Advanced Personal Finance

Every time I think the level of consumer credit in the U.S. can’t get much worse, it does just that. After reading this report about the 7.4% increase in credit card debt in November, I’m starting to wonder again.

For years it seems Americans relied on their houses as an ATM they happened to live in. Cash-out refinances made up about 50% of mortgages issued by Freddie Mac in 2006. By the beginning of 2007, 82% of mortgages issued by Freddie Mac were cash-out.

Now apparently we’ve switched back to our old stand by, credit cards. As the refinance well dries up, more people are needing to carry higher balances to support their lifestyle or cover an emergency in their life. I wonder though, how much longer this can go on.

What’s next?

After the house is mortgaged to the hilt and the credit cards are maxed, what will people do? I wonder what the next source of consumer debt will be, because I’m sure of two things. One, Americans don’t seem capable of reigning in spending to any great degree. And, two, where there is demand, there is supply. Someone will market a product that will allow people to increase their debt load.

So what’s next - widespread car pawning?

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I don’t write resolutions at the beginning of the new year. In fact, I’m kind of anti-goal in general, but that’s a topic for another post. Even so, it does help me to periodically remind myself to not focus on things related to personal finance that I can’t control.

Things fall into two categories for me - things I can affect and things I cannot. Things I can affect largely end at my skin and I find putting energy into things I cannot affect is just a waste of effort. I didn’t come to this conclusion easily or early in my life and it’s something I can forget. But it helps to remind myself from time to time.

Here are just a couple of things I cannot affect I’ve kicked around in my own head recently.

1. Interest rates. Regardless of what I think about the Fed, foreign investors, or the U.S. government, I know without any doubt I don’t have any bearing on interest rates. Those other groups of people do, but I don’t. Thinking about how this or that event might affect rates or making investments based on what direction I think rates are going to move isn’t smart for me. None of this means I don’t care what interest rates are. Far from it. As a soon-to-be mortgagee, I care deeply. I just don’t get to decide what rate I get, so why worry about it.
2. Economic indicators. There are as many economic indicators as there are economists - and that’s a lot. Whether it’s inflation, job growth, GDP or whatever, I know what I think about them means nothing. Low unemployment rates mean nothing if you’re unemployed. You have no say on unemployment. You most certainly do have a say in whether or not you are unemployed. Focus on what you can do and ignore the rest.
3. Housing prices. If there is one thing on this list I should care about, it’s this one. We recently sold our house very quickly, but for arguably less money than we could have a year ago. Does that matter? Not a bit. We weren’t selling our house a year ago; we sold it last month. Focusing on or worry about the value of your home doesn’t do any good. In a market like this, it only makes you miserable. What’s the point of that?
4. Gas prices. I don’t drive much and that’s about to change to ‘almost none.’ Nevertheless, even if I did drive more, I wouldn’t complain about gas prices. What good does it do? What are you going to do - drive less to work? not pick up the kids after school? visit your in-laws less? Well, maybe that last one, but the fact is most people don’t do a lot of discretionary driving. You can drive a more fuel efficient car, properly inflate your tires, and combine trips. You most definitely can’t change gas prices by boycotting or complaining.
5. The direction of the stock market. If you think you know what direction the stock market is going in tomorrow, this week, or this year, you’re deluding yourself. I don’t care who you are - you can’t predict it and you can’t affect it. What you can do is invest in it, month after month, year after year. Over the long haul, you’ll make a great deal of money. In the short run, who cares?
6. Taxes. I don’t know whether my personal taxes will go up or down this year. I do know I’ll be paying taxes. Do I get a say in how much? For all practical purposes, no. Worrying about taxes is pointless. (Planning for taxes, however, is decidedly not.)

I don’t know about anyone else, but I try to spend my time and effort on things I can do something about. And these things don’t fall into that category. Shouting at the tide never works. You just end up wet and hoarse.

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Just a quick reminder for those who traveled outside the U.S. during the period February, 1996 through November, 2006 and used a major credit card to make purchases, you may file a claim to have some credit card fees reimbursed.

As part of a class-action settlement, Mastercard and Visa are refunding a minimum of $25 to people who used their cards on foreign travel during that time period.  See ccfsettlement.com for full details.

As I read it, you can either file to have your actual fees reimbursed (if you have the supporting documentation) or a flat minimum of $25.

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I find it amazing what banks and credit card companies will put in advertisements.

The other day I saw a commercial for a credit card offered by a well-known bank. I forget which one or I’d say. Anyway, the gist of the ad was that, due to there undying benevolence, this bank wouldn’t charge a fee for going over your credit limit.

Excuse me, but what’s a credit limit for, anyway? It’s been a while since I had to concern myself with my credit limit (though don’t think I never have had to - I did) but what are these for if you can charge stuff in excess of the limit? I guess the honest answer is “they’re a method banks use to extract more cash from consumers.”

I just don’t get it.

I also have another observation. Have you ever noticed that credit cards are an extremely competitive business in that they’ll offer all kinds of incentives to get you to sign up for one, but no one competes on price (APR)? Aside from one of those incentives in the form of a short-term 0% balance transfer or 0% on purchases for a year, that is. Why, if competition is so fierce, do banks not compete this way?

The answer lies, once again, in economic behavior. See, when people consider whether or not to sign up for a credit card, they never see themselves carrying a balance. They believe they’ll pay off their statement every month. Except, for a sadly large percentage of people, they do carry a balance, at least occasionally.

Instead of considering the actual cost of that credit, people sign up for the free t-shirt or teddy bear. It’s proximity. The t-shirt is here, now. Finance charges are only a possible outcome; and anyway, that’s months from now.

Since people don’t shop for credit cards based on actual cost, banks don’t compete on it.

Those crafty credit card companies.

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(Note: This is NOT a paid post)

Capital One has rolled out a new service to try to get you to use their rewards credit card above all your others. It’s called Card Lab and it allows you to customize the credit card rewards to your specifications. After checking it out (though I didn’t apply for a card), I found the Card Lab to be a really cool idea, well executed.

Power to the people

I read about how credit card companies are trying to get people to use their reward cards rather than everybody else’s. They call it ‘getting to the top of your wallet.’ Anybody who uses rewards credit cards (and if you pay off your balance every month, there’s no reason you shouldn’t) knows that certain cards are superior to others in various situations. Some cards offer better rewards at gas stations, some give you rewards from buying from certain merchants.

Maximizing credit card rewards is almost a sport. Some very popular bloggers have explained how they maximize their rewards and make some pretty decent money doing it. But up until now, you had to play by the banks’ rules.

Not any more…

Without making any judgment about Capital One or their credit cards per se, I can say that their Card Lab concept is pretty cool. They present you with a list of categories (e.g. reward type, interest rate). Within each category, you find various choices.

You select which choice you prefer and as you do so, choices within other categories that are no longer possible grey out. It was easy for me to find my ideal Capital One card - no annual fee, cash rewards with a bonus kicker. I don’t care about interest rate on balance transfers, introductory interest rate, or what the APR actually is.

I’d like to see this catch on with other banks. I’m lazy and something like this could get me into the rewards game more than I am now. Right now, I have a really simple rewards program with USAA that I like. Keeping track of which card to use in which situation is way to much work for me.

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