A lot of people have been complaining about unsubstantiated rate hikes recently. In actuality they are not unsubstantiated, at least from the bank’s point of view. Almost every credit card that currently exists, even so called “fixed rate” cards, can have their terms and conditions modified at any point in time by the bank. You even signed something saying this was OK when you applied for the card. I’m sure you didn’t read it, but it was there in the fine print.

So, what’s the bank’s point of view?

Well, unknown, or maybe forgotten (since it was signed in May of this year), by a lot of people is the Credit CARD Act of 2009. This law was passed on May 22, 2009 but does not go into effect until February 22, 2010 and seems to have faded from the news lately. Basically this law will protect credit card users from the unfair practices the credit card companies have been using for years to make as much money as possible off us. The banks’ point of view is that this is the deadline for the unfair changes they can make to your credit card, and therefore they are trying to maximize their profit now by hiking up rates. You can read up more about the act here, but the main points as I see them are:

• No more “universal default” rate increases
• No more “double-cycle” billing
• Payments are applied to the highest rate balance first
• A hard credit limit (selectable by the card holder) in which transactions going over will be denied, eliminating over-limit fees.
• 21 calendar days grace period (increased from 14 days minimum now)

What to do if your rate is hiked?

The credit card I mentioned above is a Citi card and they allow me to reject the rate hike and close out my account at my current terms if I choose to. This means the account is still open until I pay off my balance at my current rate, but no new charges are allowed on the account. While Citi is doing this now, and I’m sure some other cards are as well, this option will also be available to all cardholders under the new law going in effect early next year. You might not want to close a credit card but at the same time, you just might not be able to afford not to.

Last week we watched the first episode where Mike, the expert real estate agent recommended a short sale. The man on the show broke down crying after he saw his wife get upset. They owed $520,000 on their home, and the market value was around $400,000. They had no assets to speak of, and purchased the home with 100% financing.

They didn’t mention any credit card debt specifically, but I’d like to pose a question:

If you are broke, do you pay your credit-cards or your mortgage?

The catch: You are significantly underwater in your home ($40,000 or more)

When I went to credit counseling back in the day, my counselor told me she always recommended people pay their mortgage first.

So, if you can only choose one, based on the scenario above, which do you pay?

For example, losing your job is a horrible experience made more so if you have to struggle to maintain your living expenses while repaying high interest debt. There simply is no reason to remain in debt at this point in time. Therefore getting out of debt and staying out of debt should be the main priority of individuals as the economy is teetering on the “recovery” period. Here are a few tips to help you get out of debt and maintain debt free living in the future.

If you have not yet started an aggressive assault on your debt balances, you can not afford to put it off for another day. With changes happening in the credit card industry still not complete (like the number of 0% balance transfer credit cards), obtaining and using credit will surely continue to be an added cost for most consumers. The following tips can get you started to eliminate your debt and live debt free in the future.

Take inventory

If you haven’t already, you need to first sit down with records of all your financial obligations to determine exactly where you stand in terms of debt. Most people are surprised to realize just how much money they owe and how much it is costing them to pay interest charges and penalties each month if they are not paying each bill on time every time. List your debts in order of highest interest rate or lowest balance and determine if you have the resources available to begin applying all available disposable income toward repayment. You will want to do this one account at a time to see the best results. Hopefully you have a a savings account and have looked at the top high interest savings accounts page by Patrick.

Determine if you need help

There are situations that have gone beyond simply buckling down and paying your bills in the traditional manner. If you are facing a severe financial hardship and have no reasonable way to pay the minimum payment let alone more money, you may want to consider some of the other options available to eliminate debt. They all come with negative consequences, however for people who have no other way to get out of debt, it is a chance they often have to take to finally eliminate their debt once and for all.

Changing your spending mentality

Regardless of the method used to eliminate debt, the only way to avoid the same problem in the future is by changing the habits that caused your indebtedness in the first place. For the majority of individuals the problem is not the lending industry or other forces; instead the problem is in how you handle your own personal finances. Each person must accept responsibility for their own actions and make it a point to avoid unnecessary spending and living beyond their means in the future. Otherwise you are doomed to repeat the same mistakes in the future and find yourself dealing with the same problems in down the road.

These tips have been offered for years, however they bear repeating in that some people have made it through the recession relatively intact-financially. For those individuals who have not yet realized the problem of carrying too much debt it is only a matter of time before they face a situation which brings the problem to the forefront. Do not wait until you are unable to address the issue, take the steps necessary today to eliminate your debt and begin a life of financial freedom.

I’ve decided to include the balance of my car loan (around 4.5% APR on the loan), along with the amount I still owe my mother, and my student loans. The $11,000 is the balance I owe the IRS and then I will be completely done with that debt. I plan to pay off that balance this month.

Personal Debt

Mom Trading Debt: $125,274 (APR: 0%)
Student Loans: $33,425 (average APR: 6.5%)
IRS Balance: $11,000
Car Loan: $7,567 (APR: 4.5%)

Total Personal Liabilities: $177,266

Personal Assets

Checking Account: $6,500
Savings Accounts: $59,130

Total Cash: $65,630

Debt Repayment Schedule

I’ve been repaying my Mother at a higher rate the last few months, averaging almost $2,000 a month. I intend to keep that rate going for the foreseeable future. As I mentioned above, I plan to payoff my IRS balance this month.

Why not repay my mother faster? I’ve been thinking about that alot lately. And there are 3 main reasons. 1. My mother needs a monthly income stream. The $1-2K I send each month helps her budget and save a little now. 2. I can utilize cash better than her. 3. I will be taking care of my mother for the rest of her life most likely.

If I was able to repay my mother the entire 125K or so remaining, she would still have to pull out of that a good chunk each month to meet her own expenses. I’ve mentioned here before that my mother has health issues and is unable to work full time.

So I think it is better to plan on repaying my mother quickly, but not too quickly. At a 2K/month rate, I can continue to pay off my other debts, and build my own savings. It also allows me to work on expanding my software business so I can continue to increase my earnings.

I don’t plan to payoff my student loans at an increased rate until I have at least a 100K savings cushion.

The future is looking up

As you can see, things are going really well this year financially. My software business has really taken off, and I’m planning to continue to expand that and hopefully earnings will continue to increase.

Looking at some of the goals I set for 2009, I’ve already hit a few including:

• Max out $12,000 in payback to Mom (Complete)
• Large emergency fund – $20,000 (Complete)
• Hire part-time employee to full time (Complete)

One of my goals was to save $70,000 for a down payment. I’ve decided to give that one up and just change it to a goal of having a 100K savings account. I don’t have the desire I once did to own real estate.

Looking at rental prices in Seattle and Portland, you just get so much more bang for your buck renting right now. Plus, I would have difficulty obtaining a mortgage due to my past credit history (though, my FICO is above 640 now!).

So, that’s my personal debt update. I’m looking forward to spending the holidays this year not as stressed about my debt as I can see the light at the end of the tunnel!

Also: what do you think of the new “DK” logo? I really like it…

I hate doing that.

That said, I do have something to celebrate. We took care of the emergencies with cash. We’re not going to be paying interest on that auto breakdown (talk about rubbing salt in a wound!). We wouldn’t have done that a year ago. It’s fun to celebrate doing the right thing.

In an attempt not to become completely demoralized in what we thought would be the last three months of our journey to be debt free (now looking like the last five to six months), we’ve joined Financial Peace University.

This is a financial education program put on by Dave Ramsey through a local church. It will be two hours a week for thirteen weeks; A major commitment of time and energy from us. The class is held at various times throughout the year in churches all over America.

Our oldest daughter (turning eleven this week) will be attending with us, and these folks are good enough to provide childcare for our little one. Our oldest is actually looking forward to the program. She told me yesterday in the bookstore, “That Dave Ramsey guy is everywhere mom!”

The class covers thirteen different lessons, each with a different area of financial education from college savings and retirement to charitable giving and insurance. The first hour is a video class and the second is small group work sessions, which should help to keep us intense enough to keep us going. It will also provide a support network of other weird people (the kind who resolve to live without debt) to hang out and swap rice and bean recipes with.

We’re trying to intercede before the winter blues set in and derail our progress. We’re almost there and not giving up, but now nine months into this, the routine is getting a little old and we need to revive it.

Do you need to revive your program? Are you showing signs of regressing or loosing your edge towards beating your debt?

If you’re interested in attending FPU, there’s several ways to join. We found a discounted lifetime family membership for $100. Regular membership is usually a little more expensive than that. There’s also an online-only class. You can view a sample lesson online—it’s fun and engaging, just like we expect the class will be.

I’ll keep you posted about how we do as we go through the program.

Image from freedigitalphotos.net

OK, you’ve decided to get out of debt, but what’s the best way to pay it off? Snowballs, highest interest first, etc—there’s all kinds of theories, but the one we can all agree on is that faster is better when it comes to getting out of debt. It really isn’t much fun!

It helps to have a goal. Some people have a wedding to plan (ahem, Debtkid… looks like you’re making plans…congrats!), others are inching towards debt freedom because they think they should. In my house, my husband says he’s not agreeing to another adoption until it’s done cash–and there’s no debt. (He sure knows how to light a fire under me… I’m a planner, so I know if I want any more kids in the next half-dozen years, this has got to be tamed like yesterday!)

The trick is to pay as much as you can, as fast as you can, however you can!

After a few months of that, you realize that it really is no fun at all. You’d like to go out to dinner. It would be nice to get the car detailed. You really miss the local coffee shop. You may even indulge some of these off-track behaviors…

How do you stay motivated?

The trouble comes when you start to loose your motivation. I know myself well enough to that in the fall and winter, I just can’t maintain the energy through the lousy Seattle weather. The part of me that cares goes a little numb, and then I come out of it in the spring in a terrible panic. This year, between some goal-tending strategies and FPU, I resolve to stay on track—I’ll be debt-free by the end of winter if I do.

Here’s some strategies for staying motivated

1. Create rituals. I know, it sounds strange, but burning the credit card or the statement after you pay it off and close the account, is a LOT of fun. I put my old statements in my worm composter as bedding. (It makes me happy to see them gobbled up by worms and old potato peels).
2. Review your goals and progress to goals. When I revisited my goals and realized that we likely have six more months to go on this journey instead of the planned three months, I could have cried. Wondering if we’d had a setback like this before, I pulled out some old records and realized that already this year we’ve paid off about 4x what we have left to go. It’s the home-stretch, and I didn’t even realize it.
3. Draw a chart. If you’re visual, draw or otherwise create a chart—watch your progress evolve! PS. Don’t forget to celebrate! A friend draws a cartoon and then colors in parts as he reaches his goals.
4. Write down your goals for after you are complete. Like dieters have their goal outfit, you should plan for when you’re debt free. I was thinking of starting to save for a Magic Kingdom vacation, but the kids want to go to the Great Wolf Lodge water park (closer and cheaper, score!)
5. Create a visual reminder. Put M&Ms in a jar (there’s about 1,000 per cup, so one cup per thousand dollars of debt).  If you send your creditor a $200 payment, treat yourself to a couple-hundered M&Ms. Share with the spouse and kids–that gets them excited about the goal too!  I read somewhere the recommendation to create a paper chain, with a circle for each dollar owed. I did a little math and determined that if you have 1″ circles and a 12,000 debt, your paper chain will be 987 feet long. That particular exercise could be fun (especially in the home-stretch) but might be really tough to explain to the neighbors over and over.
6. Find a support network. This blog is a great support network–get to know the writers and commenters. For me, I listen to Dave Ramsey podcasts on the treadmill. Podcasts are an indulgence of mine as I find I can’t listen to them while teaching the kids or writing, so I only get to turn them on during “downtime.”

I  hope you find these tips helpful this fall as you continue on your journey to debt-freedom.  If you have additional ideas, please add them in the comments–you never known when you might inspire someone else!

Of course, just because credit card can be useful that doesn’t mean you should choose the first offer you get in the mail. You need to be selective because you really only want one or two at most. If you have more than that, you are going to be running the risk of getting into a serious debt situation that will only hurt your long-term credit history and defeat the purpose in the first place. Below are a few tips that can help you make the right choice when selecting a credit card.

• Look at the interest rates – Rates vary a great deal so always flip over the offer and read the small print in the box on the back. Obviously, lower rates are going to be better but you want to read the fine print, too. Many of the cards start you out at very low interest rates only to increase the rates after the first few months. You may also only be eligible for the low interest rate if you transfer balances. Pay attention to how much the interest rate will increase if you are late on a payment.
• Look at grace periods – The grace period is the amount of time between when a purchase is made on the card and when interest begins accruing on that amount. Longer grace periods mean you have a bigger window in which to pay off the purchases without owing any extra interest. That’s a good thing. However, credit card companies have been shrinking that window in recent years. While it was once almost always 30 or 31 days, today some companies have lowered it to around 25 days or less.
• Check the reputation of the company – Always learn more about the company offering you the credit card company. Some have some nasty reputations for playing games with customers when it comes to interest rates and payments. Read what other people are saying. If nothing else, apply for a credit card directly through your bank or credit union.
• Know about annual fees – Some credit cards do charge annual fees to their customers. The fees vary greatly but they are always paid through your actual credit card which means you could end up paying interest on that fee, too. Your best bet is to find a card that does not charge any fee. Unless you already have bad credit, you should be able to find a company that will offer you a credit card with no annual fee. Also don’t fall for other charges, such as processing fees.

Remember that having a credit card can be very useful but making the right choice and using it responsibly will determine whether you made a wise decision or not.

Image from freedigitalphotos.net

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (Also known as “The CARD Act” and S.414) was signed by President Obama on May 22 and the first phase of it has just taken effect (August 20), but many of us are wondering—is it going to help or hurt our efforts at debt freedom?

Credit Card companies have long done as they pleased, but many of us are finding unpleasant surprises on our latest statements. Up until August 20th, the card issuers could pretty much do as they pleased—and many did! Many accounts were closed without warning, interest rates and annual fees were jacked up in anticipation of the August 20th adoption of Phase 1 of the law.

The one account I still have a balance on had an annual fee of $75 and is now $150. The $50 companion fare on Alaska Airlines (The reason I have the card) went up to $100. Thankfully, they didn’t change my interest rate, but I pretty much have no incentive to keep the card once I’ve paid it off.

I guess I should count myself lucky—many people woke up on August 20th to find their cards unceremoniously canceled.

Here’s a breakdown of just what the CARD Act means for you, and when different measures will take effect.

August 2009—Phase 1

Requires statements to be mailed 21 days before the payment is due. (14 was industry standard).
Card issuers must give consumers 45 days notice of an interest rate hike. Issuers can then either A: Opt out and close the account (and pay the balance at the same rate) or B: Accept the new rate and keep the account open.

February 2010—Phase 2

Card issuers can only raise rates on existing balances if 1 the consumer is 60 days or more past due, 2 a promotional rate expired 3, the consumer does not complete a workout plan or 4 a variable rate increased because of movement on the index.
If a rate hike is the result of a late payment, the lower rate must be reinstated after the consumer makes six months of on-time payments.

The new law also imposes other restrictions on credit card companies which will work to ban unfair rate increases, prevent fee traps, require plain sight/plain language disclosures, and will protect students and young people. (New card applicants must be 21 years of age, unless they have a proof of reasonable income or an adult co-signer.) Universal default and double-cycle billing are no longer allowed. Over credit limit fees are now prohibited unless consumers agree to allow the transaction to go through instead of being denied.

According to a news story on the Nightly Business Report, the consumers most likely to see a cancellation are those who carry large balances or have inactive accounts. Experts say that paying off most of your balances will reduce your risk of cancellation.

It’s a good idea to take a look at the latest terms on your credit card accounts—and see if any of changed recently. You may find that your APRs have changed dramatically; you also may want to make sure your account hasn’t closed.

One final note in this new law is that there’s been a little more clarity on those pre-paid credit card “gift cards” we’ve seen so much of lately. The CARD act makes it illegal to impose a dormancy or inactivity fee, or to impose an expiration date on these cards.

Image courtesy Freedigitalphotos.net

I recently saw an online article about a study of the debt incurred by plans of professional European Soccer teams. The study was interesting for a number of reasons. First, it was commissioned by Virgin Money—to promote its credit card. Second, it showed results with the average number of fans of each team with professional sport-related debt, and how much the average was, and cross-referenced that to the “Football Fan Price Index” which is clever for a multitude of reasons.

The study is reporting that one if five football fans is forced to borrow to support their football (um, that would be soccer on this continent) habit—of those, the average debt is about $1,100, but another twenty percent of these fans owe between $1,600 and $5,000. Five grand. Wow (these numbers were converted to US Dollars for the purpose of this story).

The study goes on to explain that it isn’t really all about the football, mostly it’s a result of the season ticket cost being so high.

Can we pause for a moment and clarify something?

If you are “forced” into debt by your soccer-watching habit, it is not a habit. It is an addiction. (I don’t have a soccer prejudice—if you have a Starbucks habit which is “forcing” you into debt at the tune of $1,300-$5,000 a year—it also, is an addiction.)

One part of the “study” reads “Season ticket holders are most in the red—27 percent are borrowing with over 22 percent of those owing over $1,000 (GBP) (about $1,600 USD). A balance of $1,500 (GBP) on a credit card charging a 16.9 percent standard APR would incur annual interest of $253.50 (GBP). However, Virgin Money offers 16 months interest free balance transfers on its credit card and is encouraging fans who are paying interest on their cards to ease the pain and switch.” Hmm… no conflict of interest there? I’m afraid I’ve lost even more respect for Sir Richard Branson after that blatant, scavenging slither after indebted sport fans.

For those wondering, the teams that are “causing” the most debt (according to this pseudoscientific study) are the big four: Arsenal, Manchester United, Liverpool and Tottenham. Arsenal racks up the largest average football related borrowings at $1,284 (GBP).

Consumers appear to be kicking back at the high cost:

Thirty percent have resolved to attend fewer live games in the upcoming season because of the cost—up from 26 percent last year.

Despite my personal opinions on the co-marketing of debt and professional sports, we cannot underestimate the role of the Virgin Corporation in professional sports in Europe. If you’ve watched any European sporting event on television, you’ve likely seen the familiar “Virgin” logo of this big-time sponsor. Virgin has tracked the cost of sports fandom since 2006 by producing the “Virgin Money’s Football Fans’ Price Index” which follows the costs of sporting events.

The price index sample of goods tracked include: a gallon of gasoline, a pint of beer, a bacon roll (note to self—must locate and try one of these), a train fare, a match ticket, a replica shirt, pay per view cost, and a game program.

I think there are two requirements you need to meet before deciding to finance a purchase. If you can meet both of them, you should finance the purchase.

Rule #1: The monthly payment should put no strain on your budget

And by no strain, I mean you don’t need to get a 2nd job, or a raise to afford the purchase.

Rule #2 You can earn a higher return by investing your cash elsewhere

This especially applies to small business owners. When I think about paying cash for a large purchase (not that I will be doing that anytime soon), I immediately think of what that money could do if invested in my business.

Could I get a 10% return? Very, very likely. A 100% return? Also possible.

In fact, I would argue the case for financing personal purchases is very high for small business owners at significant income levels (see rule #1).

Car Loan Example

Let’s say you want to finance a  $30,000 vehicle purchase. You have $30,000 in cash, and so you could pay cash and own the car free and clear. Dave Ramsey would be pleased if you went this route.

But lets run the numbers, sorry Dave.

Loan Amount: $30,000 Loan Term: 48 Months (4 years) Interest Rate: 7%

Monthly Payment: 718.39

Total Interest Paid: $4,482.59

Total Car Price: $34,482.59

When you can earn a higher return elsewhere….

Now, lets say that $718 a month isn’t a big payment to you (lucky you!). You would invest that $30,000 into your business and earn a 20% annual return. We will assume a tax rate of 35%, and inflation rate of 3.1%

calc source: dinkytown

Invested Capital: $30,000

Simple Interest: $15,600 Compound Interest: $3,314

Total Interest Earned: $18,914 after taxes and inflation

Wow. You earned nearly 15K by being able to invest at a 20% return, even with a 35% tax rate.

A realistic example using a 9% Return

One more example. Lets say you can’t quite earn a 20% return, but you can achieve a 9% return by investing in notes at Lending Club. And, since you’ve got great credit, you can get a car loan at 4.9%.

Loan Amount: $30,000 Loan Term: 48 Months (4 years) Interest Rate: 4.9%

Monthly Payment: 689.53

Your total interest: $3,096.99

Now, let’s assume you invested that 30K at Lending Club vs. buying the car with cash….

Simple Interest: $7,020 Compound Interest: $640

Total Interest Earned: $7,660 after taxes and inflation

What say you?

When would you finance something? Would you use my two rules? Or would you never finance a purchase when you could pay with cash?