credit cards

The part #1 of this series deals with the basics of how to keep track of your credit card accounts.

Between me and my wife, we have 18 credit cards (9 each) ! In any given month, 10~14 of them are active. Some of have balance transfers on them and others have purchase charges; that basically means I have to juggle with 10~14 credit card statements every month. I have been doing this for more than 5 years now and till date there hasn’t been a single instance of a late payment. So here are some tips on how I am able to do this; more importantly, tips on how YOU will be able to do this.

Problem with paper statements:
If you get a lot of paper statements and if you are not organized with putting papers in their proper places, you are going to miss a statement or two very soon. Plus, I don’t like the fact that many credit card companies print your full credit card number on the statement pages. This creates additional headache of shredding all these pages which carry sensitive information. Managing paper statements require a lot of resources.

Get everything online:
I have all my credit card transactions online. This is the first step towards better credit card management. Register for online access to credit card accounts and sign up for paper-free billing. Paper-free billing means you will get your statement be email. Then, register you bank’s checking account with the credit card company so that you can pay your bills online. Almost all credit card issuers have this online bill payment facility. Check with your bank to see if it charges any fees for such online transactions; if it does, my advice is - dump it and open an account with a bank that doesn’t have fees for such transactions.

Get organized with your online activity:
Once you have set up your credit card accounts for online access, the first problem you will face is managing the information: different websites, logins, and passwords. Here tools like Yodlee MoneyCenter are extremely handy. But, if you are not comfortable with that idea you can still be organized. A good way to access credit card websites without having to search for them everytime, is to add the login page to your “favorites” folder in IE or “bookmarks” folder in Firefox. Here is an example of my Firefox bookmarks (all cards are not shown):

With a list like this you also have all the credit cards in front of you at once and there are no issues like “Oh, I forgot about this card totally”. Once you have the list of cards, every week start from the top of your list and login to every credit card and check the status. If you have cards with Citibank, this becomes really easy because Citibank allows access to all Citi cards with just one login. In fact you can put cards from two different persons under the same login. So you can combine all the cards in your family if you wish. If you have cards with Discover, this thing will suck because Discover doesn’t allow two cards under one login…not even when it’s your own second discover card. Thats why in my list above there are three different bookmarks for Discover. Though each of the Discover link will take me to the same page, when I list them as Discover-1, 2 and 3, it helps me remember that I have 3 cards and avoids “Oh I forgot about the third” mishaps. With Citi this is not a problem since I see all cards once I login and hence only one bookmark for Citi.

Manage your passwords:
If you use Yodlee, this does not apply to you because Yodlee does all the remembering stuff. If you don’t use Yodlee then write down your logins and passwords on a piece of paper and store it somewhere safe. I would go one step further and recommend that you remember all the logins and passwords. It seems like a big thing to remember 18 passwords but believe me, if you try it you will be surprised to see how easy it is to remember them. Just FYI, at the present moment, I have about 33 unique users names and passwords in my memory for various online accounts. If you don’t want to remember and don’t even want to write it down, use some password management software like the Comodo iVault.

Some additional comments:
So I use 14 of the 18 credit cards, what about the remaining 4 cards? Well two of them are in my bank’s safety deposit box for ultimate emergencies and the other two are always at home for situations like “I lost my wallet and don’t have access to the bank”. If I sound a bit paranoid, it’s because I am a bit paranoid.

In part #2 of this series, I will write about managing credit cards with an account aggregation service. My focus will be on using Yodlee.

Here is a link to another excellent article on Bankrate.com about managing credit card debt. The article addresses a question from someone called “Elaine”. The question is reproduced verbatim below. Read carefully, it is not about “I cannot pay my credit card debt”, it is more about “I am confused”.

“I am in a lot of debt. I make $40,000 a year and have $16,000 in unsecured debt. I am slowly trying to pay off credit cards and then close them. I tend to find myself making large payments on the credit cards, but then needing to use them because I don’t have enough cash on hand. I know I need to pay them off, but using them again because I need them is defeating my purpose. What should I do?”

I want to give a numerical perspective to Elaine in addition what Bankrate’s Steve Bucci has to say on the question:

-If you are in such a situation where you owe an amount almost half of your annual income, the first thing you should realize is that depending on how aggressively you pay off your debt, it will take you between 3 to 45 years to wipe it off ! So be prepared for tough times and don’t despair early and read the information below carefully.
-A debt of $16,000 for an annual income of $40,000 is a very manageable scenario (though the debt is high) and I would give you a lot of hope for a financial recovery.
-Assuming a 15% APR debt, if you keep making minimum payments for each billing cycle, it will take you 45 years (!!) to be debt free. In that time, you will pay something to the tune of $26,000 just in interest. BUT, this is not realistic, so don’t worry too much if you hear such numbers.
-Why are these numbers (45 years and $26,000) not realistic? I look at it this way; your first monthly payment will be around $320 (2% of your balance). Now, if you can make the first monthly payment, which by the way is not too much considering a $40,000 annual income, you can certainly keep paying $320 for the rest of the billing cycles. This way, the amount of time it will require for you to become debt free will be around 12.5 years and you will pay about $9200 in interest alone.
-If you get a little more aggressive and keep at least $500 each month for your debt payments, you can get rid of that debt in 3.5 years after paying about $4500 in interest….now that is more like it.
-So my advice is simple: stop using your cards right now and do whatever you can to keep $500 each month for your debt payments. “whatever you can” includes renting a cheaper apartment, carrying your self-made lunch, cutting vacations and any other stuff you think you can do. You will realize very quickly that it is not difficult to keep aside about $500 a month just by making smarter choices in your everyday expenses.
-With $40,000 annual income, on a conservative side, I would estimate that your net income would be something like $2500 per month. After taking out $500 for your card payments you still have $2000 each month to spend on yourself ! That is a lot money if you use it wisely
-Read this article “Pack away your debts with the payment push” and decide how you want to distribute the $500 payments each month.
-And yeah…don’t cancel those credit cards after paying them off…doing that is going to hurt your credit score.

Resources: The following calculators at Bankrate.com will be helpful in planning your campaign against debt:

1. The true cost of paying the minimum
2. What will it take to pay off my credit card

[Image courtesy: http://www.lowback-pain.com/]

In part 1 of this series, I wrote about how much money you would potentially save by making use of a 0% APR balance transfer (BT). At the time, I was expecting to write part 2 about how to make use of a balance transfer when you don’t have any credit card debt. However, I will now cover that in part 3 and address the issue of balance transfer fees in the current part. This part will attempt to answer questions like: Is a balance transfer worthwhile if the credit card charges a fee of 3%? How much would I earn in this case? At what point do the fees become greater than the gains?

We will consider the same scenario again: you have a 0% APR offer for 12 months on your new card and you want to save money by transferring your balance from a card that is charging you a 10% APR to this 0% card. But, unlike the last time, your new card is charging you a 3% BT fee. Usually there is an upper limit on the fees (usually $75, sometimes $100). Let us see what happens in this case.

How much would you save?
Let us assume that you were planning to pay off the balance on the 10% APR card uniformly over a period of one year. Last time we saw that if you have $5000 on your 10% card, you could save about $280 ($275.2 to be exact) over a 12 month period. However, with the fees (for $5000 it will be $75), your savings will be about $200. The savings are graphically shown below for all amounts from $500 to $5000.

Lessons from the graph are:

1. For small amounts the gains are very small even without any fees. With fees they can be extremely small (read: not worth the trouble). For example, for $1500 transferred with a 5% BT fee, you will save only $7.56 ! ….yeah fees are never good :). If I were to use such an offer, I would be interested only if my balances were above $2500.
2. Since fees are capped at a maximum of $75, savings for both 3% BT fees and 5% BT fees are same for higher amounts.
3. There is another catch with transferring smaller amounts. The savings shown in the graph above are after assuming that you will take the full 12 month advantage of the 0% APR offer. However, if you are looking to transfer smaller amounts, you might be better off by just paying them off on your old card in a couple of months. For example, look at the graph below.

4. 

   It shows you the savings per month when you transfer $500 from a 10% APR to a 0% APR card. There is a 3% BT fee ($15). It is clear that the savings are more than the fees ONLY if you cannot pay off the balance for more than about 6 months. So if you can make payments of about $84 a month, I would suggest paying the $500 off instead of using the balance transfer offer. I know it is getting a bit complicated here but make sure you understand the implication of BT fees; read this stuff three times if you want to :).

5. If you are looking to transfer about $5000, then look at the graph below.

   

   Clearly, the savings become more than the fees after the first two months. Now, a balance transfer with fees will make sense this case because (normally) it is highly unlikely that you will pay off $5000 on your 10% APR card in two months.

I am summarizing a crude rule of thumb (Golbguru’s Balance Transfer Rule if you like :)) you can use:

-Don’t bother yourself with a 0% BT offer, that charges fees, unless you are looking at about $2000 to transfer. If your current card charges an exhorbitant APR (like 20% ~ 25%), again don’t bother unless you intend to transfer at least $1000.

There is another way of looking at balance transfers: you use one credit card company’s money to pay another credit card company, while you can keep your own money in a high-interest account. If you go through all of the above with this logic, you will reach the same conclusion.

Please feel free to share any experiences/cases where you feel this line of thought does not apply.

Here is a link to an excellent series of articles on basic credit card information on Bankrate.com. It will be a lengthy read so pace yourself accordingly but make sure you read it all. Here is a list of main topics that are included in the series:

Chapter 1: Match card and lifestyle
Chapter 2: Credit reports and scores
Chapter 3: Costs and fees
Chapter 4: Managing your cards
Chapter 5: Using credit wisely
Chapter 6: Special-need card users

I am sure you will stumble on some new information here.

Also, if you get some time after reading everything about credit cards, browse around the site and explore all the calculators they offer; the compilation includes almost all the calculators you will ever need to manage your finances.

Ok so you have a 15 month 0% APR offer, how are you going to squeeze the best out of it? In one of my previous post the title says “Free Money..“. Where exactly is the free money involved? Am I talking about all the interest you will save by paying only the minimum required instead of clearing off everything on your card every month? Absolutely not! Here is how you go about it and how much you will earn from such an offer.

I will divide this into a two part explanation. Part 1 below will deal with how to use such an offer if you have balances on other cards (or carry debts). In a couple of days I will post Part 2 which will explain how to use it if you don’t have any balances on other cards (or you are essentially debt free).

How to do it if you have balances on other cards?
If you application is approved for a card that gives you a 0% balance transfer offer, avail the offer immediately. Sometimes this facility is offered during the application process and allows you to enter information for the cards towards which you want this balance transfer to be applied. Give priority to the cards that are charging you high APRs (giving priority to cards that carry lesser balances and/or lower APRs for “mental satisfaction” doesn’t make any financial sense to me). If you are not able to do this during the application process, call up the credit card company and do it over the phone. This will work for most credit card offers. At times, you can request a check for the balance transfer amount instead of directly transferring to other credit cards. This is convenient if you have debts that are not on credit cards.

How much will you save?
To simplify matters, let us assume you have a card that’s charging you a 10% APR and you have a balance of $5000 on that card. If you plan to pay off this balance uniformly over a period of 15 months, it works out to approximately $356 per month. By the time you finish paying this off, you will have paid a total of about $5340 ! that’s $340 more than what you owed. If you pay off this $5000 debt using 0% APR offer, you will save about $340 !
If you consider repaying $5000 over a 12 month period in a similar fashion, you will need to pay about $440 per month. That works out to $5280 by the time you pay it off. So applying your 0% balance transfer in this case will save you $280.

To estimate your total payments use this calculator from Bankrate.com

Very important things before you get into this:

-Never use such offers to borrow more than you can pay off within the offer time period. In the above example, get $5000 from the offer only if you can pay it off completely in the 15 months (or whatever you offer time span is). Always check the regular APR that is applicable after the offer time period. If this APR is very high and if you don’t pay off the entire amount immediately after the offer ends, your savings can disappear quickly.

-Make sure you are never late on the monthly payments. You miss one monthly payment and your 0% APR will vanish before you can blink. You need to get organized if you want to play this 0% APR balance transfer game.

-Always read the fine print. Check if there are fees involved with the balance transfer offer. Most offers will not impose fees on the first balance transfer. However, some cards don’t allow it for free and will charge a 3% fee . Usually, there is a maximum limit on this fee ($75 ~ $100). I will write more about this in time to come.

-Always check if you purchase APR is 0% for the offer period. If it is not 0%, then never use that card for regular purchases till you completely pay off all the balance you transferred. Payments are always applied to lower APR charges first. If purchase APR is 0%, then go ahead and use it for purchases but keep an eye on how close you are to the credit limit.

Another chance for earning free money with this credit card: Blue from American Express.
There is no balance transfer fee.
Here is what it says in the fine print:
“There is no balance transfer transaction fee associated with this offer. However, future balance transfers may incur a fee as disclosed at the time of the applicable offer or transaction”Other highlights are no annual fees and the 0% balance transfer is valid for 15 months (!) instead of the usual 12 months.

The APR is declared to be between 12.24% and 19.24%, depending on your credit history.

I recently applied for the Citi Professional Card with 10000 bonus reward points and a 12 month 0% balance transfer offer.

Here are some highlights of the entire experience:

- The application process was not at all an issue.
- Someone from Citi Professional Card called me up after 3-4 days to inform me that I have a high credit limit on another Citi card (Diamond Preferred Rewards Card). They suggested that I transfer the credit line from my old card to my new card. Btw, this is your ONLY chance to transfer credit limit to a Citi Professional Card from a “non-prefessional” card.
- After about a week and some contemplation, I decided that the credit line transfer wasn’t enough and asked them if I could transfer some more. Strangely, this time they say “We cannot transfer credit lines between a business card and a non-business card”. Reminding them that they did this when they called me the first time didn’t help.
-The 0% balance transfer took some time; it took about 10 business days before the check was home and another 7 days hold in my brick-and-mortar bank…and now the transfer to HSBC account will take it’s own sweet time :(. So it’s almost about a month before its starts gathering interest
-Got 10000 points with the first statement of my Citi Professional Card; this went very smoothly and I already see the reward points on Yodlee.

I should mention here that it is easier to track your reward points when you have them on Yodlee. I follow my Citi Thankyou Points and Upromise Cash Back on Yodlee.

Interesting article on MSN. Here is a short summary on how to dig your own grave:

1. Using retirement savings to pay off debt. (Looks like I might debate this point some time in the future)
2. Carrying credit card debt. (Same old same old..but not entirely true, 0% APR debts are not hurting)
3. Out of control expenses. (Common sense)
4. Using payday lenders. (This is a strict no-no for people with tendency towards debt)
5. No emergency funds. (Common sense)
6. Expensive house, resulting in unaffordable mortgage payments. (Common sense again)
7. Using debt to pay off debt. (This is like you are digging a deeper hole to get out of a hole )

It’s really surprising that usually all debt advice is common sense…and yet ….the sense doesn’t seem to be so common :). Of course, I am not talking about people who are forced into debt due to unavoidable circumstances.

Interesting article on MSN about how you can hurt your credit score. Here is the hot list of weird things that can do the damage (my comments are in italics):

1. Credit company not reporting your true credit limit (Capital One) (Not really weird)
2. Credit cards with no preset spending limits (Amex) (Not really weird)
3. Disappearing deliquencies or brankcruptcy (Weird)
4. Balance transfers (Not really weird)
5. Opening new credit card accounts (not a big deal), closing old ones (can be a big deal), but everyone knows this by now.
6. Settling old debts (Weird)
7. Tickets and fines (Expected, Not really weird)

The article does not mention this, but paying some bills late can also hurt credit scores. One example is T-mobile. I know for sure that paying your T-mobile bill late goes as a negative entry in your credit report. I don’t know how they do it, but they confirmed that they report late bill payments.