first started to make a little money, I got to the point where I could stop using the credit line at my bank. I think I had only been using it as a very poor type of emergency fund, transferring a little money to my checking account when it got low to avoid overdrafts. Once I built up a savings account, I closed the credit line. I didn't realize it at the time, but that action probably really hurt my credit score. That was the only credit I was using at the time, so what I should have done is kept the line open in order to keep my ratio of debt to available credit low. Live and learn; I just wish I had learned in time for the information to be more useful.

One last good quote from the article:

What's the profile of a person with a near-perfect credit score?
"If we're talking about predicted credit risk, the ideal consumer is a very conservative money manager...It's somebody who has two or three accounts that have been open as long as the U.S. has been a country, they have never, ever been late, they do use the credit occasionally, but they always pay it down to zero or to low balances."