Fool’s Advice
by Jason SteeleEveryone’s got advice for using credit cards. Today, I thought I would take a look at the advice given out over at the famous financial commentator, the Motely Fool.
What Does The Fool Say?
Over at Fool.com, they have their 60-Second Guide to Managing Your Credit. It is rather optimistic to think that all you need to know about credit cards can be learned in 60 seconds, but I think they are trying to emphasize the fact that this is not rocket science.
0:60: How much is enough?
Here they talk about your debt to income ratio, concluding that while “the ideal number is zero,…you want to keep your debt — including car loans — to 15% or less of your after-tax income.”
First of all, I personally don’t find it ideal or practical to have a true debt ratio of zero. If I were to check my credit report, I would find all of my spending since my last statement closed listed as credit card debt. If my payment due date is tomorrow, I might have up to 45 days worth of spending listed as debt. Note that I am paying all of this on time and in full, however it is listed as debt until the moment it is paid electronically on it’s due date. I never pay interest, but the credit report still sees this balance as “debt”.
To express it more accurately, I have no revolving debt. For me, this includes car payments as well. As you might have read, I am not a big fan of car payments. What is a bit more important, at least to your credit score, is your credit utilization ratio. This should be under 30%. The most likely reason it would not be is that you do not have enough available credit.
0:53: Don’t pay by their rules
Here they beg of you not to pay the minimum balance. As you should well know, paying the minimum balance is a “fool” proof way to keep you trapped in debt for the rest of your life. Medieval serfs had a greater chance of ever becoming debt free than the poor soles who attempt to pay off their credit cards by writing checks every month for the “minimum payment”.
0:46: Watch out for fees
Yes, fees are bad. Never pay them. Never pay late, do a balance transfer, or take a cash advance. They claim there are card companies that will charge you an “inactivity fee” and will even charge you to speak to a representative. I have heard of credit cards with such egregious fees, but perhaps they exist out in the sub-prime world.
0:35: Play the system
Here is some good advice. Always call up your credit card company and tell them what you want. If you are a good customer, they should waive fees, increase your rewards, or grant you other wishes.
0:26: In trouble? Stop charging
This is also great advice. Whenever I find my monthly finances too close for comfort, I go on what I think of as a “spending diet”. Every time I want to buy something, I ask myself to reconsider if I actually need it. If I really must have it, I put it off until it appears on my next statement. If you are having trouble paying your bill on time and in full, now is the time to go on a big diet.
0:23: Boost your credit GPA
This is their way of telling you to monitor your credit score and keep it high.
0:18: Carry just what you need
I am going to have to disagree with this. I wish it were the case that having fewer credit cards resulted in a better credit score, but sadly it is not true. A major component of your credit score happens to be your utilization of credit, see “0:60: How much is enough? “. Unfortunately, having too few cards actually hurts you as it raises your credit utilization ratio.
0:13: Get some free stuff
These are the words that I live by as a reward card aficionado. If you use credit cards as charge cards, only charging what you will pay off at the end of the month, there is no reason you should not be choosing your credit cards in order to maximize your rewards.
0:05: Teach your children well.
Pass down what you have learned to your children, as without your guidance it is all too easy to develop habits that will cause them become trapped in debt.
In Conclusion
These are some very good rules. I would have included some valuable advice on managing your bills with electronic payments. I also think that the Fool needs to brush up on credit utilization ratios and the current reality of credit scoring.