Money Relationship » Credit

Use Your Credit Card as an Emergency Fund?

Adam — Tue, 30 Mar 2010 10:00:12 +0000

A few months back when I wrote about how our small emergency fund saved us, No Debt Guy commented on how having an emergency fund in cash may be counterproductive. Here is what he said:

I have often wondered if having an emergency fund is the best way to pay off debt or is it counter productive?

For example if you are carrying at credit card balance of $2,500 and have $2,500 in your emergency fund you would be better off paying off your credit card and rebuilding your emergency fund.

What if you have an emergency? You can still take a cash advance from your credit card and you are no further ahead.

This does take some serious discipline, but you will save interest costs.

He does make some interesting points. However, I feel that one needs to be SUPER cautious with that type of system.

Most of you are probably in some type of debt. It’s why you’re here. You’ve probably overspent with credit cards and bought things that you didn’t need. I know I have. So, shouldn’t your main goal to be rid of credit cards forever? Like Dave Ramsey often says, “no one EVER told me they got rich by using credit cards”. I have to agree with that point. When I was using my credit card that gave me cash back, all I could think about was hitting that $50 mark so they could send me a check. So, I would spend more money to earn 1%-3% back. Talk about counterproductive! There was no way I was going to get rich by playing that stupid game.

So, I figured I would come up with a few reasons why it may be counterproductive to use a credit card (or any other line of credit) as an emergency fund. Here are some things to consider:

You May Redefine What an Emergency Is

It’s been said before that using a credit card makes you susceptible to spending more. So, wouldn’t using your credit card for an emergency be the same thing? If you car breaks down and you only have $1,000 to fix the problem, wouldn’t you shop around? I know I would. However, if I were using a credit card I would be more likely to just give in to the initial price and pay it. It’s only on a credit card, right?

I think you may also redefine what an emergency fund is. For example, would you typically use your cash emergency fund to pick up a small amount of groceries if you are out of grocery money for the month? Probably not. But if you have that credit card to fall back on, you might just head to the store when you may have some things to eat at home. If you are like me, you would probably pick up more items too!

You’ll Miss the Experience of Paying With Cash

Most people say that it’s harder parting with cash than it is using a credit card. I’m a little more skeptical but I still think it’s true. However, I think having a cash emergency fund makes you learn to handle money better. I mean, you got into credit card debt by using credit cards. How is still using a credit card in emergencies going to make you any better at handling money?

* * *

Personally, I love having a cash reserve. It just makes me sleep better at night knowing that I can actually hand someone cash if I have a financial emergency. Handing them a piece of plastic would be much harder to handle knowing what I’ve been through financially.

How about you? Cash or credit?

Use Your Credit Card as an Emergency Fund?

Cash Is King, But Do You Really Spend Less When You Pay With It?

Adam — Thu, 29 Oct 2009 13:00:57 +0000

I listen to The Dave Ramsey Show almost every day when I am walking to work. One of his favorite phrases is that “Cash Is King”. He also argues (with good references) that people spend more when they use credit. He states that a recent study found that individuals typically spend 12-18% more when they use credit vs. cash. It’s hard to argue numbers like that, but I am going to try!

Cash Burns a Hole In My Pocket

Yeah, you read that right. Cash burns a hole in my pocket and I always find something to spend it on. Whenever I carry cash, I just think of it as play money. It’s something that I can just take into a convenient store and spend until it’s gone. It’s just begging me to spend it! So, in the past few months, I have stayed away from cash and it’s devilish qualities. But why was I like that with cash? According to Dave Ramsey, it was supposed to help me curb my bad spending habits.

Credit Is Just As Bad

Back in the days when I was still using credit cards, my problems were just as bad as they were with cash. Everyone knows that easy access to credit can get you in deep trouble. To be honest, it got me in trouble quite a bit. I was buying things I didn’t need and adding things to the cart because I could. I guess you could say that I did spend more because I used a credit card. I spent more because I knew it wasn’t coming out of my checking account.

What’s The Answer?

I knew there was no way that I could handle the cash envelope system. It was just too tempting to grab some cash out of another envelope and spend it on something else. I know a lot of you are going to say that I had no self control, and I can tell you that you are probably right. However, I wanted to fix the money problems and I took the necessary steps to correct them. Today, we solely use our debit card and checks. We also are using a software program that allows us to spend all of our money on paper before the month is even over. Ever dollar is accounted for and if we spend more money on another category, we have to cut back on something else. It’s working for us and it seems like the ways of the past are gone!

Do you see a difference when you use cash vs credit? What works best for you when it comes to spending temptations?

Cash Is King, But Do You Really Spend Less When You Pay With It?

Rent-to-Own is a Bad Deal

Adam — Wed, 03 Jun 2009 14:00:58 +0000

If you’ve never heard of it, rent-to-own (RTO) is a process where you rent an item (typically furniture or electronics) for a set amount of months and when you finish out the term of the rental agreement, you get to keep the item as your own. However, there are some things to consider when using their services such as the actual cost and what type of product you are getting. Chances are, you will get a slightly used product such as the one in the picture below.

Finances Behind the Transaction

The majority of RTO transactions are weekly terms. In other words, you pay a weekly payment to the company and they allow you to continue to rent the item. These payments will continue until the end of the term which can be 12-24 months in length. After the end of the term, the renter is deemed to now own the product. However, if you miss just one weekly payment over the term, you are deemed to have broken the contract and they will repossess the item. You will also lose any “ownership” credits that you have earned for previous payments.

The real ripoff is in the amount of payments. Let’s look at an example given from a recent article at CNN Money. Let’s say that a company rents a $1,000 TV to a customer for $100 per month for a term of 24 months. At the end of the 24 months, the customer has paid a total of $2,400 for a $1,000 TV that is now 2 years old! That is like financing it at 103% over those two years! You want to know the real thing that bugs me about these RTO companies? They are doing well in this economy because they are preying on the weak.

With this type of transaction, you would be better off financing the item on a store credit card at 25%. However, I do not recommend that. I recommend that you delay the gratification of purchasing a new TV and save the cash for it. Better yet, why not purchase a TV from a site such as Craigslist or eBay? I have done plenty of deals on both sites and got some great bargains.

The Product That You Receive

Chances are good that the product that you rent has already been rented before. So, who in their right mind would want to pay the astronomical “finance charges” to own a TV that has been used before? I know I sure wouldn’t.

That goes with all of the other items that they sell such as furniture. There are so many other alternatives to RTO so why not explore them? I know some people do not have the cash or credit to pay for these items, but I would not call a TV or a barcalounger a “need”.

Has anyone had experience with a rent-to-own company?

Rent-to-Own is a Bad Deal

Credit Cards vs Debit Cards: Liability for Fraudulent Charges

Adam — Wed, 20 May 2009 13:00:07 +0000

This will probably be a short post but I still wanted to address this important topic. With many individuals now becoming victims of identity theft, it’s important to know the amounts that you may be liable for if your credit/debit card is stolen.

Debit Cards

As many of you already know, debit cards are typically linked to your checking account and give you instant access to the funds that you have in your account. It is different from a credit card because you are using your available funds to pay for the item and are not borrowing money. However, you should be careful of the unlimited overdrafts because those banks will just let you keep buying! That makes it possible to rack up hundreds of dollars in overdraft fees in one day.

Even though debit cards are typically praised for their ability to control spending, they can be rather costly if they are ever stolen. With a debit card, if you neglect to notify the bank within two days of it being stolen, you can be held liable for as much as $500! You may even have UNLIMITED liablity if you fail to report an unauthorized transfer with sixty days of when the bank sent you the statement with the unauthorized transfer shown on it. Another bad thing about debit cards is that if your card is fraudulently used by someone that you previously gave your PIN to, you may be held responsible for all of their fraudulent charges. For example, if you gave your card to your nephew to use (and gave him your PIN) several months ago for $20 at the ATM and he later steals your card and wipes out $3000 in your checking, you will be held responsible for those charges.

My advice would be to contact your bank as soon as you notice that you debit card is gone. Even if you think you accidentally just left it at the grocery store, call them right away. It’s better to be safe than sorry and it might save you quite a few bucks. Both VISA and MasterCard have “zero liability” policies that limit fraudulent purchases used as a credit transaction (not using your PIN). However, they do not apply when you use your debit card at an ATM and for many PIN purchases.

Credit Cards

Credit cards allow you to borrow money to pay for items. If you do not pay off the balance due at the end of the month, you will be charged interest on that borrowed money. While this can be risky (just ask the millions of Americans in credit card debt), the credit card does offer you better protection against fraudulent charges.

Thanks to the Truth in Lending Act, a credit card holders liability for a lost or stolen credit card is limited. If you notify the card issuer within two days of a lost or stolen card, you are not legally held responsible for any fraudulent charges. If you notify the card issuer after two days the most you can be held liable for is $50. Many credit card companies will waive this $50 charge as a good gesture.

Although you liability is more limited with credit cards, it’s still crucial that you contact the issuer as soon as you think your card has been misplaced.

Does anyone have card fraud experiences that would like to share? How much were you held liable for?

Credit Cards vs Debit Cards: Liability for Fraudulent Charges

How to Choose Credit Cards With Rewards to Save Money – Part 2

Adam — Thu, 23 Apr 2009 13:00:54 +0000

This is the 2nd part of Mr Credit Card’s guest post. In the previous post, he focused primarily on how to choose a cash back card to save money. In this post, he is going to discuss more about reward cards that let you earn points. His site has lots of information and you can apply for a credit card there.

In this post, I am going to give a few tips on how to choose a credit card to earn reward points. The decision you have to make is what rewards you want to earn with your points. There are a few broad categories of rewards that are available with most credit cards.

Travel Rewards – These include airline tickets, hotel stays, car rentals, cruises etc.

Merchandise – Most credit card reward programs have partnered up with various retailers and brands to offer their products to their card holders who exchange them for reward points. For example, you may exchange a certain amount of points to get, say, a Nikon Digital Camera.

Gift Cards – You can also exchange points for gift cards. A typical example would be to exchange 10,000 points for a $100 Best Buy Gift Card.

Charity – Most reward programs also allow you to donate points (for cash) to charities (though I doubt that is the intention of most reward card holders).

Travel Rewards

Most people looking for a reward credit card want to redeem points for airline tickets. The decision they would have to make us whether to get an airline credit card or a credit card with reward programs.

This dilemma is probably the toughest to resolve in any credit card decision because it involves so many factors. You have to ask yourself the following :

1. How Often Do You Fly?

2. Do You Fly with Just One Airline or Many?

3. Do You Spend A Lot on Your Card?

If You Just Fly on One Airline

If you just fly on one airline, then it make sense just to get a frequent flyer credit card.

If You Have Fly on a Few Airlines

If you fly on a few airlines and are a member of a few frequent flier programs, there are a couple of alternatives. For example, the American Express Membership Rewards allows you to transfer points you earn on Amex charge cards to 17 frequent flier miles. This is very valuable and is the reason why Amex is so popular.

The starwood preferred guest program allows you to convert Starwood points to air miles on a one for one ratio for most frequent flyer programs and you even get a bonus 5,000 miles if you transfer 20,000 points. Many frequent travelers carry the Starwood credit card.

If You Are Not a Frequent Flier But Want to Use Points for Airline Tickets

For those do not travel but want to earn points for an airline ticket for a family vacation, most regular reward credit cards should work. These days, most programs allow you to book your own tickets and use points t0 cover for them. That is the advantage they have over frequent flier programs because there are fewer restrictions like blackout dates, etc. that come with regular frequent flyer programs.

Merchandise

Choosing a reward credit card for merchandise redemption is a little tough because it is very difficult to compare the breadth of products available in their catalogs as they are always changing. Furthermore, some programs require less points for certain items but more for others. But generally speaking, after much research, I’ve found the Membership Rewards from AMEX to have the best selection of merchandise in their catalog.

Gift Cards

For those who want to use points for gift cards, the best card to get is probably the Discover Card as it has over 100 partners. The Discover Cards allow you to earn cash rebates and if you redeem them for gift cards instead, you double the value of the gift cards you redeem for certain merchants.

Donating to Charity

If you are a charitable person and would like to donate to charities by your credit, most reward programs allow you to do that. Some have many partners while others have just a few. The better ones like American Express allow you to set up your card such that you automatically donate to charities every month.

Shopping With Your Credit Card

Most credit cards today have their own shopping site and partnerships with online retailers so that you can actually earn more points or get discounts when you use your card.

For example, Discover has this feature called shopdiscover.com. The way it works is that you can shop at say bestbuy.com (but going through the discover website) and you can earn 5% rebates when you use your Discover card to shop at their site. American Express has a shopping comparison site called shopamex.com, which lets you compare many items with different retailers. You can then shop at the cheapest online store and even use your reward points to shop.

Most card holders do not use this feature. But you should, since you can save quite a bit by doing so.

Other Considerations

When you are researching credit cards, other things to consider are:

1. Do reward points expire

2. Is there a cap to how many points you can earn?

3. How many points you do earn for every dollar that you spend on the card? For most, it will be one point, but many cards lets you earn more points for certain category in spending.

Final Note – While savvy frequent travelers have always used reward cards to their advantage, most credit card holders don’t. To fully take advantage of credit cards (rather than let them take advantage of you), make sure you pay in full, get a card with rewards (whether it be cash back or reward points). You will enjoy savings and perks in many interesting ways.

How to Choose Credit Cards With Rewards to Save Money – Part 2

How to Choose Credit Cards With Rewards to Save Money – Part 1

Adam — Mon, 20 Apr 2009 13:00:19 +0000

This is a guest post by Mr Credit Card from www.askmrcreditcard.com. Mr Credit Card reviews credit cards on his site. He also has a blog and you can subscribe to his blog here. Mr Credit Card will post a 2 part series on how to choose a credit card with rewards to save money on your spending.

Hi everyone! Firstly, I would like to thank Adam for the opportunity to guest post on his blog. Friends of mine inevitably ask me what credit card they should get when they find out that I actually run a credit card review site. This is a tough question to answer without first finding out about someone’s spending patterns. But the thing that always makes me shake my head is that fact that folks who pay in full every month carry a “vanilla” Visa or MasterCard. Worse of all, some even pay an annual fee to do so. If you pay your balance in full (or carry only a small balance occasionally), then you should be making money from credit cards by a getting a reward card, instead of letting credit card companies make money from you. It should be a two way street.

But how does one go about doing it? First, you have to be aware that there are two types of rewards. There are cash back credit cards that will pay you a certain percentage of cash rebates for every dollar that you spend on the card. Then there are rewards credit cards. These cards allow you to earn points or miles for every dollar that you spend on the card. You can then redeem your points for things like airline tickets, merchandise, gift cards etc.

Cash Back or Rewards?

The first decision you have to make is whether to choose a cash back card or a reward card. For this, the decision really comes down to preference. What sort of rewards do you prefer? Many travelers who fly frequently prefer to get an airline credit card with their favorite airline. Many folks who do not travel and do not want the hassle of redeeming points prefer to earn cash rebates instead.

How Do You Choose a Cash Back Credit Card?

For the rest of this post, I’m going to focus on explaining how I think one should go about choosing a credit card that pays you cash rebates. In part 2 of this post, I’ll focus on how to choose a reward card instead.

The first thing one has to understand is that different credit cards have different cash rebate formulas. And for someone who is researching it for the first time, it could be rather confusing. But here are the few features you have to be aware of:

Vanilla standard 1% formula – The vast majority of rebate cards fall into this category. They will pay you 1% rebate for every dollar that you spend on the card. While this looks like a decent deal and much better than a standard vanilla card, you can get better deals out there.

More than 1% on certain categories – These are the type of cards you should be looking at although there is less of them these days as credit card issuers cut back on the rewards they give. There are cards out there that pay more than 1% on certain categories that you spend. For example, a card like the American Express Costco Card pays 3% on gas, 2% on travel and restaurant spending and 1% on other regular stuff.

Rebates for online shopping – Some cards like Discover Card allows their card holders to earn between 5% to 20% if they use their card to shop at over 100 online retailers through their site.

Tiered Formula – Some cards also have a tiered formula. That means that you need to spend above a certain amount to earn more rebates. As an example, the Amex Blue Cash lets you earn 1% on gas, supermarket and drugstore spending for the first $6,500 of annual spending. Once you pass that threshold, you earn 5%. Having a tiered formula is not necessarily bad. It just means you have to use your card above a certain amount to fully make use of it.

How to Choose the Right Card For You

1. Figure out how much you spend on your credit card – Yes, go through your credit card bills and figure out how much you actually spend on your credit card.

2. Break down your expenses into different categories – The next step is to breakdown your spending into different categories. You should use the following breakdown as a guide:

Gas
Supermarket
Drugstore
Travel
Restaurant and Dining
Movies
Home Improvement
Others

3. Calculate rebates you can earn on different cards – Now comes the tough part. You have to do some research on the different cards available and use a calculator and figure out how much you will save from using each card. Then, once you are done with this exercise, you will know which is the right card for you. To make your life easier, I have actually created a cash back credit card calculator to save you time. All you have to do is to simply key in your monthly expenses in various categories and the calculator will show you the top 3 cards that will earn you the most rebates.

OK – that’s it for this post. In part 2, I will write about the different types of rewards that are available in reward credit cards, whether you should choose a frequent flier card or a regular reward card and other things to look out for. Remember, you should extract as much benefit as you can from credit cards and not the other way round.

How to Choose Credit Cards With Rewards to Save Money – Part 1

Chase to Add New Fee to Their Most Profitable Users

Adam — Mon, 09 Feb 2009 17:00:50 +0000

Nothing bothers me more than companies that nickel and dime you for almost anything. Now you can add Chase to that list (I imagine they would have already been on the list). They have decided to add a monthly $10 fee to their most profitable customers. Are they not making enough money on the transaction fees they charge companies in order to accept credit/debit cards?

If I saw this new fee on my account, I would cancel my card right away. I would imagine they are charging the fee to those customers that are more likely to pay off their balance each month. Honestly Chase, no one is going to want to keep their card if they pay off the balance each month and are now slapped with a large fee. So let me ask you this Chase, would you rather keep your customers a make a little money off the transaction fees or lose customers all together? I have a feeling they are going to piss-off a lot of customers and lose more money than they are going to gain.

Have any of you had this fee show up on your account yet? If you do see it, will you cancel the card even though it has a low rate?

photo by: wynlok

Chase to Add New Fee to Their Most Profitable Users

The Age of No Negotiation: Credit Card Edition

Adam — Tue, 06 Jan 2009 19:00:58 +0000

As many of you may know, I have ranted before about how you cannot negotiate many things these days. I have had trouble negotiating for a bike at a big box store. After that, I had trouble negotiating my lease at my apartment complex. I am just so tired of businesses not wanting my business. The other day I ran into this problem again with my credit card company (Citi). As many of you may already know, Citi (as well as many other credit card companies) have begun to increase interest rates on all of their cards. Even for those who have been great customers like myself (I made them a lot of money). My rate with them was about 6% and they wanted to increase it to 16%. Now that’s what you call an increase!

So, I got a letter in the mail from them stating that they would increase my rate to 16% if I did not contact them by a certain date. The letter also said I had the option to keep my current rate but there was a catch. In order to keep my current rate, I had to have the card paid off in full by the expiration of my card (June 2009) and then they would close the account for good. I have quite a bit on the card so an increase in the rate by 10% would increase my cost of credit immensely so I figured I would call them and try to work something out. The lady on the other line was very friendly but she said there was nothing that they could do. You had to chose one or the other. I asked to speak to a manager and she said that they would not be able to do anything for me either. She already had several other people requesting a manager for the same thing. I then told her that they were going to lose a customer from all of this and she just did not seem to care that I was leaving them! I told her I would have it paid off by June and to close my account.

I just do not understand what companies are thinking these days. I know the credit market is bad right now, but do you really want to lose a great customer like me? If I were Citi, I would rather keep a good customer and earn a slightly lower interest rate then lose them all together. Especially a customer like myself. I have been with them for about 5 years and have never missed a payment. The went from making some money from me to none at all. I just do not understand!

Has anyone had the same problem with a credit card company? I have always had good luck with them in the past but not now!

Make sure you comment or submit this post to PFBuzz.com for entries into the contest!

photo by: szlea

The Age of No Negotiation: Credit Card Edition