Today USA Today ran a familiar story about various people who are choosing not to use credit cards. I’ve seen similar stories in The Los Angeles Times, Money Magazine, and various blogs. The quotes are similar – we didn’t want to be slaves to debt, we spend more with credit cards, bank are evil. Personally, I don’t understand this fear of credit cards, but what I found even more interesting were the comments on the article. Whoo boy – the lines are really staunchly drawn there. Today I look at the “credit cards are evil” argument.
The “Credit Cards Are Evil” Camp
The “Credit Cards are Evil” camp believes that no one can use a credit card responsibly, that everyone will overspend if they have a card, and that a credit card is a sure way to financial ruin because those larcenous banks charge interest. One commenter repeatedly insisted that even if you pay your balance in full every month, you’re still being ripped off because of merchant fees.
So let’s look at these claims:
No one can use a card responsibly. Well, some people can. Some people aren’t really tempted to buy stuff or make impulse purchases no matter how many credit cards they have in their wallet. Some people can make a budget and stick to it, and include full credit card payments in those budgets.
Everyone spends more with credit. It’s true, there are some studies that show that people will spend more if they use plastic rather than credit. But it’s not all people, it’s some people. If I need to buy a pair of shoes, it will cost the same whether I use cash or credit. But I’m not a person who likes shopping or is tempted to buy something just to buy something. If I were, I’d be just as likely to spend the cash in my wallet as I would be to use the credit card.
Larcenous banks charge interest. I can understand the frustration with credit card interest, but at the same time, we all know that we’ll have to pay interest if we don’t pay off the balance in full. I don’t understand people who say “I didn’t realize how long it would take me to pay it off.” It’s simple math. The bank isn’t tricking you into making a minimum payment – the full amount due is right there at the top of the bill – you make a choice not to make the full payment with the full knowledge that you will be charged interest. Yes – the banks are guilty of excessive fees and sometimes usurious interest rates, but we can’t blame them entirely when we knowingly enter into a contract with them and then don’t make the full payment. Being angry with the credit card companies for charging you interest when you don’t pay in full is like being angry with Krispy Kreme because you gained weight from living on an all-doughnut diet.
Merchant fees are ripping us off. Merchants pay 2-3% of the transaction to the banks. In order to cover this 2-3%, they have to raise prices. But the increase is already there. Prices wouldn’t come down if everyone on the planet stopped using credit because the merchants know we’re willing to pay 2-3% more for the item. You also don’t get a 2-3% discount for using cash while everyone else uses credit.
Of course, credit cards are evil to some people, for precisely the reasons above. It comes down to temperament – some people love to shop or hate to budget. If you’re either one of those, then credit cards may be dangerous for you, because they do require careful management. It’s very easy to slip down that slope when you have the option of paying it later.
Tomorrow I’ll look at the arguments on the other side of the fence: the “credit cards are tools” camp. Full disclosure: I live on that side of the fence. Find out why tomorrow.
There is a movement afoot that encourages people to move their money from the big six banks into smaller community banks. I fully understand the emotion behind this desire to punish the banks for business as usual, but I’m not 100% convinced that it’s the best idea, or that it will make a big difference.
The Idea Behind Move Your Money
The idea behind move your money is that the big banks don’t care about the people. They don’t lend to small businesses. They don’t care about the community. Smaller, community banks are supposed to be more responsible and personal because you know the bankers personally. The organizers believe that a mass movement to smaller banks will force the big banks to be more responsible.
Advantages of Moving Your Money
Moving your money to a small bank certainly does have a few advantages:
Taking control. The biggest advantage to moving your money is the simple psychological boost you’ll receive from sticking it to a big bank. You’ll feel like you’re taking some sort of control over the situation.
Supporting the local community. If you find a nearby bank, you may in fact find that the bank is a part of the community, that it supports local organizations and lends to small businesses in your community.
More personalized service. If you have choose a bank with just a few branches, you may indeed receive more personalized service when you have a problem.
Disadvantages of Moving Your Money
There are also a few disadvantages of moving your money that you should seriously consider:
Lack of convenience. How many ATMs does the local bank have? Do they have ATMs where you work or live? Can you get money out without a fee? If you’re going to have to use a big bank’s ATM to get money from your small bank’s account when you travel a small distance from home, how big a blow are you striking?
Small banks took similar risks. While it’s true that the big banks were bailed out for excessive leverage, smaller banks are failing in much higher numbers because they also over-leveraged and made risky loans. Big or small, a bank is still a for-profit business and small banks eventually do everything the big guys do.
Switching banks won’t make a huge difference. Even if you use a small bank for your personal banking, tons of people flocking to small banks just makes the banks targets for takeovers. The big banks also have their fingers in a lot of pies. Sure, you can move your checking account or savings account, but do you still have big bank credit cards? Is your mortgage serviced by a big bank? Does your employer process your payroll through a big bank?
Higher risk of bank failure. Most of the bank failures have been community banks. And although the money is FDIC-insured, you may see a slight delay in accessing some of your money if the bank is seized. Before placing your money in a small bank, verify its ratings at Bankrate.com. If your bank isn’t safe or you have more than $100,000 in it, you should switch some of your money.
Can You Find a Small Bank?
If you live in a small town and do most of your transactions in that community, then you may be able to find a community bank where you can do business. If you live in a medium to large-sized city, you may not be able to find a community bank. The community banks in Los Angeles were among the first to fail in the mortgage crisis. The Move Your Money site currently lists one bank in Los Angeles as being a community bank. It’s not a personal bank – it’s a business bank and has offices in many cities in three different states.
The decision about where to bank is a personal one. Only you can decide if switching to a smaller bank is right for you and your financial habits. If you live in a big city, it may not even be possible to switch to a small bank, but you could consider a credit union.
In addition to some people opting to walk away from their mortgages, the temptation to default on student loans is growing. Unfortunately, defaulting on student loans can have even worse consequences than defaulting on a mortgage. So, let’s go over what will happen if you default, and options for avoiding default.
What Qualifies as Default?
The government gives you many chances to keep up on your student loans. You only enter default if you fail to make any payments or repayment arrangements for 9-12 months.
What Happens If You Default?
Unlike some types of debt that will eventually become stale if you just ignore them, federally-subsidized student loans will follow you for the rest of your life. As long as you’re in default, you will not be able to qualify for a mortgage or any other type of loan, including future student loans. You may be turned down for jobs because it will appear on your credit report. The government or your lender also has the option of garnishing your wages or tax refunds in order to be repaid.
Can You Negotiate a Lower Payment When It Goes to Collection?
Student loans are not like any other kind of debt. Once it enters collection, the costs only increase. You will not be able to negotiate a lower pay-off balance. In fact, you will be responsible for all of the collection costs as well as penalties. Depending on the type of loan, you will owe an additional 25%-40% of the balance. The financial aid website explains more about the collection costs.
Can Student Loans Be Discharged in Bankruptcy?
In very, very, very, very rare cases, you can have your student loans discharged in bankruptcy court. Unfortunately, you have to prove that there is no way you can ever repay your debt, which typically requires that you be severely disabled.
Can You Apply for Loan Forgiveness?
Direct federal loans may be forgiven after 10 years of public service. Only certain jobs qualify and you have to make 120 payments after 1997 to qualify, but if you’re interested in that route, visit FinAid to learn more.
Are There Alternatives to Defaulting on Student Loans?
Fortunately, your lender has many options to avoid defaulting on your loans. Your first option is deferral. Your loan can be deferred for a specific period of time. If you’re returning to school, some loans won’t accrue interest while you’re in school. Other loans will accrue interest, but you won’t be required to make payments. Members of the military on active duty are eligible for special deferrals. Financial hardship deferrals are also available. If your situation is so severe that a deferral isn’t sufficient, lenders also offer forbearances. Interest accrues during a forbearance and you are responsible for paying it, but you won‘t be responsible for the full payment amount until the end of the forbearance. Some types of forbearance simply reduce your payments while others suspend them. Your lender will review your finances to determine the most appropriate option for you.
If you’re at risk for default, the first thing you need to do is contact the lender or consolidator who currently holds your loans to discuss your options. They will help you apply for a deferral, a forbearance, or a new repayment plan. Don’t risk your financial future by defaulting on your student loans – it will only make things worse.
In college economics, I learned about the stages of adoption of new technologies or ways or doing things. Marketers love innovators and early adopters, but does it make financial sense to be an early adopter every time? What are the pros and cons?
What Are the Stage of Adoption?
There are five stages of adoption: innovators, early adopters, early majority, late majority, and laggards. Innovators take the risk of buying everything when it comes out. Marketers love them because these initial buyers help them work out the kinks. Early adopters are the next to buy – when it’s still cool, but more proven. Early majority buyers buy products when they’ve become mainstream, but not everyone has one. Late majority buyers typically wait until most other people have adopted an item or new technology. Laggards may never get around to buying something, or will only do so once it’s ingrained in society.
Should You Be an Innovaor for New Products?
My brother-in-law is an innovator when it comes to Apple products. He was convinced he needed an iPad the day it came out. I’m somewhere between early and late majority, and I’m not convinced it has a real purpose yet.
From a financial standpoint, it doesn’t make sense to be an innovator. The first buyers of the iPad will pay a high price for a first generation product with fewer features and more bugs. If they wait a year or two, they’ll get twice the features at half the price. I had another friend who bought a DVD player as soon as they were available. It set him back $500. I waited two years and paid $80. I think it was certainly worth it to save $420!
Other Advantages of Resisting the Call
In addition to saving money when you do finally adopt a product, resisting the call to buy can help you determine whether something is actually worth buying. New products come out every day, and most of us simply don’t need them. Rather than rushing to the store, you can determine if an item will actually improve your life. Most of the time, it won’t. I waited over a year to buy a Wii – until I was absolutely convinced that I would make good use of it. I certainly could have done without it, though.
Should You Be a Laggard?
Certainly, being a laggard is the most frugal option, but there are some things that can truly change your life. You shouldn’t be resistant to spending money on something or adopting an idea just because it’s “new.”
Questions to Ask Before Adopting Something
If you’re on the fence about something, or tempted to rush into a purchase, you can start with the 10-10-10 rule, or ask yourself these five questions:
1. How will I use this product?
2. Why do I want this product?
3. How many hours would I have to work to pay for it?
4. Is it worth that much of my time?
5. Will this product make a tangible difference in my life?
I’ve only recently begun filing FSA (flexible spending account) claims, but I’ve learned a few things about the process.
Use Your FSA Debit Card
If you have an FSA card, swipe it first. My HR department recommends using it in the pharmacy, rather than at the checkout. If you need to buy over-the-counter items, wait until you need to pick up a prescription and ring up the whole thing at the pharmacy counter.
Save Itemized Receipts
If you’re buying over-the-counter items and don’t have a card, keep the itemized receipt for filing your claim. I’ve noticed that both CVS and Costco list the FSA-eligible total at the bottom of the receipt. If you use the card, save the receipt anyway in case they need verification. Basically, save the receipt until at least the end of the tax year.
Save Prescription Detail Receipts
In addition to the itemized register receipt, save the slip of paper stapled to your prescription bag that lists your name, the medication, the date, and the price. Some FSA programs require more details for prescription reimbursement than the cash register receipt will show.
Get Itemized Receipts from Doctors
The IRS doesn’t allow FSA programs to accept the credit card or cash receipt for doctor co-pays. You need to get a copy of the appointment sheet where the doctor marked off the visit codes or wait for your explanation of benefits to arrive, which will list what you have to pay.
Notify HR If You Have a Problem
I had two problems with my first claim: first, the claim form crashed before I could print it. Once I got it to work again, it refused to accept claims for $10. I could enter any other number except $10. I notified HR again, but no one could figure out why it was doing that. I tried with two different computers on two different days!
Arrange for Direct Deposit of Reimbursements
If you file claims, you probably have an option of being reimbursed by direct deposit rather than check. You’ll get your money faster and won’t have to worry about lost checks if you set that up.
Keep a Copy of Your Claim
Keep a copy of your claim form and documentation if you have to mail your claims. Don’t send your original receipts – only copies. My FSA prefers faxed documentation, so I filed the fax with my other documents until my reimbursement comes.
If you use them properly, FSAs can save you a lot of money. Just make sure you file all your claims properly to reduce the hassle!
As I mentioned earlier, my husband was scheduled for surgery last week (hence my absence from the blog.) Even though we were pretty prepared, it’s been quite the learning experience nonetheless. Here are some tips I’ve learned along the way.
Warn Colleagues Ahead of Time
Obviously this tip is only if you know your spouse or child is scheduled for hospitalization. I kept my team members, bosses, and project managers apprised of my schedule and any changes so they could adjust client expectations or pick up any overflow. Everyone is very understanding, but it’s helps to keep in touch just in case something comes up.
Schedule Bill Payments in Advance
Before my husband went to the hospital, he scheduled all upcoming bill payments so I wouldn’t have to think about it. If it’s an emergency, try to take a few minutes as soon as you can to pay bills online, then you won’t worry if you paid the electric bill.
Arrange to Have Someone with You
Even with a routine surgery, things come up. I was hesitant to have my mom come stay with me, but I’m very glad I did. She stayed at my house to make me dinner, run some errands, and even did a little cleaning. She also provided moral support when I was stressed out. If you have kids, it’s even more important to make arrangements in advance to have someone help out. Just make sure it’s not someone who will cause you even more stress!
Get Money from the ATM
You don’t want to be hunting for cash when you want to buy a bottle of water. Take out some money before the surgery so you don’t have to worry about it later.
Investigate Weekly Parking
When my husband checked in, the hospital gave me a flyer listing parking options. As you probably know, parking charges at hospitals are often outrageous. However, they offered a lower-cost parking plan at a garage half a block away. I bought a weekly parking pass for $25. This way I don’t have to worry about having cash for parking or what time the garage closes. If I used the valet or another garage, it could easily cost me $11-$20 a day.
Pack Water and Healthy Snacks
Hospital cafeterias are not the cheapest places in the world (although they’re no worse than any other cafeteria.) Rather than contend with whatever they happened to be serving that day, I ate lunch and dinner at home, and packed healthy snacks and bottles of water for my hospital visits. Obviously, I brought books to help pass the time, too.
Get Out of the Hospital
It’s hard, but you have to leave the hospital some times. Go home for meals if possible. Go home to sleep. Take some time for your mental and physical health. You can’t take care of your loved one if you don’t take care of yourself.
Complete an Advance Directive
You can give your advance directive to your personal doctor to have on file. You should also bring one to the hospital for scheduled surgeries. They’ll ask you about it. Be prepared to make decisions and sign documents on your spouse’s behalf.
Even when it’s scheduled and “routine,” a hospitalization is stressful for everyone in the family. Make sure you take care of yourself, get the support you need, and be as prepared as possible. It will reduce some of your stress.