I heard someone tell me that they don’t need an emergency fund because they have enough cash advance credit limit on their credit cards to use them as emergency funds. While the statement can be true, it is a response of a typical financially irresponsible person. The general rule of thumb is to have at least 8-10 months of monthly expenses saved up for emergency purposes. Although I have $120,000 worth of credit limit, I would never use that as my go-to source of my emergency fund.

Using credit cards as emergency funds is a bad idea for 5 reasons.

1. Interest rates on cash advance transactions are super high. They range from 10% up to almost 30%. You’re essentially borrowing money at those rates.
2. There are fees associated with cash advance. Not only are the interest rates are high, you have to pay an initial transaction fee, which can be as much as 3% of the amount.
3. You incur debt. Debt is not a good thing. You should avoid debt at all cost, especially of the credit card variety. I believe our government is excellent at this practice with ever so increasing debt ceiling. Don’t follow suit.
4. Learn good savings practice by actually saving money. Learn to become financially responsible.
5. Credit scores go down. Your FICO score is heavily based on your utilization rate. If your debt to available credit limit is higher than 30%, your scores will suffer.

Bonus – Readers’ Additions

1. It takes a lot longer to pay off a credit card at huge interest rates than it does to replenish your emergency fund should you need it.

So, be responsible and start saving for emergency funds. Don’t use credit cards.

photo: emergency, David Shankbone

By now, most of you have probably heard of the famous Debt Snowball method, developed by Dave Ramsey himself. The method is designed to help those in debt to get out of debt as quickly as possible. Personally, I think this is a great method with very high success rate and I support it 100%. However, it simply is not the most economical method to eliminate debt. You will often end up paying more in interest and will sometimes even take you longer than the traditional ways of eliminating debt.

Debt Snowball
You see, the debt snowball method calls for eliminating the debt that has the least outstanding balance, regardless of interest rate or terms of the loan. For example, if you have two credit cards with debt you want to eliminate, you would put maximum effort in paying down the card with the lower balance off first while paying just the minimum amount due on the other card. When the first card is finally paid off, then you would proceed in putting maximum effort in paying down on the remaining card.

The Debt Snowball method does not account for the interest rate at all. If Credit Card A has a balance of $5,000 with 10% interest and Credit Card B has a balance of $10,000 with 20% interest, it doesn’t make any sense to pay off credit card A first. But the debt snowball method calls for that. On the other hand, if you pay off Credit Card B first, then you will save more by paying less interest.

So, why does Dave Ramsey tell us to pay off Credit Card A first, the card with lower balance and lower interest rate in this scenario? Financially, it just doesn’t make any sense.

Financial Responsibility
It can be safely assumed that if you carry two credit balances that total $15,000 in debt, then you are a financially irresponsible person. A financially responsible person would not be put themselves in a situation where they would be in such a big debt, especially of the credit card variety. Additionally, in order to become debt free after putting yourself in debt to begin with, it requires even greater financial responsibility. You could apply for a free balance transfer credit card and transfer the balances to avoid paying interest for the time being, but without financial responsibility, you could end up worse than you were before. Odds would indicate that such person would not be able to come out debt by their own accord, without getting help from someone else. That’s where the Debt Snowball method comes in.

It’s All Mental
Debt elimination, along with other addiction like smoking and gambling requires a great mental advantage in order to become successful. You just have to force yourself to do it! Dave Ramsey insists that personal finance is 80% behavioral and 20% knowledge. With debt snowball, by eliminating the one with the lowest debt, the gratification of having some sort of success will come sooner, which will motivate you to keep going. In contrast, if the highest debt balance has the highest interest rate as well, it will take longer time before fully eliminating it. Not seeing the results right away may sway you into giving up prematurely.

It might be a bad example with only two credit cards, but imagine if you had 12 credit cards with debt in all cards. Trying to eliminate the debt all at once will be a struggle. But by attacking the card with the lowest balance first will result in a higher rate of success.

What are your thoughts on Dave Ramsey’s Debt Snowball method? Have you tried it? Does it work?

Balance transfer cards can be godsend for those who have outstanding credit card debt, especially if the fee to transfer the balance is waived and the interest on the transferred balance is 0%. There are many good promotions out there that you can take advantage of today. However, along with everything else in life, it is vital that you make sure to read all the fine print before applying.

Zero percent balance transfer cards are helpful because you save money by not having to pay any interest on the balance. But at the same time, you need to be responsible and have a plan of attack in eliminating the credit card debt. Without a plan of attack, it could put yourself in a worse financial situation than you began with. That includes reading and understanding the fine print and adjust your plan of attack accordingly.

Fine Prints To Look For

1. Interest Rate After Promotional Period – During the promotional period, it’s zero percent (that’s why you signed up remember?). But after this period ends, all bets are off. The interest rates can go up as high as 22% or even higher. Discover® More Card – $0 Balance Transfer Fee provided the following fine print:

0% intro APR for 12 months from date of first transfer, for transfers under this offer that post to your account by July 10, 2012. After the intro APR expires, your APR will be 10.99% to 19.99% based on your creditworthiness. This APR will vary with the market based on the Prime Rate. (emphasis added)

Similarly, Citi® Platinum Select® MasterCard® had almost identical fine print:

0% introductory APR for 21 months from date of account opening. After that, your APR will be 11.99%, 16.99%, or 21.99%, based on your creditworthiness.  These APRs will vary with the market based on the Prime Rate.

Because the interest rates are so high after the promotional period of 0% on balance transfer, it is vital that you do not have any balance when the 0% period expires. Either pay off your balance or transfer to another 0% balance transfer card.

2. Penalty For Late Payment – Understandably, taking advantage of this promotion requires the user to be responsible with the payments. If there is a single late payment, there will be a severe penalty APR that is much higher than the normal APR. Discover Card had the following in their fine print:

From up to 15.99% to up to 24.99% based on your creditworthiness and other factors. This APR will vary with the market based on the Prime Rate. This APR may be applied to new purchases and balance transfers if you make a late payment. If your APRs for new purchases and balance transfers are increased for a late payment, the Penalty APR will apply indefinitely.

In addition to this penalty, the credit card also holds the right to end any introductory APR on purchases and balances when a late payment is made. So, be responsible and not be late with any of your payments. Should you find yourself in this predicament, one thing you can do is give your credit card company a call and request a waiver on the penalty interest rate. They may or may not accommodate, but the worst thing they can do is say “No”.

Have you been burned before for not reading all the fine print when making a purchase or applying for something?

photo: charles, my credit cards

After I had signed up for my 12th credit card, I needed a spreadsheet to keep track of all of them. I needed a document that included all the due dates of each of the credit cards. There’s no way I would be able to remember without writing them down somewhere. So now that each of these credit cards billing cycle is coming to and end, I had to link my accounts to my checking account so I can easily make payments online. The process for doing this was very simple. All I had to do was get my checkbook out and enter the bank name, bank routing number, account number, and my name on my bank account and it would be linked almost instantly. Some accounts required 3-4 days to confirm that account. Then it got me thinking. I could have entered anyone’s information and it would have worked! If I had a copy of someone’s check, every single piece of information required to link it to my credit card account is on the check!

Will this work? Can someone else use one of my voided or used checks and steal my money, or even steal my identity? The quick answer is YES, but it’s not likely.

Although only a few information is required to link your checking account, they do go through a series of account verification process which may include permanent address, social security number, and date of birth among others. Since your credit card company and your checking account issuing bank already have this information, the process of verification and confirmation will be easy and quick. Sometimes, in addition, the credit card bank will make two small deposits to your bank account to verify that it is indeed your bank account you’re trying to link to. They will take away the two deposits after the bank is verified and confirmed.

Avoid Identity Theft
Identity thieves make a living by stealing personal information from people and using that information to open new credit or to make loans. If they get access to your social security number, name, address, and date of birth, then they can steal your identity. Over 10 million Americans every year are victims of some sort of identity theft. So be cautious with your information and make sure you just don’t leave them anywhere. To avoid your identity from being stolen, follow these steps always:

1. Opt out of paper statements. I like to do all my banking online and opt out of paper statements. That way, I don’t have any paper trail of any documents that could expose my personal information. I just look at them online and be done with it. If they send me documents, I either store them away securely or shred them completely.
2. Get free credit report every 4 months. There are three major credit bureaus and every person is allowed one free credit report from each of these bureaus every year. For example, you can request one free report from Experian in January, Equifax in May, and TransUnion in September and repeat this process every year. Make sure there aren’t any unusual account openings in each of the reports.
3. Never click on email links. Phishing scams are become ever so popular and it’s gaining in popularity because it’s working. Scammers are becoming more clever to entice you to give them your information. When you receive an email from your bank or credit card or any other personal accounts, and they ask you to click on any link, don’t do it. Always type in the URL directly using your browser.

Avoid Credit Card Fraud
Thieves are also stealing through credit card frauds. By definition, if an unauthorized user is using a credit card that does not belong to them, they are committing a credit card fraud. If a transaction is made using your credit card and you did not authorize it, it’s credit card fraud. Follow these tips to avoid becoming a credit card fraud victim:

1. Only carry 2 credit cards with you at any given time. I have 12 credit cards and if I carried them all in my wallet and lost my wallet, then I would find myself in a nightmare situation. Someone had left their wallet at my church this past Sunday, with driver’s license and 5 credit cards. No one knew who he was and I’m not sure whether he recovered his wallet or not, but I’m sure he is/went through hell because of it.
2. Don’t peel off the activation sticker. If your wallet is stolen and the thief sees the activation sticker on the credit cards, the chance of them not using the credit card is increased. It’s not foolproof but it could act as a deterrent.
3. Check your accounts regularly, at least once a week. Sometimes, when a credit card is lost or stolen, the victim doesn’t realize it until it’s too late. When I lost my two credit cards at once one day, I didn’t know until I received a fraud alert phone call from both my credit card companies. Check your accounts regularly and make sure there are no unusual transactions made. Sometimes, thieves will make small transactions to make sure the account is still active before making big ones.

Were you once a victim of identity theft or credit card fraud? How did you handle it?

MoneyGreenLife.com was featured in the following carnival: Yakezie Carnival – Credit Cards Edition

]]> http://www.moneygreenlife.com/can-my-identity-be-stolen-using-information-on-my-bank-check/feed/ 1 http://www.moneygreenlife.com/how-to-take-advantage-of-zero-percent-balance-transfer-credit-cards/ http://www.moneygreenlife.com/how-to-take-advantage-of-zero-percent-balance-transfer-credit-cards/#comments Thu, 12 Jan 2012 16:49:23 +0000 Charles http://www.moneygreenlife.com/?p=3464

Zero percent balance transfer credit cards can be a good way to save money. If you have a big balance on any of your current credit cards, transferring the balance over to a zero percent credit, the savings from not having to pay high interest can really add up. If you have $5,000 balance with 20% APR on your credit card, you can save up to $1,000 in interests alone in one year. I’m sure you think of quite a few ways to spend that $1,000 elsewhere.

How Does Zero Percent Balance Transfer Work?
Depending on the credit card, there’s a balance transfer fee, typically anywhere from 3-6% of the transfer amount. So, if you’re transferring $5,000 over to your new credit card, the fee can be $60-120. If there’s no balance fee, then it’s completely free! That’s all there is to it. There’s no catch!

Things To Be Wary Of
Although the interest rate on the balance transfer is zero, that’s only during the promotional period. After this promotional period ends, the APR will return to the normal rates, which can be as high as 20%, sometimes even higher. So be cautious of the length of the promotional length and also the post-promotion APR. If the promotional period is less than 12 months, I would stay away from it and look for other competing cards. Make sure you read the fine print before applying for any cards.

Be Responsible
With any credit cards, if you’re not careful, you can put yourself in great financial danger. Don’t just sign up for a zero balance transfer credit cards without a game plan. Always have a purpose and goal and always stick to it. A friend who made plenty of mistakes after became debt free. During that time, he took advantage of such credit card. He accumulated a pretty decent credit card debt over the years and was looking for ways to help him pay it off quicker. Once he transferred all of the balance to his new credit card, he “forgot” about the purpose and reason when he realized that the interest on his new balance was 0%. Instead of making payments to reduce his debt, he made minimum payments and pocketed the rest. All of sudden, he had “extra” spending money. After the promotional period ended, the normal interest rate kicked in at 20.99%, higher than his previous card. Had he stuck with his original plan, he could have been credit card debt free by the time the promotional period ended. Instead he was back to square one and a year wasted.

Current Promotions
There are a few good current  promotions going on right now. Do your own diligence and make sure the card you choose is the right card for you.

• Discover® More Card – $0 Balance Transfer Fee!- Not only will you save money from 0% interest, you will also save money from not having to pay any balance transfer fees with this card. 0 fee on balance transfer and 0% APR on balance transfers for 12 months. Also enjoy 0% APR on any purchases made with this card for 12 months as well! There is no annual fee with this card. For your information, there are a few variations of the Discover More Card. To ensure you receive this promotion, please click on the link provided. When you go to Discovercard.com website directly, all the promotions are not clearly outlined and you risk of signing up for the wrong card.

There’s been so many good credit card promotions out there lately that I just had to take advantage of them all. Southwest Visa was giving away 50,000 rapid rewards points after first purchase, good for two domestic round trip flights. I signed up for two of these, one being a business account. This comes in very handy because my wife and I plan on taking a trip to Hawaii this coming summer to celebrate our 1 year anniversary. We’ll fly out to Las Vegas using these points and from there fly out to Honolulu. That will also be free because I signed up for Hawaiian Airlines credit card where I’ll receive 35,000 points, good for 1 round trip flight from mainland. I also signed up for two of these. That’ll pretty much take care of our travel expenses.

For our hotel stay, I signed up for Hilton credit cards where I’ll receive 60,000 HHonors points. Depending on the quality of the hotel, I can use these points for up to 6 nights. I signed up for myself and one for my wife so we have two of these cards as well. I also got approved for Marriott credit card where I’ll receive 50,000 points. These points will also get me up to a few nights for free. All together, including my everyday Discover Card, Chase Freedom Mastercard, and my new AMEX Everyday card, I have a total of 10 credit cards and my wife has 2 cards under her name, giving us a grand total of 12 cards. However, I still advocate having only three or four credit cards at a time as a general rule of thumb.

Now, I don’t recommend just anyone to go crazy with credit card signups. If you don’t know what you’re doing and if you’re not careful, things can get out of control pretty quick. The last thing you want is to find yourself in a massive credit card debt. All together, I have over $120,000 in credit limit now. That’s insane!

Things To Consider
Before you apply for any credit cards, make sure you consider the following things:

1. Credit Score – Every time you apply for a new credit card, your credit score will take a hit. Typically, they’ll be anywhere from 3-8 points for each hard pull in your credit report. Make sure you have enough wiggle room in your score to take a few points off of your score. My credit score was 830 from Experian so I was still able to afford to lose a few points from my overall score without compromising any future borrowing power.

2. Issuing Bank – Most banks only allow a few credit cards to be opened at any given time. If you already have three cards from Chase, then you may be declined if you were to apply for another Chase card, despite your credit score. If you already have three cards from Chase, think about opening a card from Citi or Bank of America.

3. Promotions – Oftentimes, you can take advantage of a promotion by signing up and spending a required amount of money within a certain time period. Make sure you read the fine print and that you are able to meet the requirements to release the promotion. Some cards have as much as $10,000 spending limit in order to receive the promotion.

4. Canceling Cards – If you change your mind and need to cancel your cards, you should wait at least 6 months from your apply date. If you cancel too early, it could lower your score by a few points. If you wait at least 6 months, there should be no penalty in your score. Also, if you cancel too soon, you could be blacklisted from the issuing bank. The longer you hold on to the card, the better it is. I don’t plan on keeping all 12 cards forever. I will probably cancel a few cards within the next twelve months.

I signed up for American Express Blue Cash Everyday Card a few weeks back and took advantage of the $100 cash back offer. When I clicked on the link, I was given an option to choose between two cards: Blue Cash Everyday or Blue Cash Preferred. They’re basically identical cards but the Preferred Card has a $75 annual fee while the Everyday card has no annual fee. The differences come in the rewards the cards provide. The new and improved rewards program from American Express is excellent and I believe it is superior to ShopDiscover by Discover and Ultimate Rewards program by Chase.

With the Everday Card, you will receive 3% cash back at supermarkets, 2% cash back at gas stations and department stores, and 1% cash back everywhere else. With the Preferred Card, you will receive 6% at supermarkets and 3% at gas station and department stores, and 1% everywhere else. They both sound a pretty good rewards program, but which card is better?

It all depends on how much you spend annually. If you spend enough to recoup the $75 annual fee, then the Preferred Card is a better option. Otherwise, the Everyday Card might be the better option. I decided on the Everyday Card because I didn’t want to deal with the annual fee and have to worry whether I’m spending enough. But let’s take a look at the actual breakdown to see which card is better.

Over the past 12 months, I spent about $25,000 in credit card purchases. $4,500 was spent towards gas and $2,800 at grocery stores. Our shopping at department stores was negligible. Assuming I spend about the same amount this coming year, let’s compare the numbers for both cards.

Using Everyday Card, I would receive ($4,500 x 2%) + ($2,800 x 3%) + ($17,700 x 1%) =  $351 total cash back.

Using Preferred Card, I would receive ($4,500 x 3%) + ($2,800 x 6%) + ($17,700 x 1%) – ($75 fee) =  $405 total cash back.

So, using my last year’s spending metrics, choosing the Preferred Card would provide me with $54 more cash back every year. On top of that, the Preferred Card is currently offering $150 sign up bonus compared to only $100 for Everyday Card.

Preferred Card is better for me. Which card is better for you?

My friend lost her debit card this past weekend. It was horrific due to the Veteran Day weekend and the thief managed to spend over $1,000 before running out of funds in my friend’s checking account. Although more and more people are choosing to use debit cards over credit cards, this story is a prime example why credit cards should be a preferred method of use.

When her checking account over-drafted, she had no money to spend for the entire weekend, due to banks closing for the holiday. Although she was able to resolve her situation as soon as she could, it could have been a lot worse just as easily. Had she lost her credit card instead, she would have been in far better situation and would still have the funds for spending.

In case you find yourself in similar situation, follow these guidelines and it should help you along the way.

1. Report it right away – Call your bank and let them know as soon as possible. Under the federal law, if you report that the card is lost within 2 business days, the most you will liable for the fraudulent transactions is $50. If you report it after 2 days, you could be liable for up to $500.  If you wait even longer than that (60 days), you could be liable for all transactions. However, if you report it prior to any fraudulent transactions, then you will be liable for $0. So, the best thing is to report it right away.
2. Keep all receipts – When you receive your monthly statement, cross check what the statement indicates against all your receipts. If you suspect any unauthorized activity, report it to your bank right away. Just because no activity was noticed when the card was lost does not mean that the thief will not use it later on in time. You can use online services such as shoeboxed to help you be more organized with your receipts.
3. Carry a backup or secondary card separately – If you only have one account and you lose the card, you will have no money to spend, unless you have extra cash lying around. Having a separate secondary card allows you to keep spending money without interruption in case you lose one of your cards. Perhaps you can keep the back up card in your car or at home so it’s separate from your primary card.
4. Keep your cards separate – If you keep everything in one place, the thief will know your home address, your full name, date of birth, and your card information. They can do a lot of damage in terms of identity theft and fraudulent expenditures. By keeping them separate, chances of you losing everything at once becomes minimized.

Have you lost your cards before? How did you handle it?

When I was a student at my college 15 years ago, my campus was flooded with credit card vendors, offering free T-shirts and other goodies to woo the students into signing up for credit cards. I must have signed up for at least 5 cards during my freshmen year to get the free stuff. But that was pre Credit Card Act that was passed in 2010. Now, you have to be at least 21 years old to sign up for a credit card outright. If you’re under 21, you need a co-signer, mainly your parents, unless you can prove to the credit card companies that you are capable of making payments out of your own hard earned money. Although it’s becoming harder for students to build credit scores, there are still ways available for students to get a jump start on the process.

Even if you’re over 21, you can still have one of your parents be a co-signer. Better yet, you can be the co-signer and piggyback off of their credit score. Then you will receive a piggyback effect on your score from your parent’s score.  Make sure to pay off all balance on time, without fail. And I mean ALL of the balance, not just the minimum payment. Don’t carry any balance over to the next month. If you find yourself doing this, it will be very hard for you to recover and you should cancel your credit card immediately before it becomes too late. Studies show that less than 50% of all student credit card accounts are paid off each and every month.

Sign up for one card only. Since you have no real credit established, you will drastically hurt your score by opening too many credit cards within a short period of time. Wait at least one year before opening up your second credit card account if you need to.

Here are some student cards that are available currently:

Discover Student Card – Receive $25 Cash Back Bonus – You will receive $25 bonus after your first purchase if made within 90 days of approval. With Discover Student Card, you will enjoy all the perks, including rewards program. However, you will receive 1% cashback bonus after making $3,000 in annual purchases and only 0.25% bonus before $3,000. You will enjoy 5% cash back on rotating categories which include gas, groceries, department stores, etc.

Citi Forward Card For College Students – Enjoy 5x rewards points for every $1 spent at restaurants, on books, movies and music. Earn 1,000 points for signing up for paperless statements and 100 bonus points every month you pay your bill on time without going over the spending limit.

I’ve been using Chase Freedom Mastercard for my gas purchases for many years now. I first signed up when they used to offer 5% cash back on gas purchases, but those days are long gone now. I now receive 1% back on gas and will be switching to American Express Blue Cash card. Blue Cash offers 3% cash back at supermarket purchases, 2% cash back on gas purchases, and 1% back on everything else. On top of that, for a limited time, you will receive an additional $100 back when you spend $1,000 within the first 3 months of signing up. There is no annual fee associated with this card so there is nothing to lose. In fact, it’s all gain and them some.