Friday, June 20, 2008

Playing the Angles with Your Credit Cards

Do you know what day of the month your credit card closes? For each of your credit cards? What time of the month your utility bills are due? Do you know how many days’ grace you get before your rent or mortgage is considered late? If any? Do you know what day of the month your automatic life insurance or car payment or satellite radio payment is deducted from your checking account? Do you know what day of the month your bank credits interest on your checking and savings accounts? Knowing these dates can save you a lot of aggravation. And money. Knowing them can steer you to time your bill paying and your savings to maximum effect.

Let’s assume you’re like a lot of people who use credit cards. You charge things and then it’s a scramble to actually find the cash. So here’s a tip on how to give yourself the maximum amount of time to do that. Learn the day of the month that your credit card closes. This means the last day of the cycle that any purchase will be added to what you should pay off in full that month. Let’s say your Visa closes on the 15th. That means if you charge anything after the 15th, you won’t be billed for it for over 30 days, and you won’t have to actually cough up the cash for another 20 or so. This is because although credit card companies have been drastically shortening the number of days in which they give you to pay on time, they still take a lot of time to send you a bill. A recent statement I received said my billing cycle closes on the 6th of the month. But I did not receive the bill until the 17th, and I have only until the 26th to pay it. But don’t worry. I’ll make it. Paying bills on time is the most powerful way to establish and keep good credit regardless of income.

Postponing a purchase by one day can give you almost 60 days to get the cash. This is called float. In theory, you’ll be putting the cash for that credit card bill into some amazing money market account that will earn you a ton of interest for two months. Banks move billions around and generate millions in short-term interest that way. The reality for most individuals is that you can only play the float to postpone paying, not to generate additional income. Still, paying later is better than paying now, because inflation makes the money you pay later a little less expensive. And who knows? You might get a raise or a better job or an inheritance between now and later.

If you don’t know the day your credit card closes, you might buy something on the last day of the billing cycle. Then you’ll see it on your bill immediately and end up with only about 21 days in which to pay it. Not so good. You might as well have paid cash and been done with it. But of course, since so many Americans depend on a weekly or biweekly paycheck, even the three weeks is enough lead time for you to get paid and allocate the funds to pay your credit card bill. So what’s your excuse for not knowing when you’ll need the cash to pay your bill?

What if you have more than one credit card and want to get the maximum float on your purchases? Then the technique is to charge for the first week or two of a card cycle, and then switch to another card that is in its first week or two of its cycle. Every card is different, and in theory you can have four cards and carefully use only one each week.

This technique will not save you any money. What it will do is give you more time to earn or find money to pay the bill you expect to receive.

Timing is important. If you don’t know when your car payment is automatically deducted from your checking account, you might forget to keep a high enough balance to cover it on the day it gets deducted. Oops. If you know you won’t have the rent or mortgage money until the 5th instead of the first, do you also know whether you’ll be charged a late fee, or reported as late on your credit report? Since every negative mark on your credit score means that money (credit) will cost you more in the future, you always want to keep that score as good as possible. Paying on time is ideal. Slipping in under the wire will work, too, if you know what the absolute deadline is.

And what about bank interest? It’s a pitiful percentage these days, but still, if you know that your bank credits interest at the end of the quarter, you might decide to withdraw funds for your vacation, or that big renovation project, or even for the down payment on a house, on July 1st, not June 30th.

With credit card companies shortening the number of days you have in which to make a payment and still be on time, you must pay attention to due dates, too. It’s very easy to open a bill and toss it aside thinking you have two weeks in which to pay it. But these days, you don’t have that much time. So if you’re not using electronic banking or calling in phone payments, or FedExing your payment overnight (it’s cheaper than paying a late fee), then you should be extra careful to note when you’ll have to pay a bill. Ideally, you’ll know this in advance of receiving it. And you’ll be stockpiling your income so the moment the bill arrives, you can pay it.

The bottom line is that you’re going to have to pay for what you bought. But first pay attention to the details, and you’ll get yourself a little more breathing room.

Wednesday, June 11, 2008

Mixed Messages

It should be a mere funny coincidence, but it’s not. An article in the Business section of the Washington Post talks about how the new iPhones will cost half what the old ones did and are expected to bring in a new tier of customers. Meanwhile, an op-ed piece in the New York Times excoriates the American people for not saving. We spend too much, it says, unlike our thrifty forebears. I found it ironic that the op-ed piece quotes Ben Franklin more than once as an avatar of thriftiness. Ben was a shrewd businessman, but his thrift came in having a hardworking wife who managed his business affairs. He himself spent decades living it up in the salons of London and Paris on OPM (other people’s money). He liked to tell other people how to live, but did he himself live that way? Not really. True, Ben Franklin was a self-made man and he lived on sparing rations in his early years. But that’s my point. He was willing to sacrifice to make a fortune. But he was not the type of person who made his fortune by saving up money one day at a time for years. He made it by creating businesses that were successful. And then his wife kept the money flowing.

It’s the middle of June now, and half of the people entitled to Stimulus Rebates have received theirs. Did you? Is it spent yet? What did you do with the money? I have spent $400 of mine. I spent $300 on a piece of electronics that I had been planning on buying for about five years. The other $100 was on a friend’s new hardcover book and some DVDs, one of which is a present for someone. Modest enough, you say. Maybe I’ll save the remaining $200.

Meanwhile, I just spent $10,000 that I do not have to get my driveway paved. Cash advance, 3% transaction fee, no interest for over one year. I figure that I saved a minimum of $525 on gravel per year. I’ll probably break even on the driveway, assuming the cost of gravel goes up, after maybe 15 years. Will I actually live in this house for another 15 years? Not according to national statistics. I’ll be long gone before this driveway earns out.

Or will I? A house with a paved driveway is a cut above one with a mere gravel driveway. Whereas asphalt is the basic in a suburb, in the boondocks where I live, it’s a luxury. So let’s say that I get an additional $5,000 on the sale price of my home because I had the driveway paved. That means my investment amortizes after something like 10 years. Or maybe less, depending on the rising price of replacement gravel. Will I still be living here in 10 years? Better odds, but still not good.

In this economy, with so many people strapped for cash (including me) and credit (not including me), I got a very good deal on the paving price. Businesses are hungry for customers. But still, I financed the paving with borrowed money. I leveraged my good credit to get an immediate, no-questions-asked loan on very favorable terms. I have reason to believe that I can pay it all back in the time required. (We waited until a car payment dropped off our monthly nut, plus somebody got a raise.) And for another 3%, I can probably transfer the remaining balance a year from now to another credit card and ride for another year if I need to. And then I can do it again.

So, was my action part and parcel of the folly of Americans who live on credit and who aren’t thrifty? Or was it thrifty because I spent as little money possible now to get what I needed now? At today’s prices?

And here’s another angle to ponder. I had $10,000 in a CD at the bank, and it would have matured and have been available in two weeks with no penalty. So I could have taken savings out of the bank to pay for the driveway. But I didn’t. I feel more comfortable keeping the $10,000 in savings, while taking on $10,000 as debt owed to a credit card. Why? Because it’s hard to save up $10,000 and stick it in a bank. It’s a lot easier to spend $10,000 and then slowly pay it off. And if I suddenly had no income, I could stop paying on the $10,000 debt, and live on the $10,000 savings. And meanwhile, I have a paved driveway and the paving company has been fully paid, which meant that eight men could feed their families or pay their rent this week.. Sounds like a win/win to me.

Finally, lest you think I was extravagant to have my driveway paved at all, consider this: Delivery trucks and rainstorms kept creating enormous potholes in the gravel. Huge ones that cost a lot to repair, in time and effort and in the purchase of new gravel. Meanwhile, the potholes were a lawsuit liability. What if someone broke an axle on their car on my driveway and sued me? Or fell and broke a leg? I’d be out much more than $10,000 when all was said and done. So have I been thrifty after all, by improving my property now and averting the likelihood of future catastrophes?

One thing I know for sure. I’m not living it up in London and Paris on government money.

Thursday, June 5, 2008

Trapped in a Mistake

A recent Carolyn Hax syndicated advice column gave an interesting answer to the question of what to do if you hate your job but can’t leave it. She asked the person to consider whether thinking you can’t leave a job is the truth or just a limited view of it.

This is exactly what I realized a while back when I took the time to seriously ask myself why we had had such terrible times with money. Instead of reiterating the usual excuses, “It’s all the fault of the grasping credit card companies,” and “The mortgage lender is gouging us,” I asked myself what actually happened to get us into a bind that lasted for a number of very unpleasant years.

And here’s what I figured out: We couldn’t afford our new house.

It doesn’t take long to realize that you can’t afford your house. Is every month’s mortgage bill taking all your cash? Are you running a balance on your credit cards that you never ran before? Is it impossible to save? Leaving out other possible factors (such as major medical bills or unemployment), the answer probably is that your new house is keeping you poor.

People hate to admit mistakes and that’s what catches us. Having made that mistake, we simply can not accept that we can and should fix it. We dig in and bend all our efforts to keeping that house instead. Yes, in the long term, there are good financial reasons to hang in there. A house is a major capital investment than can pay off big over time. But I’ve often wondered if those good financial reasons ever outweigh the amount of pain caused by being chronically broke and constantly under extreme financial pressure. There’s nothing sacred about a house. It’s just a box to protect you from the elements, and as comedian George Carlin says, “a place to keep your stuff.”

It’s the same with a job. You can quit. There will be consequences, and they should be considered seriously, especially if you might face difficulty finding another job. But we none of us are shackled to our work the way people have been throughout history by feudal systems, indentured servitude, slavery, or the like. Today, a lot of people are facing financial pressure because they bought too much house. But even so, they think they must keep the house. But is keeping a particular house a dire necessity? Or is it simply desirable, for various emotional or social reasons? I can understand a family wanting to stay in a good school district, for instance. But being the poorest person in your excellent school is no fun. So count the real price of staying, not only the supposed benefits.

Friends of mine inherited a share of a house in an affluent neighborhood and debated moving the family to it. But they realized that they could afford to buy the house, but not to live the lifestyle of that neighborhood. So instead they cashed out their share in the house and bought a much more reasonably priced house in a less expensive area. And then had plenty of cash left to furnish their new house comfortably, go on family vacations, and live in financial ease on a daily basis. It was the smart decision.

In the current real estate market, getting out of the trap of a too-expensive house is not easy. There are programs that offer various kinds of assistance, but it has been widely reported that these are difficult to access or to get to work. Still, if the result is a mortgage that has been re-sized to what you can afford, or a house sale that leaves you free and clear of debt, then it’s worth the aggravation and effort.

The idea is not to box yourself in. Not in a job, and not in a box that’s just a place to keep your stuff. Yes, we love our homes, but they shouldn’t own us. When times get tough, whatever the cause, we need to change our limited view of our choices.