Archive for December, 2007|Monthly archive page
Nick writes with a common question:
I am a NTU student with $15,000 of debt. What is the first step in paying this off?
Debt elimination involves three steps:
- Stop acquiring new debt.
- Establish an emergency fund.
- Implement a debt snowball.
Here’s how to approach each step. (I’ll use Nick’s situation as an example, but the principles apply to everyone.)
Stop acquiring new debt
(This step can be accomplished in an afternoon.)
This may seem self-evident, but the reason your debt is out of control is that you keep adding to it. Stop using credit. Don’t finance anything. Cut up your credit cards.
That last one can be tough. Don’t make excuses. I don’t care that other personal finance sites say that you shouldn’t cut them up. Destroy them. Stop rationalizing that you need them.
- You don’t need credit cards for a safety net.
- You don’t need credit cards for convenience.
- You don’t need credit cards for cash-back bonuses.
You don’t need credit cards at all. If you’re in debt, credit cards are a trap. They only put you deeper in debt. Later, when your debts are gone and your finances are under control, maybe then you can get a credit card. (I don’t carry a personal credit card. I don’t miss having one.)
After you destroy your cards, halt any recurring payments. If you have a gym membership, cancel it. If you automatically renew your World of Warcraft account, cancel it. Cancel anything that automatically charges your credit card. Stop using credit.
Once you’ve done this, call each credit card company in turn. Do not cancel your credit cards (except for those with a zero balance). Instead, ask for a better deal. Find an offer online and use it as a bargaining wedge. Your bank may not agree to match competing offers, but it probably will. It never hurts to ask.
Establish an emergency fund
(This step will probably take several months.)
For some, this is counter-intuitive. Why save before paying off debt? Because if you don’t save first, you’re not going to be able to cope with unexpected expenses. Do not tell yourself that you can keep a credit card for emergencies. Destroy your credit cards; save cash for emergencies.
How much should you save? Ideally, you’d save $1,000 to start. (College students may be able to get by with $500.) This money is for emergencies only. It is not for beer. It is not for shoes. It is not for a Playstation 3. It is to be used when your car dies, or when you break your arm in a touch football game.
Keep this money liquid, but not immediately accessible. Don’t tie your emergency fund to a debit card. Don’t sabotage your efforts by making it easy to spend the money on non-essentials. Consider opening a savings account at an online bank like ING or StandChart. When an emergency arises, you can easily transfer the money to your regular checking account. It’ll be there when you need it, but you won’t be able to spend it spontaneously.
Implement a debt snowball
(This step may require several years.)
After you’ve stopped using credit, and after you’ve saved an emergency fund, then attack your existing debt. Attack it with vigor. Throw whatever you can at it.
Many people say to pay your high interest debts first. There’s no question that this makes the most sense mathematically. But if money were all about math, you wouldn’t have debt in the first place. Money is as much about emotion and psychology as it is about math.
- Order your debts from lowest balance to highest balance.
- Designate a certain amount of money to pay toward debts each month.
- Pay the minimum payment on all debts except for the one with the lowest balance.
- Throw every other penny at the debt with the lowest balance.
- When that debt is gone, do not alter the monthly amount used to pay debts, but throw all you can at the debt with the next-lowest balance.
I’m a huge fan of the debt snowball. It still takes time to pay off your debts, but you can see results almost immediately.
You can do other things to improve your money situation while you’re working on these three steps.
First, focus on the fundamental personal finance equation: to pay off debt, or to save money, or to accumulate wealth, you must spend less than you earn.
Curb your spending. Re-learn frugal habits. (Frugality is something with which most college students are all too familiar.) You can find some great ideas in the archives of this site. Also check Frugal for Life.
While you work to spend less, do what you can to increase your income. If possible, sell some of the stuff you bought when you got into debt. Get an extra job. (But don’t neglect your studies for the sake of earning more. Your studies are most important.)
Finally, go to your local public library and borrow Dave Ramsey’s The Total Money Makeover. Don’t be put off by the title — this is a fantastic guide to getting out of debt and developing good money habits. I rave about it often, but that’s because it has done so much to help my own personal finances. After you’ve finished, return it and borrow another book about money.
The most important thing is to start now. Don’t start tomorrow. Don’t start next week. Start tackling your debt now. Your older self will thank you.
There was a period in my life when I had a lot of problems with sleep. It took me very long to fall asleep, I was easily awaken, and I simply wasn’t getting enough of rest at night. I didn’t want to take medication and this led me to learn several tips and tricks that really helped me to overcome my insomnia. Some of these tips I try to follow regularly.
- Don’t worry about not getting enough sleep. Try not to worry about how much you sleep. Such worrying can start a cycle of negative thoughts that contribute to a condition, known as “learned insomnia”. Learned insomnia occurs when you worry so much about whether or not you will be able to get adequate sleep, that the bedtime rituals and behavior actually trigger insomnia.
- Don’t force yourself to sleep. The very attempt of trying to do so actually awakes you, making it more difficult to sleep.
- Go to bed only when you are feeling really tired and sleepy.
- Don’t look at the alarm clock at night. Looking at the clock promotes increased anxiety and obsession about time.
- Body-heating procedures. Some studies suggest that soaking in hot water before going to bed can ease the transition into a deeper sleep.
- Avoid oversleep. Don’t oversleep to make up for a poor night’s sleep. Doing so for even a couple of days can reset your body clock and make it harder for you to sleep at night.
- Sex. Sex is a well-known nighttime stress reliever. Healthy sex life enhances your relationship, relaxes your body, releases ‘happy’ chemicals, and even promotes wellness. And it welcomes sleep.
- Avoid alcohol as a sleeping aid. Avoid the use of alcohol in the late evening. The most common myth found among people is that they believe alcohol helps in the sleep. But the fact is alcohol may initially act as sedative, but it produces a number of sleep-impairing effects in the long run.
- Associate your bed and bedroom with sleep and sex only. Don’t watch TV, eat, or read in bed. Although these things help some people sleep, they can also give your brain the idea that bed isn’t just for sleeping – and this can keep you awake.
- Naps. If you suffer from insomnia, try not taking a nap. If the goal is to sleep more during the night, napping may steal hours desired later on. If you’re a regular napper, and experiencing difficulty falling or staying asleep at night, give up the nap and see what happens.
Written by C. Simmons of HealthAssist.net
It is known by some, but not all, that businesses pay fees in order to accept credit cards as a form of payment. In fact, over 7 million merchants in the U.S. accept credit cards. During 2006 they collectively paid over 30 billion in fees to offer customers that convenience.
Despite the size of the industry, its a mystery to most as to who is pocketing these billions of dollars in fees and why it has to be so unbelievably complicated. I had a CPA tell me the other day, “I’m a smart guy. I understand numbers, pricing and reconciliation, but for whatever reason I just cannot get my head around credit card processing fees.” He’s not alone. Hopefully this article will clear up some of that confusion as I provide some context about where credit card fees come from, who’s making the money, and how fees and rates are determined.
Banks make roughly 80% of all credit card processing fees
Yes, banks are the biggest benefactors of consumers using plastic. Banks co-issue debit and credit cards with Visa and or MasterCard (AMEX and DISV don’t issue cards through banks). Visa and MasterCard are essentially membership associations owned by the issuing banks, and collectively own about 70% of the market. For example, Visa is a membership association of over 13,000 banks nationwide.
Banks make money every time a card they issued is used to purchase something. For example, let’s assume that a business is paying an effective rate of 3.5% to accept credit cards (that 3.5% is usually comprised of a discount rate and a per transaction fee but I just used a flat rate for simplification purposes). Roughly 80% of that 3.5% is going to the issuing bank. The rest of the 20% is divided among Visa or MasterCard, the credit card processor, and if there is one, the Independent Sales Organization (ISO).
How do banks justify their fees?
Credit card usage has seen explosive growth in the past 20 years for a number of reasons. Consumers get 15 to 45 days to pay original purchases, rewards and other perks, a line of credit for extra spending power, fraud protection, a monthly accounting of all purchases, and plastic is more convenient than cash or check.
All of these conveniences cost banks money. They have costs associated with fraud, bad debt, customer support, rewards and other perks, and float (they pay for your purchases before you pay them). Putting two and two together here on the creation and payment of fees, banks come up with rewards programs but merchants end up picking up their tab!
Continuing our example, if you buy movie tickets for $20 and the movie theater is paying 3.5%, the bank that issued that credit card would make $0.56 ($20 x 3.5% = $0.70, x 80% equals $0.56). Visa and MasterCard add their respective fees of .0925% and .0950% on top of what the banks charge (Note: that’s 9.25 and 9.50 basis points. 100 basis points equals 1%). Adding the fees from the bank and Visa or MasterCard together form what is called ‘interchange’.
You now understand why you find a credit card offer in your mailbox everyday. Outside of the 18% interest rates, annual fees, and late fees, being a card issuer is a lucrative business! Banks are making money on both the front and back end.
That seems simple enough, why does everyone say it’s so complex?
There are over 100 different interchange ‘rates’ or ‘categories’. The particular rate that is charged on any given transaction depends on a number of variables, including:
1) The type of card that is used in the transaction i.e. debit, credit, rewards, or business card, international, etc.
2) Where the card is used i.e. restaurant, retail, gas, business to business, ecommerce, etc.
3) The method of usage i.e. swiped, over the phone, or via ecommerce.
4) What information the business captures during the transaction i.e. name, address, tax ID, tax amount, unit description, etc. (the information required is a whole other layer of complexity).
5) When the transaction is submitted to the processor for settlement and funds transfer after the initial authorization.
As you can see, it’s a very complicated matrix. Very few people, including those who’ve been in the industry for years, really understand interchange.
Qualifying for different rate categories and getting hit with downgrades can be expensive
Merchants can often do more than they think to better manage the credit card fees they pay. For example, transactions can be ‘downgraded’ when they don’t meet interchange requirements. Reasons for downgrades include not capturing the correct information when processing (such as billing address), settling the transaction after a certain period of time, not swiping the transaction and many more. Learning how to recognize these penalties and then making the appropriate adjustments can help you lower your fees.
One example is if an a restaurant employee hand keys your credit card number into the point of sale system because the magnetic strip can’t be read, the transaction falls into a different rate category . The transaction is penalized because ‘non swiped’ transactions carry more risk and therefore higher interchange fees. The increase in rate can be significant ranging from 30 basis points to 1.6%, or more. Actual rates of course vary according to the fee structure you have with your existing provider.
Different rate categories and downgrades are the dirty little secret for merchant service providers. It’s where they make most of their margin because they offer artificially low rates and don’t disclose higher market ups on transactions that don’t fall into a specific rate category. Too many merchants fall for this and think their paying the single, highly competitive rate that was advertised.
A quick search of merchant service providers will demonstrate that non disclosure of fees is a standard practice. See two examples here.
Your undecipherable monthly credit card statement
As icing on the cake, the unreadable format most merchant service providers use to present this information to you on a monthly basis doesn’t help. Of course, the format used is not because they have no other option, it’s because that’s what makes them the most amount of money.
The frustration with credit card fees
Some merchants accept credit cards because they find them to be a easier method of accepting money from customers. Most, however, accept them because they have no other choice and the costs can be significant. Many merchants and advocacy groups have cried foul lately with Visa and MasterCard increasing ‘interchange’ fees over 117% in the past five years while maintaining over 70% market share. The Card Associations have been accused of being monopolistic.
Interchange has come under increased pressure lately
A few years ago, Wal-Mart won a class action lawsuit against Visa and MasterCard. They claimed that interchange was being improperly priced with debit cards having the same interchange rate as credit cards. Among other things, they argued that debit cards should be have a lower interchange rate because money comes directly out of the account versus a credit card where there is 15 to 45 days between purchase and payment. The courts agreed and awarded Wal-Mart and other retailers billions of dollars in compensatory damages. There are currently a number of other legal battles against the Card Associations surrounding interchange.
Credit card is amazingly easy to get into and almost seemingly impossible to get out of. When we’re young we naively get a credit card in hopes of building our credit, purchase a few things here and there with the best intentions of paying off our balance at the end of the month. We end up charging more and more because we like our new found purchasing power and really don’t consider the debt that we’re building up. Before we know it, we have thousands of dollars in credit card debt and it seems that the light at the end of the tunnel has been shut off. Fortunately, there’s hope to be had. You can pay off your credit card debt in a 4th the time you normally would.The problem with credit card debt is compound interest. With many credit cards you will be paying anywhere from 19% to 29% in interest, this will take you to the cleaners financially if you let it. Most of your payment will be going toward the interest and very little of it will be going toward your principal balance making it take seemingly forever to pay off your debt. Since most people are paying minimum payments or close to it on their credit card debt, it will often take them decades to get out of their credit card debt.
If you want to say goodbye to the balance on your Visa once and for all, the first thing you have to do is stop borrowing on it. You’ll never pay it off if you keep charging things up on it. Cut it up, or put it in water and freeze it so that you’ll not be tempted to use the card again. If you send in $100 a month on a credit card debt, change it so that you pay $50 every 14 days on your credit card. This is called the Eisenson method, essentially it will make it so that you’re paying extra payments without even realizing it. Over the course of the year, you’ll end up paying two extra payments which will go completely toward the principal balance of the credit card.
It’s shocking how fast you can get out of debt using this method to pay off your credit cards. Since the interest rates are so high on your debt, paying down extra on the principal will dramatically reduce the amount of interest you pay, in fact you’ll likely be able to get out of your credit card debt in 1/4th the time that it normally would.
The US sub-prime mortgage crisis has lead to plunging property prices, a slowdown in the US economy, and billions in losses by banks. It stems from a fundamental change in the way mortgages are funded.