I Made A Mistake

amazon_store_cardA personal finance mea culpa:  During the recent holiday season I forgot to pay the balance on my Amazon credit card.  It was a store card, good only for purchases on Amazon.  I had paid the balance in full every month for over 3 years.  This one time I was about 10 days late, and wham — a $35 fee!  I called Amazon and cancelled the card, thinking they might wonder why I was cancelling and perhaps offer to refund the fee, but that didn’t happen.  So, just as an exercise in self-discipline, I’ll have no Amazon store card for at least a long while.  I’ve already purchased a couple things and charged them to my current I’m-only-in-in-for-the-bonus credit card.  Maybe Amazon will notice and they’ll make me an offer.  The $35 fee, the only fee I ever paid on this account, isn’t too bad.  I bought a couple computers when I first got the card, and Amazon allowed me 6 months to pay with no interest charges.  That might have been worth around $35. Still, my mistake means $35 is gone forever.

Be Careful With Subscriptions

outlanderSometime last year, my wife got interested in a TV series, something about a woman who somehow was transported back in time to Scotland of the 1700s.  She (my wife, not the women in the TV series) watched the first few episodes on Amazon Prime, but then discovered that she would have to subscribe to a pay-TV service to see the rest.  She subscribed, watched the series, and promptly forgot about the subscription.  Just last month ago I noticed I was able to watch movies on Amazon Prime and I wondered if it was costing anything.  Turns out  her credit card was getting charged $9 per month for several months.  Lesson learned.  Point is:  Are you paying for something you’re not even using because you don’t know about it or have forgotten about it?

Online Mistake Costs $70 (Which I Got Refunded)

I sorta like opening checking accounts (and setting up direct deposits and e-bill paying, maybe opening a savings account so as to avoid any monthly fee) just to get bonus of $150 or more.  One of the banks I’ve done this with offered me a credit card charging 0% interest for the first 12 months and paying me a $350 bonus if I charged $500 per month for the first 3 months.  I took the offer and earned the bonus.  All was going well until a few days ago.

I was online, making a payment, and I accidentally clicked the wrong button!  Instead of selecting to make a payment from the credit union where I keep most of my money, I accidentally selected the checking account at the same bank that issued the credit card.  I was paying off nearly the entire card balance (I guess it’s okay to carry a balance when the interest rate is 0%), which was a little over $1,000.  But I didn’t have that much in the checking account at that bank.  No matter!  Without any warning, the payment was made and the checking account had a negative balance.  I looked in vain for a way to un-do the transaction.  I was so flustered that I immediately made another mistake when I tried to transfer some money from the savings account at the same bank into the checking account, so as to partially offset the negative balance.  I accidentally did the transaction backwards, resulting in an even larger negative balance!  Finally, I transferred money from the credit union to the checking account at the bank (the money which I intended to use for the credit card payment in the first place) and I waited.
reverseJust as I feared, the next day there were two $35 service charges for insufficient funds.  Despite the fact that these accounts exist solely for the purpose of obtaining the bonuses for opening them, I felt pretty strongly about being charged $70 for just clicking the wrong button.  Especially when the bank’s online system didn’t give me any error message (“hey, you’re trying to make a payment of $1,000 from an account that only has a balance of $500”) or any way to un-do the transaction.

I did an online chat with one of the bank’s customer service people and, with sufficient amounts of politeness and contrition, along with the fact that I actually did transfer the $1,000 from my credit union account to the checking account at the bank, was able to get both fees reversed.

Moral of the story: Be careful not to click the wrong button. And, as is often the case with customer service, it often pays to ask.

The Cost of Credit Cards

Data from the Federal Reserve show that Americans owe close to 1,000 billion dollars of revolving debt* (which I’ll refer to as credit card debt).

Dividing the total credit card debt ($1,000,000,000,000) by the adult population of the United States (the 245 million (245,000,000) persons over age 18) shows us that, on average, every American adult carries a total balance of about $4,000 on his or her credit cards.

Note that this is an average for all adults.  Because we know that some adults have no credit card debt, we can be certain that the average total credit card balance of adults that do carry credit card debt must be higher than $4,000.  Many of them carry these balances for months, or years, or decades.

How much does it cost to carry a credit card balance?

The answer depends on two things:

  • the size of the balance
  • the credit card’s interest rate

Let’s assume Joe College gets his first credit card.  A short time later he has spent $1,000 — all charged on the card.  Thereafter, the credit card balance doesn’t go much higher (let’s say that’s close to the card’s credit limit, and Joe’s a smart guy; he knows he might be hit with an over-the-limit fee if he goes over the limit).  If Joe paid off the entire $1,000 as soon as he got the bill, then there’d be no balance and therefore no interest charge.  But that’s not what happened.  Joe makes payments in an attempt to pay it off, but too-often he gives in to temptation and uses the card to buy something he wants, or there’s something he urgently needs and he charges it. Thus, the balance is sometimes a little below $1,000, sometimes a little above $1,000, but it averages $1,000 for an entire year.

Most credit cards have interest rates between 10% and 30% per year.  People with good credit scores (who are probably likely to have low balances) might get cards with rates that are lower, while those with bad credit scores might have cards with interest rates that are even higher. So let’s assume the interest rate on Joe’s card is 15%.

The average balance on Joe’s card is $1,000 and he pays 15% interest per year.  How much does that cost him?

The annual amount of interest paid is a simple calculation of the interest rate as a percentage of the average balance, or:

[interest rate]/100 × [$ average balance] = amount of interest paid per year

which in our case is:

15/100 × $1,000 = $150


0.15 × $1,000 = $150 **

The $150 is broken down into monthly changes of $12.50 that are added to each month’s bill. If Joe paid only $12.50 per month, the $1,000 balance would never be reduced.  If he didn’t even pay the $12.50 interest change each month, his debt, the credit card balance, would grow as the interest would be compounded.  (His debt would also grow because he’d be hit with a late fee that would almost certainly be even higher than the month’s interest charge.  A payment greater than $12.50 would reduce the balance by whatever amount was additional to the interest.

We assume that Joe makes the payments that are normally required, which takes care of each month’s interest charge and applies some additional amount to the balance — but, as already noted, Joe keeps making purchases with his credit card, so the average balance is continually at $1,000.

This costs him $150 per year.  Consider that for a moment.  After 7 years, Joe will have paid more than $1,000 in interest, effectively doubling the cost of the first $1,000 worth of purchases he made soon after he got the card.  If he keeps going he will pay for those purchases several times.  After another 7 years, the credit card issuer will have another $1,000 of Joe’s money, … and so on for as long as Joe carries that balance on his credit card.  If Joe ever pays late or misses a payment on this credit card or any other debt, it’s quite likely that the credit card issuer will increase the interest rate on Joe’s card.  If the rate goes up to 20%, Joe will pay $1,000 every 5 years.  At 30%, he will pay $1,000 in interest charges every 3 and 1/2 years.

borrower_is_slaveLet’s remember that Joe’s spending spree stopped when he reached the card’s credit limit.  After that — after he charged that initial $1,000 — he was able to keep new charges on his credit card and what he was able to pay in equilibrium.  It’s that initial $1,000 that made Joe a borrower.  If he had been able to find that equilibrium when the credit card balance was $0, and kept his average balance at zero by charging only what he could afford to pay off each month, he would have saved that $150 each year.

The Bible says that the borrower is slave to the lender.  That should make us wonder: What was it, in that first $1,000 of charges, that was so important, so essential, that Joe had to have it, even at the cost of turning himself into a slave?  There’s an excellent chance that after he’s paid over $1,000 in interest, Joe can’t even remember what he’s paying for as he finishes paying for it for the first time and begins paying for it the second (or third …) time.  As the old saying goes, the purchase should outlast the payments.  If Joe can’t even remember what it is he’s paying interest on, can it be important enough to pay for it over and over again?

Think how much better off he would be if he had resisted the temptation to over-use his credit card.  If he had cooked dinner at home instead of going out to a restaurant, if he had gotten some new (to him) clothes at Goodwill, if he had gotten some free furniture from Craigslist or hand-me-downs from friends or family.  Had he done that, he would have been at least $1,000 richer every 7 years.

Now consider that the average American has a credit card balance of over $4,000.  Take a look at Joe’s story again, but multiply every number by 4.  A balance of $4,000 at 15% costs $4,000 in interest payments every 7 years.  At 20%, it’s $4,000 every 5 years.  At 30%, $4,000 every 3 and 1/2 years (which is well over $1,000 per year!).

Look at yourself: Are you an average American?  Are you running a credit-card-interest tab (put it on the card, put it on the tab) that’s costing you hundreds, or thousands, of dollars each year?

Remember the annual-spending tip.  If you earn, say, $50,000 per year and you’re paying $500 in credit-card interest, then interest on credit-card debt is costing you a full 1% of your income.  Are you paying 1% of your income in interest when you’re not even saving and investing 10% of your income for your own future … and maybe telling yourself you can’t save 10%, there’s nothing you can cut down on.  Well, how about cutting down on the credit-card interest you pay?

The moral of the story should be clear: If you don’t have a credit card balance, do everything you can to avoid getting one.  If you have one, do everything you can to pay it off.

* Revolving debt is basically what people owe on bank-issued credit cards and retailer-issued store and gas cards, which allow the borrower to make additional charges without any additional application process. Thus, many borrowers add new debt as fast as they pay off old debt. Home equity line of credit (HELOC) loans would also seem to fall into this category, but the Federal Reserve does not include loans secured by real estate in total revolving debt.

** The actual calculation used by credit card issuers is a bit more complex.  It involves dividing the interest rate by the number of days in a year (~365) and multiplying that by the average daily balance each month.  But our approximation works well enough for our purposes.

Vending Machine Credit Card Fee

I don’t buy things from vending machines anyway, so what should I care if people who use a credit card get charged more?  Vending machine prices are the worst kind of retail markup.  Far better to avoid the convenience and eat and drink things brought from home.  But if you really want to pay for it, you can pay an extra 10 cents — that’s like an additional 6% — for using a credit card.

Just Three More Payments and They’re All His

One of the fun things about live bluegrass music performances is that it seems to be standard practice for bluegrass musicians to include jokes and humorous anecdotes in the show. I guess this is an old tradition.  You can hear it in the old radio broadcasts of the “Grand Ole Opry“, and the tradition has been carried on in public radio’s “Prairie Home Companion”.

saddle_shoesAt a free concert in a local park (of course I go to free concerts) I saw Monroe Crossing, a bluegrass band led by a man who not only sings and plays guitar, but also knows how to tell a joke. Some of his jokes were a running gag the subject of which was the youngest band member: his youth and good looks, his nice clothes, and his saddle shows.  One of the jokes that referred those beautiful shoes ended with the punchline, “Just three more payments and they’re all his”.

Part of the humor was the way he said the line: slow, sardonic, and after a well-timed pause.  It’s also funny because it seems absurd.  Pay for shoes on an installment plan?  That’s how most people pay for cars!  (Although it would be better if they didn’t.)  A loan?  For shoes?  Paying interest to a moneylender to get a pair of shoes?  Ha!

But think about it.

If you buy shoes, or clothes, or lunch and dinner with a credit card and if you don’t pay 100% of the balance every month before any interest accrues, then you’re the butt of the joke.

Why You Should Pay Your Credit Card Bill At Least Twice Per Month

I got my first credit card before the modern internet began, before credit-card issuers had websites that could be used to check balances and make payments.  Back then, you could easily get in trouble with credit cards by simultaneously charging purchases on your credit card while you were spending whatever money was in your bank account.  If you didn’t carefully keep your credit-card receipts (and I often didn’t), you could be in for a shock when the monthly credit-card bill arrived in the mail.

Here’s what could happen:  Over the course of a month, I wrote checks for the usual rent and utility bills (remember, this was before the internet) and made some withdrawals from the old neighborhood ATM for walking-around money.  (Being careful not to pay ATM fees, of course.)  I also ate a few meals at restaurants, had some drinks at the local beverage emporium, got groceries, saw a movie, maybe bought some clothes, picked up a few books or magazines, bought several gallons of gas for the car, ordered something from a catalog, maybe paid for a car repair or perhaps a large purchase or two — and I put all these purchases and more on the card and … WHAM! …  the U.S.P.S. delivers a credit-card statement.  Open it and find the total due on the credit card bill exceeded what was left in the bank.

Sure, I could have avoided that if I had kept all the receipts and maintained a running day-by-day total of the credit-card balance.  And that’s a great idea.  Maybe staple the receipts to a calendar on the wall.  Seeing the total climbing into the danger zone should be a warning to stop spending money you haven’t got.  And yes, even in those pre-internet days, there was an 800-number I could call to check on the balance.  But the problem was, I didn’t keep track.  Be just a little careless and there was soon more credit-card debt than I could properly handle by paying off the balance in full each month.

credit_card_pay_nowNow, in our internet-everywhere age, you have another option.  Instead of adding up the receipts to a running total, you can just log-on to your credit card’s website and see what you’ve spent.  While you’re there, click the “Pay” button (certainly, you’ve already linked the card’s payment system to your checking account) and pay off the total balance.  Do this every two weeks, or even more frequently, and you will never be surprised by a terrible end-of-the-month total.

As you’re paying off the credit card, you’re also reducing the amount of money in your checking account — which should send a “current balance” signal to your brain and cause you to be careful with whatever dollars you have left.  Thus, making multiple payments per month does two things: it eliminates the chance of a surprisingly large balance on the credit card bill and it prevents you from spending money in the checking account that should go to paying off the credit-card bill.

Another possible advantage:  A low balance on your credit cards might help improve your credit rating.

A word about “using the bank’s money”:  Years ago, one of the touted “advantages” of using credit cards was that by using a credit card for all your normal purchases and then paying it off as late as possible each month you were “using the bank’s money” instead of your own.  The idea being, you could keep as much of your money as possible in an interest-earning account before using it to pay credit-card debt.  You could get maybe an extra 20 days each month earning interest and that was “free money” that you get to keep it for yourself.  Nothing wrong with this approach, if you’re careful enough to do it correctly.  It may not be as worthwhile now (circa 2015), during a time of low-to-zero interest rates on checking and savings accounts.