Money magazine’s latest issue has a few interesting writeups. One of them is about whether to pay off your credit card debt or contribute to your companys’ 401k plan.
The article focuses mainly on the math side of the equation. On the one hand, contributing to your 401k and simply paying your credit card minimums results on you paying interests (which works to about 14% these days for the average credit card holder). If you have bad credit, that makes it worse.
The good thing about contributing to your 401k plan is that if your employer matches your contribution, then you will automatically be earning a great return simply from the match (which could be 50% up to the first 6% of salary or more).
Aside from the match, and depending on your investments inside your 401k plan, your 401k could potentially grow, or decline.
Hence, if we look at this situation, it is a rather complex one. It is complex simply because there are many assumptions to be made. What this article fails to point out is that the final decision will more often be based on our attitudes towards credit card debt and saving for retirement. Here are a few questions to ask yourself if you are caught with a decision like that :
1. How did you get into credit card debt?
2. Is your spending out of control?
3. If you pay off your credit card debt, are you likely to get into debt again?
4. Do you have an emergency fund?
5. Are you spending within your means? (somethings running a credit card balance can be a strategic decision).
6. Are you on track with regards to saving for your retirement?
7. Do you have an emergency fund?
8. What is your take home salary relative to your credit card debt?
9. How long will it take to pay off your credit card debt if you paid the minimums?
10. How soon do you want to be credit card debt free?
In some cases, the decision is very clear cut. If you can afford to pay off your credit card debt in a year of two, then it may make sense to do so. Or if your employer has no matching policy in your retirement plan, then it also makes sense to pay off your credit card debt as soon as possible. For those who have no emergency fund (or not enough), then saving for an emergency fund should be the priority over saving for retirement or even reducing your credit card debt.
In most other cases, there is a fine balancing act and the truth is that there is no right or wrong answer. Try to work out the math under reasonable assumptions. But in my opinion, having a plan that feels comfortable for you will probably work best.
As we are about to end the new year, here are my two biggest financial goals not just for 2008, but for the foreseeable future.
1. Pay off my mortgage - Readers of this blog will know that I have no credit card debt. However, I still have my mortgage. Though my mortgage only accounts for about 20% of our gross income, I am still bothered because our incomes are not exactly stable or predictable (hint : we’re not teachers nor do we work for the state or federal government).
The reason why I want to get rid of my mortgage is because it accounts for a rather large portion of our income. After taking away taxes, mortage and living expenses, we are left with not much to really enjoy ourselves.
Furthermore, I have always wished we could tithe more, contribute more to charity. But this whole lump sum that goes towards our home mentally inhibits me contributing more. How I will accomplish this is somthing to think about. At present, I think we will contribute a monthly figure to pay down principal on top of our regular mortgage payment.
2. Achieving a seven figure payday in 2008 - We are far from that at the moment. But Mrs Credit Card owns her own business. One of the beauties of owning your own business is that its success is entirely up to the business owner. It depends on your vision and your ability to execute. Mrs Credit Card could business as usual or aim for the usual 10% to 20% increase in sales! But she has decided to aim higher and has worked out a strategy to how to achieve this. I am very excited for her as well as myself.
For me, I have a regular job. And the difference is that my payday goal is tied to who I work for and to a very large extent, the industry I work in. Hence, I can understand the wonders of owning a successful business and determining your own destiny.
The other reason why I’m excited for Mrs Credit Card is that if she achieves this goal, we are only a couple of years into achieving total financial freedom. This certainly beats having a twenty year goal, being extremely frugal (out of necessity). And I’ll certainly pay off our mortgage. Also, if and when this goal is achieved, all the worrying over investment performance will become redundant. We’ll be slightly more conversative and be prudent.
Anyway, that’s it. Two big goals and a slightly different route we are taking. We are as “Rich Dad” said trying to take the fast route, not the slow route. Since this is now in writing, we’ll be accountable (at least on this blog) at the end of 2008.
Credit Card companies use various advertising means to get consumers to sign up for their cards. However, very few use celebrities to endorse their cards. Perhaps the one exception is American Express. In fact, the most recently, American Express had Tiger Woods as theircelebrity endorser.
Anyone who uses celebrities for endorsements take some risk that the endorser might generate negative headlines. However, Tiger Woods has by far been a great endorser for American Express. He represents success and hard work, traits that Amex hopes will resonate with their cardholders or future cardholders.
In Europe, figures like Jose Mourihno, ex-Chelsea’s coach also endorsed for American Express. Jose Mourinho is one of the most successful soccer (football in the rest of the world!) coaches in Europe and lead Chelsea to two back to back Premier League championships. Once again, he represents another successful celebrity that American Express has used.
If you notice all the Amex ads on TV with these celebrities, the card that is always associated with them is the Green Charge Card. None of these celebrities are seen endorsing the Blue Credit Card or any other card for that matter. The charge cards come with an annual fee and given that most credit cards come with no annual fee, American Express is using celebrities to endorse their more prestigious cards.
Celebrities Issuing Their Own Cards
Aside from endorsing cards, celebrities have also issued their own cards. The best example of this is Russell Simmons Baby Phat Debit Cards. Russell Simons set up his own finance company called UniRush Financial Service (note : you do not need to have a bank to actually issue a credit card - back office administration functions can be outsourced to banks). Rhat Farm and Baby Phat Fashions are fashion companies he started.
Despite the fact that it is not a mainstream “Western Union” card or a typical debit card, Russell Simmon’s card is actually pretty good and cost effective. I just wonder how popular is it? I’m pretty sure they have fans.
Past Legends?
Some companies make use of past celebrities to issue cards. Two classic examples are the Elvis Presley Prepaid Mastercard and the Johnny Cash Prepaid Mastercard (both have been discontinued). I just how many diehard fans have actually gotten this card?
Will you get a credit card that is endorsed by a celebrity?
I’ll be interested to know if you have ever gotten a credit card or debit card because of celebrity endorsements? Part of the reason I got the Amex Gold Card years ago was I guess because of brand awareness. Did all the celebrity endorsements and slick TV ads influence me? Maybe so.
But what about fans of Russell Simmons? If you have got his card, I would like to hear you comments.
I will soon be doing an in-depth study on credit card fraud protection features offered by issuers. But here is a preview of what some of the larger issuers are doing. But first, let us look at a study on this issue that has been published recently. Javelin Strategy has ranked the top credit cards and issuers in terms of credit card fraud protection features. The results of Javelin’s Card Issuer Scorecard Study are listed below:
Overall: Safest card issuers
1.Bank of America (Visa Platinum)
2.American Express (Blue from American Express)
3.(2-way tie) Discover (Discover Platinum), First National Bank Omaha (Platinum Edition Visa)
4.Citibank (Citi Platinum Select)
5.Navy Federal Credit Union (Platinum MasterCard)
Fraud Prevention: Top card issuers
1.Citibank (Citi Platinum Select)
2.(3-way tie) Bank of America (Visa Platinum), First National Bank Omaha (Platinum Edition Visa), Navy Federal Credit Union (Platinum MasterCard)
3.Discover (Discover Platinum)
4.JPMorgan Chase (Chase Platinum Visa)
5.Nordstrom (Platinum Visa)
Fraud Detection: Top card issuers
1.American Express (Blue from American Express)
2.U.S. Bank (U.S. Bank Visa Platinum
3.Bank of America (Visa Platinum)
4.Discover (Discover Platinum)
5.(3-way tie) Capital One (Capital One Platinum MasterCard), First National Bank Omaha (Platinum Edition Visa), Wachovia (Wachovia Visa)
Fraud Resolution: Top card issuers
1.(12-way tie) American Express, Bank of America, Capital One, Citibank, FNB Omaha, HSBC, National City, Navy FCU, RBS National, State Farm Bank, Target, Wachovia
2.(8-way tie) BB&T, Commerce Bank, Discover, Nordstrom, Sun Trust, U.S. Bank, WaMu, Wells Fargo
3.(3-way tie) Fifth Third, GE, USAA
4.Advanta
5.JPMorgan Chase
Features offered by different issuers
American Express Blue
To add to their list, here is a list of features that are offered by some of the highlighted cards mentioned above. Let’s start with the American Express Blue Credit Card. The Blue Credit Card offers a CreditSecure for only $11.99 a month. It allows you to check your credit reports and scores from the three major credit bureaus. There are daily monitoring of your reports and you will receive email alerts when there is any suspicious activities. You also get Identity Theft coverage policy for up to $5,000 per occurrence provided by Virginia Surety, Inc, Card and document registration service to assist you in the event they become lost or stolen, and also access to customer representatives.
American Express generally offers fraud protection guarantee. All you have to do is simply call the 1800 number and you will not be liable for any fraudulent charges. You can also set email alerts when you are approaching your credit limits and when there is suspicious activities on your card.
Bank of America Visa
Bank of America also has a similar program called the Privacy Assist Premier. It cost $12.99 a month. You can access your credit reports and scores. Every 90 days, you will get an updated, easy-to-read summary credit report that collects data about credit activities and credit scores from the 3 leading agencies. Your credit files will be monitored each business day. You’ll be sent a notification within 2 business days when new accounts are opened, inquiries are made, or address changes occur so you can take action if needed.
If you become a victim of identity theft, you’ll be covered for certain items by an Identity Fraud Expense Coverage at no additional cost of up to $25,000. This coverage is not available to New York residents.
Chase Visa
I found that Chase has one of the most systematic process in place for email alerts. For example, you can request that they watch out for things like international transactions, cash advances, internet transactions, set a dollar transaction amount, change of address request, change of pin request, balance transfer request, new credit card request and any new authorized user. You also get $25,000 in fraud insurance.
Citi Platinum Select Card
Citi also takes a multi prong approach to identity protection and fraud. Firstly, like other issuers, Citi has early warning emails for any suspicious activities. What sets Citi apart is that you are given a virtual credit card number for you to shop online. While shopping online is actually one of the safest and least likely way to be a victim of identity theft, this is a great extra protection measure.
Citi also has a group of specialist that
* Advises you on how to file police reports and close accounts with other creditors
* Stay on the phone with you when you place Fraud Alerts with credit bureaus
* Assist you with their Identity Theft Tool Kit, which will help you take the proper steps to get your good name and good credit back.
* Quickly clear any fraudulent charges on your account.
* Set up a new Citi card for you with the appropriate credit line you need to get through this challenging time.
Like I said earlier, this is just a little preview, I will be posting more about this issue going forward.
According to studies, about a third of all high school students actually carry a credit card that is co-signed by their parents. This really raises the question of whether kids in their teens are equipped to handle credit. Will having a credit card too early instill bad money habits?
I am having serious reservations about letting my kids have a credit card when they are in high school. I did not even have my own credit card when I was in college. My parents did give me a credit card when I took a little vacation when I was in college. I only got my own credit card when I started working. Here are my thoughts and reasons why a high school student should not have credit cards.
1. They are at an age where peer influence is great. What brand of shirts they wear, what cell phones do they have are terribly important things for high school kids. To a certain extent, any kid will be influenced by their peers in school. I fear that if a high school student sees their peers simply take out a card to buy stuff, they will think it is “normal”.
2. Young adults need to learn the concept of delayed gratification. With credit cards, it is so easy to fall into the trap of buying things before you have earned it. I’ve met many people who have always paid their bills (including credit card bills) in full every month. The one common thread among them is that their parents have brought them up with the concept of never getting into debt.
3. Kids need to learn that you have to earn something before you can buy something. That was what my parents have taught me. Before they bought a TV, they made sure they had enough to either write a check or pay cash. I do not want my kids to have more credit card debt in January after a Christmas binge when they are adults.
4. I feel that my kids need to be taught that the ability to have credit has to be earned. One of the reasons I never carried a balance was because I felt that I was so used to making sure I had cash before I spent on anything. I’m not too sure that I’ll have the same atitude if I was given a credit card early in my life.
How about Prepaid Credit Cards?
Some parents might argue that giving a high school student a prepaid credit card is a good way to start learning about money management and budgeting. Well, in my younger days, there was no such thing as a prepaid credit card. Perhaps a prepaid credit card is OK, but I’m not totally convinced.
If you have ever given your high school kid a credit card, I would like to hear your experience.
I have always wanted to donate more to charity (I guess deep down inside, we all want to be more charitable). However, the biggest obstacle for me is actually the amount of mortgage that I have!
Right now, my mortgage payment is about 25% of my gross income. Take away the taxes and we are down to about 45% of income left for all other purposes. I generally try to save ten percent of my gross income. If I target ten percent to be given to tithing and charity donations, then I’m essentially left with 35% for my other household expenses. Furthermore, I would like to add some additional principal payment to my mortgage to pay off my mortgage quicker.
So the question is how do find the money, or rather the discipline to give ten percent to charity and tithing when I would actually like to pay off my mortgage faster? I’m still trying to figure this out and here are my initially thoughts.
1. Donate my Credit Card Reward Points to Charity - I carry the Amex Platinum Charge Card, the Business Gold Rewards Card, both which earns me Membership Reward Points. I could potentially donate my points to any public charity. Problem with this is that I will be tempted to use my reward points for other purposes!
2. Get a charity credit card - The company I work for supports the Make-A-Wish Foundation. I recently joined the committee to help organize a series of fund raisers. I could potentially get Make-A-Wish Credit Card, use it and have 1% of the amount that I charge to the card automatically donated to the Make-A-Wish Foundation.
3. Purchasing from companies that donate a portion of their receipts to charity - My friend Jim recently set up Giving Bean. It is an online roasted coffee shop which will donate a portion of their receipts to your favorite public charity. Being a coffee drinker, I may well just be tempted to purchase my regular supply from him (although I could easily get free samples!). I wish there are more companies like this one.
Maybe it’s all in my head? - But maybe I’m just finding excuses not to be more charitable? I find it hard to fully give ten percent to tithing (which I should and I guess you can lump in other charities in that mix as well). But I figured that if I get a charity credit card, then at least a portion of the money I charge to the card will be automatically donated to charity and it will not really come out of my pocket. If I also purchase my coffee from Jim, then I will also be donating more without necessarily coming up with more cash.
Having said that, it will still probably not make up enough for me to presently reach the 10% goal. But I’m definitely striving for that.
Nothing stirs up more debate in the investment arena than the debate of index investing versus active investing. Most people I’ve come across are either for passive investing or active investing.
In the personal finance bloggeshere, quite a few bloggers have taken the position of passive investing.
Passive (Index) Investing Proponents
Free Money Finance is a proponent of index investing and has written quite a few post on this matter. why he likes index funds. Trent from the Simple Dollar also believes in index funds. Blueprint for Financial Prosperity also is invested mainly index funds and has written a post on why he loves index funds. Nickel’s asset allocation in his 457b is also in index funds.
Bloggers who invest in active funds
The various bloggers have written quite a bit about asset allocation and are mainly invested in actively managed funds. SVB describes her asset allocation. The Sun Financial Diary revealed his asset allocation and active funds to Silicon Valley Blogger.
Pitfalls of Index Funds
We all know the great thing about index funds. They are low cost. But for those investing in index funds, one thing is for sure. Index funds ALWAYS UNDERPERFORM THE MARKET because the match the market’s performance less a nominal fee they charge (0.20% in the case of Vanguard’s funds). For index funds in less liquid sectors like the small cap space, he returns may not really reflect the sector’s returns accurately because of the illiquidity of the sector. Index funds must also recognize that they assume market risk. That means that if a particular index falls 10%, then the index fund should also fall 10% plus the fee.
Risk Adjusted Returns - the missing discussion point
What seems to be missing in this whole passive versus active investing debate is the point about risk adjusted return, With an index funds, you assume market risk. A good active fund manager aims to achieve superior risk adjusted return, ie. achieve similar or better than index returns with lower risk (or volatility). This is a very important point because a fund with better risk adjusted return will outperform in a bear market. When you outperform in a bear market, you will end up ahead in absolute monetary terms (not just fee-adjusted return).
But what are the sophisticated investors doing with index funds?
Despite the “advantages and low costs of index funds”, are the most sophisticated investors jumping on the bandwagen? Well, index funds have certainly grown trememdously over the last few years. Yet, most of the largest funds (endowment funds, pension plans) do not invest solely in index funds. Yes, they do have some portion of their portfolios in index funds. But not 100%. Why?
Index outperform in some years and active managers outperform in others
Why do the largest investors not invest 100% in index funds? It is the exact same reason why investors invest in both growth and value. Growth and value investing are actually negatively correlated. In certain years, growth outperforms and in others value outpeforms. The same applies to index versus active investing.
In certain years (like the late 90s), index outperformed. The reason for their outperformance was because stocks (especially tech stocks) were overvalued. Active managers simply did not see the rationale for overpaying for expensive stocks. Then from the peak of the S&P and the Dow Jones Industrial index in 1999 to the end of 2006, active maangers outperformed the index. In fact, from the peak in 1999, it took seven years for the indices to return to their 1999 peak! That means if you were unlucky enough to invest in an index at the peak of the market in 1999, you would have almost the same amount of money at the end of 2006! You would have lost faith with index funds!
Take the Moderate Position
As with most issues in real life, we should avoid taking extreme and absolute positions in this debate. The largest investors have both active and passive managers. Why should we very mortal pf bloggers argue and take absolute positions in this debate? The only problem with this is that it is not easy for many of us to mix up our portfolio with both active and passive funds. Some are forced to invest in actively managed funds.”>forced to invest in both active and passive funds. Perhaps, this will be a topic for another post.
Getting a 0% balance transfer credit card is one method of reducing your credit card interest payments. The savings that you make on your interest payments can then be used to pay “more” of your credit card debt interest. By getting a credit card with a 0% APR teaser deal, you save on your credit card interest payment by paying 0% rather than the regular rate for a fixed period.
Done in a disciplined fashion together with a debt payment plan, this is a useful tool to speed up the credit card debt reduction process. However, there are a few pitfalls you have to be aware of :
1. You cannot miss a single payment - While having a 0% deal is cool, credit card issuers will raise your interest rate the moment you miss a single payment or are late on a payment. Hence, if you get a card with such a teaser deal, make sure you make in advance. It’s best to pay your bills online or enroll in automatic payment with your bank.
2. You should not fall into the trap by taking on more debt - Well, I’ve seen quite a few friends fall for this one. Discipline is the key here.
3. You should not charge anything else to your card - For most 0% deals, any payments that you make will go towards charges with the lowest interest (in this case - your balance transfer). Therefore, if you charge anything else to your card, then you will incur higher interest charges because your interest payment will only be used to pay the 0% portion.
4. Beware of fees - The standard fee for balance transfer is 3% of balance transfer with a minimum of either $5 or $10. There is usually a cap of $75 on the maximum balance transfer fee. When you get a card to do a balance transfer, make sure that there is a cap on the balance transfer fee. Better still, get one with no balance transfer fee for the introductory offer.
Best Credit Card Balance Transfer Offers
With these points out of the way, there is only one credit card today that I would recommend for a balance transfer.
IBERIABANK Visa Platinum - The IBERIABANK Visa Platinum is the only card today that offers a 0% balance transfer deal (for 6 months) that has no balance transfer fee.
Well, this is the only card I would recommend for balance transfers at the moment. Other cards that offer 12 months 0% deals all have a balance transfer fee. But they do not cap their balance transfer fees and what ends up happening is that you paid a hefty fee that eats into your potential interest savings.
Having a poor credit history and using a credit card designed for those with poor credit may not only cost you more in terms of higher annual fees, higher APRs, other miscellaneous fees, but it may also affect your career earnings. How is that so? Well, here are a couple of incidents that occurred not too long ago.
Financial Advisor with Subprime Credit Card - A couple of weeks ago, a good friend of mine had an appointment to meet a financial advisor that cold called him. He asked me to come along as he knew I write about finance stuff on my blog and thought that I knew more about money than him! He wanted me to come along (not to say anything), but to size up this person.
This person introduced himself to my friend and went through the routine of asking my friend about his finances, how he invested, what his financial goals were etc etc. The meeting ended after 40 minutes and the financial advisor offered to pay for our coffee. He picked up the tab and took out his credit card to pay. To my horror, I recognized that card as the First Premier Bank credit card! This is card that only people who have poor credit carries. Now, let me be clear about one thing - I have nothing against people who have bad credit and carry subprime credit cards. But when a financial advisor carries such a card, that does not give a good impression at all. After all, how can you trust an advisor with money when he carries a credit card that is for people with poor credit?
Friend upgrades to American Express Business Gold Rewards Card - Another friend of mine is a very successful commercial real estate broker. The credit cards that he has are the Citi PremierPass(SM) Card and the Citi Upromise Card.
One day, he asked me my opinion of which card was best for him. I proceeded to ask him questions about how he used his credit cards, how much he spent on the cards he had and what sort of rewards he was looking for? We discussed the pros and cons of different cards and reward programs. But after a while, he said that he really need to get a card with a certain “status symbol”.
I then mentioned to him I had the American Express Platinum Card. He then asked me about the fees and the benefits. I told him I got the card so that I could review it and talk about it on my blog! On the spot, he decided to the get the Business Gold Rewards Card from American Express. He said he needed to get a “prestigious” card because he is always talking to and dealing with very successful commercial real estate investors. Carry anything other than an American Express Card will not do for him!
Be careful which card you carry - If you have poor credit, then you probably have no choice but have a subprime credit card. But if you are in a sales position or a financial advisor, attorney and other “high profile” careers, carrying the right credit card is very important. My real estate friend even went through the effort of getting an American Express card which charged a higher annua fee. For him, prestige and the card you carry says a lot about you.
If you have a poor credit credit card, hopefully this post will motivate you to improve your credit score quickly so you can get a no annual fee regular credit card. But for some of us in certain professions, perhaps we do have to think about the type of credit card design, prestige and impression that our card carries. Having a poor credit credit card may actually hurt your career (or at least immediate sales opportunities).
About three weeks ago, I was driving to see some clients and while I was preparing to pay my toll, I accidentally drove through the EZ Pass Only Lane even though I had no EZ Pass in my car.
To my horror, I realized that there was no person in the booth. I wound down the passenger window and asked the operator in the other booth if she could help me. The answer was “no”. I was told to wait for a letter and a fine.
Well, the letter has finally arrived. The total amount due was $44.00. It consisted of the Toll Balance of $19.00. The Administration Fee was $25.00! So what should have been a $1.00 toll fare becomes 44 times more! All because of my carelessness.
Now, about a week ago, I was in a rush in the morning and I went through a STOP sign without stopping. There were no cars. But before I knew it, there was a police car behind me. I stopped and the officer came and we went through the whole motion. I gave him my driver’s license. After what seems like eternity, he finally came back and gave me a citation but he did not deduct any points. The fine was $107.50!
About a month ago, I was in the city for a meetup group. It was raining and I parked my car at a public car park. I place two dollars worth of quarters into the parking meter. It was good until nine o’clock at night. When I arrived at 9:45pm, I realized I got a ticket. I seldom go to the city at night and thought parking was free after nine o’clock. Turns out that is not the case. The fine was $26.00.
Getting a fine for going through the wrong lane in the toll booth or getting caught for not stopping at a STOP sign or not putting enough quarters certainly was not part of my budget. Thank goodness I’m not strapped for cash. I will now be much more careful when I’m driving.
