Confessions of a Credit Junkie: Everything You Need to Know to Avoid the Mistakes I Made
224
Confessions of a Credit Junkie: Everything You Need to Know to Avoid the Mistakes I Made
224Paperback(First Edition)
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Overview
When Beverly got out of college, she spent the next 10 years racking up debt on seven credit cards. Credit card limits, she believed, were merely "guidelines," certainly not anything to be taken seriously...especially if she was in dire need of a new pair of shoes. The fact that she was a CPA at the time adds an ironic twist to the credit quagmire she slowly descended into.
In Confessions of a Credit Junkie, Beverly candidly details her own credit card mishaps and offers easy-to-follow advice, often with a touch of Southern humor, to help others avoid them. In this much-needed book, you'll learn:
Anyone in debt will benefit from the down-to-earth, practical tips Beverly offers.
Product Details
| ISBN-13: | 9781601632944 |
|---|---|
| Publisher: | Red Wheel/Weiser |
| Publication date: | 11/25/2013 |
| Edition description: | First Edition |
| Pages: | 224 |
| Product dimensions: | 11.60(w) x 7.90(h) x 0.80(d) |
About the Author
Beverly runs a popular credit card blog on her Website and has coauthored two books, The Complete Idiot's Guide to Person-to-Person Lending and Simple Numbers, Straight Talk, Big Profits! She lives in Johns Creek, Georgia, with her husband and two children.
Read an Excerpt
CHAPTER 1
10 Mistakes I Made That You Never Have To
You can think of this chapter as the credit card version of the reality TV show What Not to Wear. It's an appropriate way to look at it because a lot of my debt came from purchasing designer clothes.
I had a difficult time trying to decide which mistake to talk about first because, you know, they're all pretty big. But when I think back to when it all began, it's really the credit card offers that stick out in my mind.
I know that it seems like a fairly unimportant detail to settle on. But I still remember holding the offer letters and thinking about how important I'd become. It was like a Sally Field moment: You like me! You really like me. It didn't cross my mind that millions of other people got these same offers. Basically, the banks really liked everyone.
So after I settled on the credit card offers as the first mistake, I started listing all of the other mistakes I made. And, you know what, they kind of fell into a logical progression.
Mistake #1: Applying for every credit card offer
When I was in college, I had only one credit card and that was my Rich's card. In case you've never heard of Rich's, it was a famous department store that was later bought by Macy's in 2005. Rich's was my favorite store because it had a great petite section. I applied for their credit card and I got approved. I didn't have any credit history other than a car loan for a small amount. But even back then, retail cards were pretty easy to get.
When I graduated from college with an accounting degree, I went to work for a petroleum company. The salary was very good. It was to me, anyway, because I'd never had that much money before. Every night when I'd go home after work, I'd check my mailbox. And you wouldn't believe the offers! The envelopes alone were gratifying to read: You've been pre-selected! You've earned it! You deserve this card!
I bought into the hype and began to think that, yes, by golly, I did deserve these cards. When I received the first one, from Citi, it was such a rush to pull this shiny card from the envelope and see my name in embossed letters.
And, like most junkies, I wanted to experience that feeling again. And again and again. I applied for several cards all within a few weeks. Keep in mind that this was before the Internet. If the Internet had been available, heaven only knows how many credit cards I would've applied for.
By the time I was done credit card shopping, I'd applied for seven cards and was approved for all of them. I didn't know that opening a lot of accounts in a short amount of time would lower my credit score and also make me appear to be desperate for money, which I'll talk about in a minute.
As for your credit score, each time you apply for a credit card, the issuer does a hard inquiry on your credit report. The impact isn't high, if anything at all. It's about two to five points off your credit score for each inquiry. But that's for each inquiry.
There's another negative side effect when you open too many accounts at once. Banks love to play amateur psychologist. While I was opening credit cards left and right simply because of the abundant opportunities, the banks were likely starting to view me as a consumer who desperately needed the credit to pay next month's rent.
When banks think you're about to fall off of your own personal fiscal cliff, they take steps to limit their exposure. And these days, the banks are highly sensitive to risk. Our spending patterns are monitored and, during the height of the Great Recession, I heard of banks closing accounts if a cardholder started shopping at discount stores. It's kind of ironic because that should also be a sign of being responsible with money.
Anyway, back then, I probably had APR (annual percentage rate) increases because of my behavior. I didn't read my mail (Mistake #8; blissful ignorance), so I had no idea what my interest rates had become.
Today, it's unlikely I'd get away with what I did in such a short amount of time. I was young with a short credit history and I opened seven accounts in rapid succession. But even if you could get away with it now, you never want to open so many accounts at one time.
Aside from the hit on your credit score and the impression that you're broke, you can get in a lot of trouble when you suddenly have a lot of credit. Once you're experienced with credit cards and you've proven you can use them and never carry a balance, then it's fine to have several. I know folks who have dozens of credit cards and they use spreadsheets to keep track of them. I don't recommend that, though, unless your super power is organization.
Mistake #2: Not reading the fine print
I have to confess that I never read the fine print on any of my credit cards back then. Looking back, I have to take my confession further and admit that I had no idea there even was fine print. I knew there were pages and pages of information that came in the mail with my new cards. I ignored it because I didn't have the patience to read it and I didn't think it could possibly be important.
I'd just tear open the big envelope and stick my hand in there like I was looking for the prize at the bottom of a Cracker Jack's box. After I got what I needed, the rest of the paper went into the circular file.
When I think back, my only defense was this: I didn't know what I didn't know. I had no experience with personal credit, with the exception of my Rich's card. Amazingly, I did okay with that card. It was when I graduated and had real money that the problems started.
Of course, reading the fine print isn't going to guarantee that you'll stay out of debt or that you'll pay your bill on time. But if you know you'll be paying a 19.99 percent interest rate if you don't pay off your balance every month, it might motivate you to watch your spending. The fine print tells you about fees, such as annual and foreign transaction fees. You'll also learn if the bank has a penalty rate and which circumstances will lead to you getting stuck with it. Penalty rates can be as high as a variable 29.99 percent.
If that rate doesn't scare the bejeebers out of you, then you don't understand compound interest. But don't worry, you'll learn about this in Chapter 4. And I promise it won't be painful.
Mistake #3: Buying stuff I didn't need (then buying more of it)
I started to call this one "not having a budget." Because, really, if you have a budget, there isn't usually a line item for "outrageous amounts spent on designer clothes so I feel better about myself." I worked in a corporate office with a lot of men, and I felt I needed "power" clothes and accessories to be taken seriously. These were the days of suits with huge shoulder pads.
I'm 5-foot, 2-inches tall and petite. I looked like a tiny linebacker in these suits. I'm not a psychologist, but there was clearly an emotional element to my spending. I bought one thing after another and all of it was designed to make me feel professional and credible.
At the end of the day, it doesn't matter why you're buying so much stuff. There's one end result when you spend more than you earn: You get into credit card debt. But there's also fallout beyond the debt itself.
One month during my spending decade, I bounced 12 checks. And to be honest, this was a total surprise to me at the time. The NSF (non-sufficient funds) fees set me back quite a bit. I actually had to stop making credit card payments for a few months (Mistake #7) so my cash flow could catch up to my monthly expenses.
If I'd had a budget, I would've known I was going into the red that month, and hopefully, stopped myself. I think budgets don't get enough attention these days. They just seem kind of dull, right? Well, that's a thing of the past. There are so many great options out there. And many of them are free.
If you don't have a budget in place, you need to sit yourself down and take a look at some of the free online money management programs. It doesn't have to be you and a spreadsheet unless that really appeals to you. Do whatever is easy for you. If it's easy to use, you'll be more likely to stick with it.
Our family uses Mint.com and we have for years. I say "our family" because we all use it. Even my youngest, my 17-year-old son, started using it when he got a part-time job. I like the user interface because it's very visual. You can set up budgets for different categories. You can look at pie charts and graphs and see where your money went that month. There are other free online money management programs out there, too. So check them out online and find one that you feel comfortable with.
One complaint I hear a lot is that having a budget is too restrictive. Nothing could be further from the truth. It actually puts you in charge. The way you spend your money reflects how you're spending your life. A budget ensures that you're spending your hard-earned money on things that matter to you.
Mistake #4: Not knowing how much I spent or where I spent it
This, of course, is related to Mistake #3. Are you starting to notice how interconnected personal finance is? A mistake in one area creates a problem in another area. It's a domino effect.
Do you know what mindful spending is? It means you pay attention to every dollar you spend. If you're on a budget and you're practicing mindful spending, you don't buy a lot of things you don't need. There's no "Oh, my God!" moment when you get your credit card statement. You already have a good idea of how much you owe before you open the envelope. Tracking your spending is the only way to know how much you spent and where you spent it. When you don't track your spending, you're on your way to debt. It's really that simple.
I just told you that I use Mint.com to budget my finances. Mint.com also lets me set up category limits and I get an e-mail when I'm approaching one of my pre-set limits. So I'm able to track my spending by category.
Here's something to keep in mind if you use your credit cards for reward points or just to postpone the expense until your statement arrives. You need a budget for each credit card. So if you declare you're going to spend $400 a month on your airline miles card to buy groceries, you need to stick to that. If you go over that amount and can't pay the balance in full when the statement arrives, you're going to pay interest expense.
So what if you do need to spend $50 more on groceries one week because you're having a house guest? Or maybe it's your daughter's Sweet Sixteen party? Because you have a budget, you find that extra $50 from another category that month so you can stay on budget and still pay your bills on time.
Having a budget also gives you the go-ahead for a "budgeted splurge" item. A budgeted splurge is when you buy an item that may be a little expensive, but you've cut corners in other areas of your budget to pay for it.
Here's an example: I spent $32 last week on Givenchy mascara. I do a lot of video and TV, so I spend a lot of money on makeup. But this is part of my budget. I rarely go out to movies and I'm a pro at getting good value on groceries. I drive a nine-year-old car and I intend to drive until it literally conks out in the middle of the road.
My point is that it's okay to be a little crazy in one area, if you've made sacrifices somewhere else. The beauty of a budget is that you're making choices about how you spend your money. You spend money on things that are important to you and you don't waste it on things that aren't.
If you're about to apply for a credit card, a car loan, or a mortgage, there's another reason to have a budget for your credit cards. In Chapter 2, you'll learn how keeping a low balance on your cards helps to boost your credit scores.
Mistake #5: Carrying a balance on my credit cards
I wasn't worried the first time I couldn't pay my entire balance off. I should've been, though. I remember thinking it was not a problem and I'd pay it all off the next month. Yeah, that didn't happen.
This is how credit card debt starts. If my attitude had been "I can't believe I did this! I'm putting away the credit cards until I get this balance paid off," I would've nipped it in the bud right then. Instead, my attitude was "Ah, no big deal. I'll pay it off next month. In the meantime, I need a new scarf to add a little pizzazz to this outfit."
I didn't even look at how much interest I was paying. The reason was because I wasn't thinking about the effects of compound interest. I continued to buy things with my cards because I'd set that pattern for myself. Once I started carrying a balance on one card, it was a short jump to carrying a balance on another card. And then another.
Before you know it, you're carrying balances on all your credit cards and just making minimum payments. Carrying a balance becomes your "new normal" and the shock factor is gone. Don't let that happen to you.
I started my credit card blog because I wanted to help people learn how to profit from their credit cards and stay out of debt. I always have the same mantra: Don't carry a balance on your credit card. There are times when life gets messy and you might have to carry a balance now and then for a few months. That's fine. But have the appropriate "OMG!" reaction that I totally lacked. Step away from the credit cards and fix the money problem.
Using a credit card to get the miles or cash back is a good strategy. Or putting a large purchase on a credit card simply because you want an interest-free loan for a few weeks is fine, too. But the only way you'll profit from credit card use is if you pay your bill in full during the grace period. For those who don't know, when you use your card to make a purchase, the grace period is the amount of time you have to pay the bill before interest charges kick in.
Once you stop paying your bill in full every month, you're on a slippery slope. Imagine skiing down a snow-covered mountain at ever-increasing speed. Now imagine that without skis. Yeah, that's about how the effects of compound interest will feel.
Mistake #6: Maxing out my credit cards
You can carry a balance on your credit cards and still have a very good credit score. As long as your balances on each card are low and you pay all of your bills on time, your score won't suffer. Well, not directly related to your credit card balances, at least.
When you max out your credit cards, however, all heck breaks loose where your credit score is concerned. By maxing out, I mean spending up to (and for some, beyond) the limit on your credit card.
You have something called a "credit utilization ratio." It's the amount of credit you've used compared to the amount of credit you have available. I'll cover this in more detail in Chapter 2, but for now, all you need to know is that your credit utilization ratio should be no higher than 30 percent and preferably closer to 10 percent.
Let's look at an example. And listen, don't freak out about any of the math in this book. Trust me: My motto is that math should always be easy. No one should ever have to solve a word problem that involves determining the arrival time of trains going in opposite directions at different speeds in the rain.
Okay, here we go. Let's say you have three credit cards.
* Card A: $100 balance; $1,000 credit limit.
* Card B: $300 balance; $2,000 credit limit.
* Card C: $500 balance; $1,000 credit limit.
Your credit utilization ratio:
$900 (100 + 300 + 500) / $4,000 = .2250 = 22.5 percent
Anything under 30 percent is good, so this is acceptable. Let's say you decide to buy new furniture at a cost of $800 and put it on Card B. Card B's balance is now $1,100.
Here's your new ratio:
$1,700 ($900 + $800) / $4,000 = .425 = 42.5 percent
This is a high ratio and it has the potential to lower your FICO score. I'll get into how your FICO score is calculated in Chapter 2. Again, don't freak out. We won't be doing algebra or anything with moving trains. I'm just going to give you the basic information you need to know to stay out of trouble. And for those of you who like to dive headfirst into this stuff like me, I'll give you resources to check out.
Before we move on to Mistake #7, there's one more point to make about maxing out credit cards. Remember when I said issuers like to play amateur psychologist? If you start maxing out your cards, your bank might start thinking you're desperate for money. The banks notice when your credit score drops, too.
Unlike a real psychologist, though, they won't give you a call and ask how you're feeling today. It will more likely be a knee-jerk reaction to what they perceive is your impending financial doom. This reaction could involve increasing your interest rate. Issuers sometimes do this so they can collect as much interest as possible. You know, just in case you eventually default.
Or they might decrease your credit limit as soon as you start paying down the balance a little, which makes your utilization ratio even worse. This is a particularly depressing situation because you think you have some breathing room on that card and then — poof! — it's gone and you're maxed out again.
(Continues…)
Excerpted from "Confessions of a Credit Junkie"
by .
Copyright © 2014 Beverly Harzog.
Excerpted by permission of Red Wheel/Weiser, LLC.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
Foreword by Liz Weston,
Introduction,
Chapter 1: 10 Mistakes I Made That You Never Have To,
Chapter 2: Your Credit Life Explained in Simple Language,
Chapter 3: What's Your Credit Card Personality?,
Chapter 4: The Fine Print Made Easy,
Chapter 5: Your First Credit Card: Build Credit, Stay Debt-Free,
Chapter 6: Plain Vanilla Credit Cards,
Chapter 7: Rewards Credit Cards for Fun and Profit,
Chapter 8: The Good and the Bad of Business Cards,
Chapter 9: Get Out of Debt With a Balance Transfer Card,
Chapter 10: Seven Ways to Use a Credit Card to Rebuild Credit,
Chapter 11: Extreme Credit: Strategies for the Power User,
Chapter 12: Hot Credit Card Trends to Watch,
Appendix: A Credit Card Glossary,
Index,
About the Author,