Advanced Personal Finance

Since writing my post on identity theft for kids, I’ve come across the details of how a parent can request the credit report, if any, of his or her child. This comes from Smart Money.

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Here’s a by-product of the often recited ‘buy everything with a rewards credit card’ advice  - the effect on our children.

My three year old daughter has never known a time without POS terminals at every retailer. We rarely pay for anything with cash. I’m sure if we didn’t teach her otherwise, she’d think you can walk out of a store with anything you want if you just put your little plastic card in the machine.

One of my daughter’s earliest toys was a little cash register with a place where you could slide a fake credit card. We’d play grocery store and when she’d tell me to pay, I’d hand over the card. “Crrredit,” she’d say as she slid the card through the ‘reader.’

She’s since grown up to using the real ones. When we check out at Target, she always puts the card in for me. What’s most disturbing, perhaps, is that she knows exactly which buttons to push on the screen and then ’signs’ for me. I’m sure this is exactly what warms the shrunken hearts of credit card executives everywhere.

Before you think this is a ‘evil credit card company’ story, I’ll be the first to admit I’m completely in charge here. (Ok, as in-charge as the father of a cute little girl can be.) I could pay in cash. I could make sure I conduct the entire transaction myself. But this is the world we live in.

I guess this is why there are so many blog posts out there about teaching kids about money and articles about teaching smart credit card use or why a 1% return can be a good thing. Without a conscious effort on her parents’ part, this little girl could have a seriously warped image of money. More important, she could have a seriously warped image of money’s true worth.

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I am mad as a hornet. My wife went to pay her credit card bill online and realized it was the due date. She dutifully called Citibank to confirm her online payment would post that day. They confirmed that, yes it would, except that only $1,000 of the $1,300 balance could be paid. Back story: We ‘connected’ this card to our checking account with another bank (I would never do traditional banking business with Citibank) so we could pay directly out of it. Because of a delay in this, once before she was charged a late payment fee.

So now we’ll be get hit with finance charges for the unpaid $300 balance. That’s if she was informed correctly and the payment will be processed that day. At this point, I don’t know if any of what she was told by the CSR is correct. It’s quite possible we’ll have to pay a late fee, too. We’ll see.

By the way, it’s not necessary for anybody to point out that she should have paid before the date it was due. It was a legitimate mistake and I’ve made worse. I’ve actually forgotten completely and paid late!

Needless to say, she cancelled the card immediately. I hate you Citibank.

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Suze Orman and a bunch of other personal finance gurus counsel you to not cancel credit card accounts. The reason being it ‘damages’ your FICO credit score. See, when you close accounts, it reduces your available credit. If you have any balances, your ratio of credit used to credit available is higher. That’s bad because if you need a loan, you are charged an interest rate based in part on your FICO score.

I just closed two credit card accounts I’ve had for a little less than a year. I got them both for the free up-front rewards they offered. The AMEX Gold offered the something like $200 in account credit after first purchase (it’s now $250 or a plane ticket). The Citibank card offered $150 in gift cards if I remember right. They’re both gone.

I don’t care what Suze Orman or anybody else says about closing unused credit card accounts. If you’re a responsible person with a good credit profile, you won’t care whether your FICO number dips 15 points for a couple of months. And it only may dip. Depending on your available credit ratio, it might not change at all.

Though the exact formula Fair, Isaac (the company behind FICO) uses to calculate the common FICO is guarded like a state secret, it’s generally agreed it’s composed like this:

As you can see, amounts owed is about a third. This component is really the ratio I talked about earlier - credit used to credit available.

Why not keep the accounts open anyway? They’re only a couple of pieces of plastic, right? Simple - hassle. I don’t want two more cards hanging around. These days, with our second child coming in a couple of months, I’m all about reducing. Reducing clutter around the house, reducing complicated credit card/bill paying strategies to maximize rewards, just reducing.

So regardless of what Suze Orman says, I cut up two credit cards today.

(Graphic courtesy Consumerism Commentary)

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I wasn’t going to ever write about credit card arbitrage, but a couple of fellow PF bloggers have had some experiences within the last week that I felt deserved comment.

First I read Q’s post at $1 Million to My Name about how he’s finally succumbed to the lure of 0% balance transfers. Credit card arbitrage, or 0% balance transfers, are a common way some personal finance-savvy people make a little ‘free’ money. Essentially, you apply for a 0% balance transfer credit card with a large credit limit, borrow the money, then deposit it into a high-interest savings account like INGDirect, Emigrant Direct, and so on. Depending on the amount you borrow, you can make several hundred dollars a month in interest.

I’ve not done this for one main reason - hassle. I don’t want to keep track of a bunch of credit cards I’ve borrowed against. I also don’t want to have to worry about making a mistake somewhere along the way that wipes out all the work doing this. Basically, doing this would complicate my life and I don’t think it’s worth it. The other (much less important to me) reason is that doing this seriously negatively affects your FICO score.

Which brings me to the second reason I finally wrote on the topic - doing credit card arb could cost you in other ways.

Sun at Sun’s Financial Diary came across a Discover card that gives a balance transfer rate of 3.99% APR until 2011. He thinks if he were to apply for the card, his application may very well be denied because he currently plays credit card arb. He’s got balances of $50,000 on various cards.

Something like this might save you much more money but you can’t take advantage of it because you’re in debt for a huge amount of money playing the 0% game. Or what if you suddenly need a car loan you didn’t anticipate? My wife had that experience when she got into a car accident and the insurance company declared her car a total loss.

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