Struggling with business debt

By: Christina

06/11/2009

What should you do if your business is closed, but you still have a ton of business debt dragging you down?

A reader asked this question:

In desperation last year to keep a business afloat (and thinking that more money was the answer) I had my mom open some credit cards in the corporate name (using her personal guarantee) I REALLY believed that the money would be the answer and it would lead the business to prosperity and the ability to pay things back – but that’s not what happened…

I have since closed the business, but have been paying the credit card bills (about $1000 of monthly payments towards over 45k in credit) out of my personal salary with my new job. We are suffering tremendously to pay these bills and have just recently stopped paying some of our own bills because of not wanting to ruin my mother’s name!

Any options other than continuing to suffer to make these payments?

Dear reader,

It is devastating when a business fails, there is no doubt about it. Particularly if you are left with a large amount of debt. In your case, part of the debt is in a family member’s name, which makes it doubly difficult. The good news is, you have a ton of options. I’ll walk you through them, so that you can decide which ones will meet your needs.

Let’s start with your personal finances. You said that you are falling behind in your own bills so that you can pay your business debt, and protect your mother’s credit rating. That is definitely the right thing to do, but it is going to ruin your credit. Let’s see if we can get control of that first.

Step #1: The planning stage

Before you do anything else, make complete lists of what you owe, and who you owe it to. Do two lists – one list of your personal bills, and one list for your businesses’ bills that your mom guaranteed.
Include the following things for each account:

The amount you owe
The contact information for each lender
Your current interest rates
Any fees on the account
Your account number.

Doing this will save you a TON of time in the long run. Also write down the name and operating number of any representative that you speak to when you call, as well as the date and time that you called them.

Step #2: Deal with your finances first

Cut back where you can, and raise your income by taking side jobs if you can. That said, you will need to set aside a block of time to call each of your own creditors. This includes your utility bills, as well as your credit card bills.

Since you are behind on some of your bills, you will need to be able to make some sort of a payment when you call to negotiate. When you are ready to do that, call everyone you owe, and ask them to do the following things:

Remove any late fees
Lower your interest rates
Waive any yearly fees
Make a payment plan – try to get them to temporarily reduce the amount that you have to pay each month, if you can. You can explain to them that you closed your business, you have a new job, and you are just going to need some time to get everything back up to speed. Be friendly, and polite. Do not close out any accounts – especially your credit cards, because this will lower your credit score. The good news is, since you are behind, your creditors are going to be more willing to negotiate with you.

**If your credit card company refuses to make a payment arrangement unless your account is closed, you will have to decide what is best for you. Closing the account will hurt your credit score, but probably not as much as several months of late payments (or non-payments) will hurt it. For more information on how credit scores work, you can check out this article.

Now if you call and you get absolutely nowhere (which sadly does happen…) call back and try this tactic with your credit card companies:

Tell them that you have found a wonderful balance transfer offer and you intend to balance transfer your debt unless they can match the rate. If the representative still will not help you, ask point blank to be transferred to the retention department.

The retention department exists to help the credit card company keep it’s customers. They are authorized to reduce your interest rates, and pretty much everything else, no questions asked.

I recommend that you not make a payment until they are willing to negotiate with you. Usually a week or more past due is enough. Obviously, don’t tank your credit score and go months past due! Use your own discretion here because this tactic will lower your credit score.

Before you use the balance transfer strategy, check out a few competing offers so that you can back up your claims with something like “Discover has a 0% balance transfer offer going on right now…”

If you make any sort of a payment arrangement, make sure you keep your end of the deal. Otherwise, you will see your interest rates skyrocket, your accounts closed and sent to collections, etc. You really, really want to avoid that if at all possible.

So, at the end of this stage, you will hopefully have lowered your interest rates, removed all of the fees on your accounts, set up reasonable payment plans with your own creditors, and hopefully your credit lines will remain open.

Taking the time to go through these steps for your own accounts will free up more money, and give you a better ability to negotiate the debt that is affecting your mother’s credit rating.

Negotiating the debt that your mother guaranteed:

This is a horse of a different color, and you will want to be careful. In the suggestions above, I have assumed that it is more important for you to get control of your finances than to protect your credit rating (going past due is the easiest way to get a company to work with you on payments, ditto for closing out accounts or balance transfers.) With your mother’s loans however, her credit rating is of the utmost importance. That means that you have far less leeway in your negotiations.

You have one excellent initial option:

Try the balance transfer strategy, and have any fees removed – Simply having your interest rates reduced, or fees removed will not impact her credit score at all. It is important that you do not mention that the business has been closed. That may be all the encouragement that the credit card companies need to close out the account. If they close the account, it could affect your mother’s credit score.

I do not know your entire financial picture, but I am hoping that negotiating your own accounts, and reducing the interest rates on hers will be enough to get you through. If it isn’t, you can try the strategies listed below. You also have the option of taking all of your accounts to a professional debt negotiator. (I will give you the details on that at the end of the article.)

The second best option for guaranteed accounts:

Have your mother check all three of her main credit reports. She can do this for free by visiting AnnualCreditReport.com.

You will need to know whether or not any of the business loans are being reported on her personal credit reports each month. If they are, handle those accounts with kid gloves because anything you do will affect her credit score.

Now, if the account shows up as open, but the payments and debt are not being reported, you might be able to do a little more negotiation and set up payment plans without hurting her credit score. Personally, I would handle those accounts one at a time, starting with the smallest line of credit that she guaranteed. If something goes wrong, a small line of credit being closed out will have less impact than a larger line of credit.

Basically you will want to repeat the same steps that you took with your personal debt with one exception: Do not go past due in order to negotiate the debt at any point. It is very likely that a late mark will show up on her credit report if you do. It will make negotiations more difficult, but it’s not impossible.

When you call those creditors, make sure you ask them what will happen if you negotiate a payment plan with them. A simple, “My mother is the personal guarantor on this account. I do not want to hurt her credit score. If I make a payment plan with you today, will that show up on her personal credit report?” should be enough.

I hate to tell you, but the average customer service representative will probably not know the answer to this question. You may need to speak with a manager, a manager’s manager, or even someone in the collections department to get an honest answer. Once you know the answer, you can proceed accordingly.

As far as your mom’s guaranteed loans go, avoid the following things:

Closing out the account
Being late
Lump-sum settlements
Payment arrangements that involve the account being reported as anything other than “paid as agreed” on your credit report. If you aren’t sure how the payment arrangements will be reported, make sure that you ask the rep or manager that helps you set everything up.

Now, if all of this is sounding like a headache and a half, don’t worry because you can get help.

Professional Debt Negotiation

Professional debt negotiators are experts in reducing debt to a manageable level. They can literally help you reduce your debt by as much as 40% – 70% of the initial total. That sounds wonderful at the outset, but you do need to understand that if you hire a professional debt negotiator, they will do both of the following things:

Close your credit accounts
Hold your payments until you are past due in order to gain leverage in the negotiations

Neither of those are really acceptable options where your mom’s debt is concerned. So – if you hire a professional, make sure that they understand this is part of the deal:

They must negotiate both of the following things as well as the total amount of your debt:

None of the accounts will show up as delinquent, or “settled” on your mother’s personal credit reports.

They must get something in writing from each creditor that says “If for some reason the debt does show up as settled, or anything other than “paid as agreed” on your mother’s credit report, they will not attempt to validate the debt when she challenges it on her credit reports.”

If the debt negotiator tells you that is not possible, try a different company. If three companies tell you that isn’t possible, consider using a debt negotiator for your personal debts if you need to, but avoid doing it for any loans that your mother guaranteed.

Other available options:

You can also consider consolidating all of your loans under a Home Equity Line of Credit (HELOC), if you own your home, and you do not already have a loan of this type.

If your credit hasn’t been too badly damaged, you really can consider balance transferring at least part of your debt to a card with better rates. You could especially consider transferring the loans that your mother guaranteed onto new cards that she has not guaranteed so that you can negotiate the debt as you see fit.

When it’s all said and done:

Clean up your credit report, and your mother’s, if needed. Under federal law, you have the right to challenge anything on your credit reports. If the companies that you owed money to do not validate the information within 30 days, it must be removed from your credit report. It’s a bit of a time-consuming process, and I’m sure you will want to help your mother do it if you end up needing to, but it is well worth the effort. Especially if she ends up with something negative on her credit report as a result of your negotiations. You can find complete instructions for challenging items on your credit report here.

I wish you all the best as you work through this situation. With time, effort, and perseverance you can get your debt resolved without damaging your mom’s good credit score. Please feel free to come back if you have additional questions, we’re happy to help.

Can Credit Card Companies Go After You If You Leave The Country?

By: Christina

06/10/2009

Also See: What Happens To My Debt When I Leave Canada?

Also See: Can I Leave Singapore With Credit Card Debt and What If I Want To Return?

We just had this email from another reader:

I have several credit cards with balances on them here in the US. I am about to be transfered back to the UK for work (I am from the UK, not a US citizen), and so will not be using my US issued CC’s again. If I do not pay them off, do you know if the companies (visa and mastercard) will try to retrieve the money once they realise I am not intending to repay it? I know if will ding my credit score here in the US, but I don’t care about that.

John Mathews

Answers – John – let’s go over the procedure of what happens when you stop paying your credit card bills.

1. After 60 days, most credit card issuers report your late payment to the credit bureaus – That is when you credit score gets dingged.

2. They normally sell it to an external collection agency after that – some have in house collection agencies, many start the process of selling their uncollectible debt.

3. You start getting calls from collectors – This is when the harassment starts for most folks

4. Your creditors might sue or threaten to sue you

5. Once you are past the statute of limitations, creditors cannot come after you – could be as short as 4 years in some states or 7 years on others

Disclaimer : This is not legal advice but just our opinions.

John, since you are leaving the country, I doubt that the creditors will come after you. They certainly cannot call you! They won’t be able to track you down. But if you ever get sued, you would need proper legal advice especially if you are out of the country.

But here’s the issue I have with the email you sent us. You did not say anyway that you are in financial trouble. All you said is that you are from the UK and your company has sent you back. So presumably, you have a job. If you have a job, and are financially capable of paying off your credit card bill, then please pay it off. Society runs based on a certain level of trust. If every foreign worker were to leave and just not pay their credit card bills, then credit card issuers will never issuer to them at all? If you are capable of paying off your debt, then please do so. It is the proper thing to do.

If you have lost your job and are relocated back and have financial difficulty, then that is another issuer altogether.

Oh and one more thing: if there is ever a judgement against you, you may have to disclose that if you ever want to work here again.

Here is another email from a reader with a similar situation:

I am from Pakistan, i was working for an insurance company, the company layoff more then 1000+ emp, i am 1 of them, this was last year dec 2008. i am planning to go back to my country, i actually owe more then $30,000, i cannot pay off every thing coz i only have $2500 in my bank, i am really in a very bad status, i have been trying to find a job for past 6 months. i have 2 daughter & 2 sons back home, i am not able to feed them or my self, so i want to go back to my country & try to find some work there. so what can i do about the credit card debt. what happens if i don’t pay? can they hold me in Pakistan… or if i pay very slow with that affect my status. coz $30000 is a lot. please help me to find a way out of this debt.

kevin khan

Answer: Kevin – for your situation, I would consult an immigration attorney. I doubt you will ever be asked to leave this country or have your status affected if you do not pay your credit card bills or even if you file for bankruptcy.

I also doubt if you can ever be arrested in Pakistan if you do not pay your credit card bills here. You won’t get arrested here though you will certainly be harassed by tons of collection agencies!

But look, you have $30,000 in debt and only $2500 in savings. You just cannot afford to pay them. Simple as that. Question for you is do you ever intend to come back here and work? If you do, then you’d better consult your immigration attorney on how your financial situation may impact your ability to get a Visa down the road.

Best of luck to you.

Chief Family Officer Interview- Cathy Paid Off Her Student Loans, Only Mortgage To Go!

By: Mr Credit Card

06/08/2009

I love successful debt reduction stories. They give everybody inspiration, but just for folks in debt, but also for those who aren’t in debt because it shows us the wonders of financial goal setting and determination to achieve them. Cathy, who is the Chief Family Officer of her family got rid of her student loan debt in April this year. Unlike many folks, she did not incur any credit card debt when she was in college. Instead, she and her family made the effort to pay the student loan off faster. She is now focusing on paying off her mortgage (which she estimates can be done in six years).

I asked for an interview after she announced her success at paying off her student loan (which she agreed). BTW – my questions are in bold.

Cathy – Many students graduate with a ton of credit card debt. Yet, when you finished law school, all you had was student loans. What did you do differently from your student peers (whether spending or lifestyle) in college or grad school?

I wasn’t as frugal as I should have been in retrospect, but I also knew enough not to spend beyond my means. So, while I had friends who used their credit cards to pay for vacations and things like that, I told them that I couldn’t afford to go. I distinctly remember skipping a celebration cruise to Mexico after graduation for that very reason and not wanting to admit that I couldn’t afford it, but no one blinked an eye. And I know not going was the right thing to do. I just wish I’d known more about using coupons, ing generic, etc., so that I could have taken out less in loans.

How often did you get credit card offers in school?

I honestly don’t remember.

In your blog, you had a short post about your “tipping point” where you realized you had to take some action to get rid of your student loans. Just for my readers, can you tell us what was that tipping point again?

It was when I graduated from law school and saw how much I owed in student loans each month. That’s when I realized that I needed to learn about personal finance and change my financial situation. (There’s more about how my financial habits changed in the original post here: http://www.chieffamilyofficer.com/2008/06/my-personal-finance-tipping-point.html.)

You mentioned in your blog that you used a combination of the debt snowball method and snowflakes method to reduce your debt. Just for the benefit of my readers, could you give a brief description of what they are?

Others have already described these better than I ever could – Moolanomy has a good explanation of the snowball here. And the originator of the snowflake, PaidTwice, explains that here.

Most people would agree that credit card debt is bad, but that mortgage debt is “good”. Personally for me, all debt is bad. I was renting the first 10 years of working but I now have a mortgage to pay (though I never had any credit card debt). This to me felt like having credit card debt! What made you so obsessed with paying off your mortgage as soon as possible?

Well, I wouldn’t say that I’m “obsessed” with paying off the mortgage. The reason we’ve decided to make that a priority is because when it’s paid off, we’ll have quite a bit more flexibility in terms of our options (such as private school vs public school for the kids).

Do you use any budgeting tools like YNAB or Quicken? How do you monitor your household monthly spending?

I meant to try YNAB but never got around to it. I’ve used Quicken in the past, and it’s what gave me the framework for how I manage our spending now. Most of it’s in my head at this point.

As I read your blog, I get the sense that perhaps Marc (husband) and yourself are on the same page as far as finances go. Did you get that feeling (or did you know) before you married him. Did you consciously or unconsciously made sure that he was financially responsible?

We are pretty much on the same page, and I do think it’s important that we’ve been that way from the beginning. It was absolutely important to me that he was financially responsible, but I think it’s a character trait that’s indicative of a person’s overall character. I suspect you’d be hard pressed to find someone who is financially irresponsible and yet responsible in every other way in life.

Do you actually sit down with Marc and discuss your finances or does he trust everything to you?

We discuss almost everything, but there is a great deal of trust that goes both ways. All of our accounts that can be joint are joint, and we don’t question every purchase the other person makes. We do, however, each have a separate credit card just so that we have separate credit in case something were to happen to the other person.

You seem to acknowledge that you cannot be a total tightwad and be frugal to the last cent on everything. You mentioned on your blog about pampering yourself once in a while and also things like being prepared to spend slightly more on take outs because of the “dinner time stress”. Do you actually budget or plan for the occasional splurges?

A little bit of both. The occasional splurge doesn’t really get budgeted for unless it’s substantial. Things like spending more to relieve stress on a regular basis get factored into the budget.

Being who I am, I have to ask this question. How many credit cards did you have and how do you make use of them? (like cash back or airmiles etc) Which cards do you have and like?

I have two cards and get cash back on one and miles on the other. We just started using our Amex Blue Cash as the primary card since we haven’t been flying due to fear of traveling with the kids (we’re in no rush to make that happen).

Like yourself, I pay off my bills in full. One of the ways that I have always spent less than I earn even though I’m using credit cards to pay for almost everything is that I do not spend on things I do not need (even if they are on sale). In your blog, you mentioned an occasion where you stopped ing a rice cooker with a timer even though you would love one. Aside from stopping yourself from ing things even if they are on sale, how do you ensure that the credit card is not abused?

I think knowing that you are going to pay the bill in full in a few weeks is actually a great way to stop from unnecessary spending.

You’ve spent a considerable effort in eliminating your student debt and now would like to reduce your mortgage principle as well. How do you balance that with having an emergency fund? How many months of expenses do you have in your emergency bank account?

Depending on how drastically we cut our expenses, we have six to twelve months’ worth in the EF. Finding a balance is all about finding what works for you. Of course, we’ve had our EF for a long time now. Back when we were starting out, building the EF took priority over paying off the principal on debt.

You blogged about your failed all cash experiment where you tried to just use cash. You mentioned how difficult it was with your kid and carry tons of $1 bills and quarters. Would you still recommend this “experiment” to others?

Why not? The worst that happens is you give up as quickly as we did. On the other hand, you might learn a lot about your spending habits and/or reduce your spending.

You mentioned that you are setting aside money in UTMA accounts for your children. As you know once they reach the age of maturity, with a UTMA account, they can use it however they like. Have you considered a 529 plan instead where you can only use it for “education”?

The UTMA accounts are actually for that purpose. It’s money that the kids have received as gifts. It seemed a better use than going out and ing them toys on top of the tons of toys they already have. I’m certain that when they’re older, they’ll appreciate the fact that Mom and Dad saved the money for them. And we’ll talk about what the money should be used for before they’re given access to the accounts – things like living expenses, car insurance, etc. Education money is saved separately.

You are an attorney, a mommy and your family’s CFO. And you blog diligently. How do you manage your time? Do you plan your meals ahead? When you do actually blog? I would really like to hear your time management techniques.

I wish I had easy answers. The real secret is the world’s most amazing husband and father. Other than that, I can only admit that I often blog at the expense of housekeeping.

You mentioned about getting roomba, the robot vacuum cleaner? How is that working out? And have you invested in any other “time saving” gadgets?

It didn’t work out. The long hair was too much for it to handle, and I don’t think I cleaned the brushes properly. I love my slow cooker dearly.

You stated that you could pay off your mortgage in six years. I have no doubt you will achieve that and I wish you all the best. Thanks you so much for your time.

My Radio Interview With Walletpop.com

By: Mr Credit Card

06/04/2009

I was interviewed by Walletpop 2 days ago on their BlogTalkRadio Show. The interview lasted 15 minutes and I was asked about the rewards perk situation in todays’ credit environment. You can check out the interview here :

Here’s the link to my Walletpop Radio Interview

Reward Cards In A Post Bill of Rights World

By: Jason Steele

06/03/2009

Yesterday, I discussed one possible future of reward cards, where high annual fees earn rewards that were valuable to the cardholder, yet represented little marginal costs to the bank and the affiliated business. As examples, I gave airlines that give away club memberships, priority perks, and two for one coupons.

Enter The Loss Leader

Another viable business model may be the reward card as a “loss leader”. As you may know, a loss leader is a popular product priced at or below cost in order to entice a customer to bring other business to the merchant. Typically, these are very high profile products that consumers purchase largely based on price. Common examples include turkeys being sold at supermarkets before Thanksgiving. The shopper at that time of year will visit a store to an insanely cheap bird, yet the store makes plenty of profit off of the stuffing, sides, beverages, and other items that they will inevitably purchase.

I would argue that my American Express Business Platinum feature a loss leader of 5% cash back on gasoline. I got the card last summer when gas was $4.00 a gallon, and I used it almost exclusively for gas purchases. Amex seems to have caught on, and will be reducing the cash back on gas to 3%.

When Schwab Bank introduced their reward card with an industry leading 2% cash back on all purchases, it seemed there had to be a catch. They do require that you have a brokerage account with Schwab, even though opening such an account is free. It seems like they will win with this card, even if they never make a penny off of it directly. Their strategy may very well be to offer a fantastic reward card as a loss leader, go entice people to get a brokerage account. Their reward card may as well be just free advertising for their brokerage services.

Want A Reward Card? Then Open An Account With Us

Here is an article I came across about a person who got rejected for a Wells Fargo Credit Card, in part, because she did not have a checking account with them. There were other reasons, but the bank seemed to give at least some preference to customers with who they already had a banking relationship. Extrapolate this a bit further, and you can see where this is going. Perhaps you want the new SuperDuper reward card from SuperBank. In order to get it, you must have a checking account with direct deposit with your local SuperBank branch. Maybe your insurance company will have an affiliated credit card, or perhaps your cable company. It really doesn’t matter if the credit card makes a profit, as long as they get you to sign up for other profitable goods and services.

Banks Will Get Creative

I am not a banking industry insider, just a humble consumer affairs blogger, yet I came up with these ideas in a few minutes of my spare time. I imagine the people who brought us double cycle billing, and payment due dates on national holidays will be at least as creative as I have been. The good news is that these loss leaders are value added incentives, rather than punitive tricks and traps.

Broke Ass Student Interview – A Debt Reduction Story

By: Mr Credit Card

This is an interview with Jennifer Lynn from Broke Ass Student. When I first knew about her blog a couple of years back, she had over $15,000 in debt. Right now, she is just a few months from paying off the remainder $4000+. So she is essentially hitting the home stretch. I like to hear and document success stories like this because I think it can help our readers a lot (especially those who are facing similar situations). Below is her story and the interview.

How did you get into $15,000 of debt? Were they all credit card debt or does it include other debt like student loans etc?

I was actually in nearly $20,000 worth of debt at its peak and the feeling was excruciating. The bulk of it was student and car loans, with some credit card debt sprinkled on top.

I’ve never been lavishly irresponsible with credit cards but I certainly wasn’t saving enough either. In other words, my spending was fast and furious and money was evaporating as quickly as it was coming in. Of course a recipe for disaster ensued – zero savings, a few choice credit card purchases, a brand new car loan, an emergency room visit without health insurance and WHAM!, suddenly and practically overnight I found myself trapped in debt hell.

How many credit cards did you get in college?

I tended to carry only one main card and paid the minimum balance off each month. Although I was never late on a payment, I certainly wasn’t getting anywhere by paying the minimum and always absorbing the interest hit.

What tactics did credit card issuers use to sign people up?

Credit companies set various stands up around campus and offered free merchandise for signing up for their cards. My friends and I had no concept of APY percentages or grace periods – hell, most of us didn’t even have a job. All we knew was how we were being offered these pretty nifty cards with $1,000 balance limits and we always somehow seemed to be pre-approved.

Although I was disciplined enough to send credit payments in on time (I did, in fact, have a job ;-), I still didn’t realize how foolish it was to allow the exorbitant interest rates to accumulate on balances. Consequently I ended up paying far more for items than if I had simply used cash or paid off my balance in full each month.

In your blog, you mentioned the “moment” when you realize that you had to confront your debt. Can you “relive” that moment again with our readers.

It was the painful clarity of realizing how disastrously broke I was. Hospital bill collectors were calling. A mounting car loan had to be paid each month. Student loans were piling up. I was even beginning to slip on minimum credit card payments. I felt helpless, had no savings and was literally buried underneath this rancid pile of debt.

I broke down and cried when I realized it could take years to eliminate all the debt I’d accumulated in order to set my finances straight. Although I was never out of control with my spending, I was still barely slipping by and blowing a lot of cash on outings with my girl friends and other unnecessary luxuries. Consistently living paycheck to paycheck was a sobering realization – I needed to grab control of the situation and begin making wiser financial decisions! The first critical step was to stop digging myself into any further debt.

Could you briefly describe the your “action plan”. Were you very precise as in really figuring it out how much to pay a month and knowing when exactly you will be debt free? Or were you flexible and figured out as you got along?

I headed straight to the library and grabbed any book I could get my paws on regarding personal finances. For roughly three months, I holed myself away to quietly read and absorb as much information as I could cram into my broke little brain.

My financial journey needed to begin with baby steps, otherwise it felt too overwhelming. I outlined a rough but manageable plan for myself – ie, first to save $600 while paying off minimum balances and once that goal was reached, I upped my savings amount to $1,000. Once I reached a sustainable safety cushion, I had a little more wiggle room to determine which debt to aggressively tackle first.

There’s debate in the debt reduction world about paying your higher interest debt first (since that is the mathematically correct way to do it). Others emphasize paying off your smallest debt. Did you strictly follow any of these methods?

Once I was able to mentally wrap my mind around the situation and accept it, I wanted to eliminate the whole stinking crap pile as efficiently as possible. First I pleadingly tried to re-negotiate rates but since my finances were less than pristine, I unfortunately didn’t get very far. So I took a deep breath and chose to eliminate the highest interest debt amounts first.

Do you use any budgeting software like quicken?

I’ve never used any type of budgeting software.

You mentioned a couple of times in your blog how you “practiced self restraint” when for example a skincare salesperson tried to get your attention ! What advice would you give to people about making sure you stick to a budget? How did you get rid of the ” now pay with your future” mentality?

Instead of telling myself I can’t afford something, now I ask how can I responsibly afford it? I’m extremely conscious of my spending and try to invest in quality purchases that offer good value and will last a long time. So instead of ravenously spending with future earnings through credit, I now only purchase items with money all ready nestled in the bank.

What were the most “painful” spending items you had to cut back on?

I love food and adore fashion but the biggest sacrifice by far has been in traveling. I’m kind of a free spirit and really miss wandering the globe and becoming immersed in new cultures. I lived abroad in Europe and Scandinavia for four years and would really love to resume my adventure lust some day.

You mentioned in your blog about how you were “sued for credit card debt”. I’ll point readers to this post, but could you briefly tell us about it? Have you heard back from them since you did not settle?

This was a very traumatic experience at the time but I’m grateful for all the knowledge I gleaned by going through it. Basically the collection agency was suing me for thousands of dollars but didn’t even have the courtesy tell me what the alleged debt was for! I was baffled and extremely frustrated.

My lawyer stated how many collection agencies have judges in their back pocket and therefore couldn’t guarantee a favorable outcome, even if there wasn’t a shred of evidence presented against me. I was furious, however, and refused to back down. After I filed a Motion of Discovery with the courts (which forces the Plaintiff to produce all their evidence), the collection agency mysteriously vanished.

I spent roughly $500 for a lawyer and endured months of harassment but looking back, the experience itself was invaluable. I became horrified at how some collection agencies operate on a mafia-like level by using fear and intimidation tactics. Overall, this experience actually served as a protection as I became more acquainted with legal law and my rights as a consumer. I’d advise anyone going through a similar nightmare to retain a local Consumer Protection lawyer immediately to help you become familiar with your specific state’s rights. Many lawyers also offer free initial consultations.

And as far as my circumstance goes, perhaps someone snuck into my undies drawer and used my card while I was abroad? Since no receipts or purchases were ever provided by the collection agency, I guess I will never know the complete truth.

You mentioned that this experience taught you to check your credit report every year. Aside from checking your credit report, do you subscribe to any credit monitoring services?

I did have access to one of my FICO scores through WaMu before they were recently taken over by JPMorgan Chase, as WaMu provided monthly TransUnion FICO monitoring as a courtesy to their card holders.

Do you monitor your fico score? And if you do, could you share with us on how your score has evolved as you got more into debt and as you reduce them?

Through WaMu I excitedly watched as my FICO transformed from a 615-ish level to an eventual 750+. Unfortunately, I’m constantly bombarded with credit offers again. 🙂

Do you enroll in automatic payment with your credit card bills or auto loans so that they are paid off automatically?

I laugh every time this suggestion comes up because I actually used this method once and it got me in a wee bit of trouble. I set up an automatic bill pay online through my checking account a few years ago and one day my bank unexpectedly experienced a technical glitch. I didn’t realize my bills hadn’t been paid for the month until I started receiving nasty notices in the mail. So it would be wise for those with automatic bill payment to err, actually keep an eye on things. Unlike me.

But I actually prefer to use a more ‘hands on’ manual approach because it gives me more control on where I want my finances to flow for the week or month.

You mentioned in your blog how important you think emergency funds are. Can you tell us again how your views on this came about?

Recently I read a statistic that nearly 50% of Americans lack any type of savings and it was a sobering read. I view cruising by without an emergency fund as the equivalent of venturing through quicksand. As Murphy’s Law suggests, unexpected expenses will occur, and they certainly always do. When friends approach asking for debt advice, I beg them to establish a bit of an emergency fund as an initial priority because if you’re suddenly forced to go into further debt to cover emergencies, it’s merely compounding upon the existing problem.

Did your parents talk to you about money? If they did, how and what have they taught you?

My parents were excellent financial role models as they always firmly lived within their means. My mother stayed at home with us and in general I believe they did a wonderful job supplying my brother and I with a very comfortable childhood, even with limited resources. And they never fought about money. As much as I’d love to pass the buck on this one, I really can’t blame them for my financial mishaps. Those were mainly due to my own stupidity!

On your blog, you mentioned about ways to save money like coupon cutting, learning to cook etc. What are some of the methods you have used personally?

I’ve probably tried every imaginable frugal tip out there but I really suck at coupon clipping. However, maintaining an extensive veggie garden and whipping up my own tasty meals at home has helped me save enormously. But the most beneficial (and comforting to my pocketbook!) has been to only what I truly love. Following this rule has helped me trim the unnecessary excessive ‘fat’ from my financial diet.

You wrote about this incident and I will never forget this. You said you have to turn down an invitation to hang out and have drinks with your friends because you did not want to charge it to your credit card anymore. Question is did you have to constantly do this? How do you or how did you handle similar incidents when you do not want to “hang out” because you knew you would be spending money on stuff you did not want to but instead would like to use the money to pay off your debt?

I still vividly remember that incident and admittedly it was difficult. Thankfully I no longer have to sacrifice the occasional night out because I now have savings exclusively set aside for fun and spontaneous events. My friends cringe when I give them the evil eyeball while they’re paying a $5 fee to sneak extra dough from the corner bar ATM but in general they’ve been extremely patient with me.

You mentioned that you stopped using credit cards for a while and switched to debit. How was that experience like? Would you recommend that to others?

Using debit prevented me from accessing the convenience of ridiculously easy credit so it proved to be extremely helpful in the beginning. I had to stem the flow of poisonous debt so going strictly debit was an excellent starting point. Now I use a credit card and pay my balance in full each month. The notion of carrying a balance from month to month never even crosses my mind because it’s simply not an option. Not even for my beloved Crème de la Mer. Sniff.

What credit card do you use now?

I use a Discover Rewards Card, which offers cash back and other redeemable rewards. I never anything unless I have enough saved first so if I throw $1,000 on the card, that exact amount is immediately payed back from cash all ready snuggled in my checking account. I rarely wait for my statement to appear in the mail. Usually I pay the bill off that same evening.

Unlike others who have come to “hate” credit cards, you seem to implicitly acknowledge that credit cards are not evil. Given how far you have come, is there any fear that you will go back to old habits or do you think your experiences have been enough that you do not worry at all about getting into credit card debt again?

I’m fairly certain I’ll never fall into the credit trap again, especially while credit companies are changing on a whim during this tougher economy. Right now I don’t trust creditors not to change rules midstream and therefore will wisely steer away from accumulating a credit balance beyond my grace period. I’ve slowly weaned myself off credit and don’t rely on my cards for anything. And if credit companies start pulling manuevers like charging interest immediately upon purchases (as they’ve been threatening), I will stop using cards completely. Those evil bastards!

If you were in front of first year college students, what advice would you give them about money, student credit cards etc?

My advice to first year college students would be to proceed with extreme caution. Decisions regarding money will shape your financial health for many years to come and nasty mistakes will inevitably haunt you relentlessly. Student loans and credit cards are not free money and, yes, you really do have to pay all that money back eventually. Strive to get in the habit of saving at least 15-20% of your income from every paycheck and focus on paying any credit balances off in full each month. Your hard-earned money is important and you deserve to reap the rewards of your sweat and toil, not some greedy credit industry. But most importantly, enjoy your youth. Experiences and memories are far more valuable than accumulating really cool ‘things’.

The Past and The Future

By: Jason Steele

06/02/2009

The Past

Not all that useful, but definitely interesting is this little retrospective from Slate on the history of the credit card. My favorite is number 10, the University of Delaware Mastercard. UD happens to be my Alma Matter, and it seemed like a significant percentage of my classmates worked at nearby MBNA doing telemarketing. MBNA was purchased by Bank of America in 2005. Finally, you may know that Vice President Joe Biden is a UD grad, but did you know that both Obama’s and McCain’s top campaign strategists attended UD?

The Future

Remember way back before the Credit Card Bill of Rights passed , when banks were pushing the line that they would no longer be interested in “dead beats” who pay their bills on time. Now read this article from Advertising Age. It only took a week or two for undesirable deadbeat to become desirable again. Banks are waking up to the fact that merchant fees are a huge cash cow, especially with low risk “deadbeats” like myself who pay their bills on time and avoid interest and fees. Not only are these banks competing against themselves, but they are also competing against debit cards, cash, and checks as a method of payment rather than a method of finance.

I think that there may be a future in annual fees, but only if the card provides a major benefit to the customer. I would at the following examples to see where the trend is going.

Delta Reserve American Express

This card has a huge $450 annual fee. On the other hand, you get massive benefits that more than justify the fee. The biggest two are the domestic first class companion upgrade, and the Sky Club lounge membership. Other perks include priority standby privileges over non-card holders, and lots of uber-valuable elite qualifying miles. Note that these benefits really entail little if any marginal cost to Delta or American Express, yet are very valuable to their card holders.

Chase Continental MasterCards

Holders of these cards will still be allowed two checked bags for free. Again, this really isn’t much additional marginal cost for Continental, yet it is a valuable perk for the customer. Their “Presidential” card has a $375 fee, but includes a business class two for one ticket, and elite membership with Hyatt hotels and Avis car rentals.

What Is The Trend?

It seems that companies will be looking to entice desirable customers with higher annual fees, but that fee will come with membership perks that justify it. Some frequent fliers jeolously complain that people are ing the status that they are “working” hard for with all of their travel.

When it gets right down to it, the “deadbeats” are the most reliable bet for banks in a crisis like we are facing now. Having to many customers who always pay their bills on time seems to be a problem most banks would like to have.

Where Is The Credit Crisis Worse?

I have seen the claim of a city being the “foreclosure capital” so many times, I am completely disillusioned. Depending on which news report you read, the foreclosure capital is Stockton, California, Colorado, Jacksonville, Florida, or Las Vegas, Nevada. In fact, the way the media covers it, it almost seems like some cities take pride in the title.

When it comes to credit card debt, there are several contenders. If you look through the top twenty, half seems to be hard hit cities in the Midwest like Cleveland and Indianapolis, while the other half seems to be warm weather places, largely in Florida, that have been part of the real estate bubble. Either way, regional financial difficulties seem to translate directly into credit card debt/

CITIBANK WANTS DEAD PEOPLE TO PAY UP!

By: Jason Steele

05/29/2009

So says the title of the joke/hoax email that you might have seen. The earliest account I can find on the internets is this from 2004.

“My Aunt died this past January. Citibank billed her for February and March for their monthly service charge on her credit card, and then added late fees and interest on the monthly charge…the balance had been $0.00… now was somewhere around $60.00)

I placed the following phone call to CitiBank:

Me: “I am calling to tell you that she died in January.”

CitiBank: “The account was never closed and the late fees and charges still apply.”

Me: “Maybe, you should turn it over to collections…”

CitiBank: “Since it is 2 months past due, it already has been.”

Me: “So, what will they do when they find out she is dead?”

CitiBank: “Either report her account to the frauds division, or report her to the credit bureau…maybe both!”

Me: “Do you think God will be mad at her?”

CitiBank:”…excuse me …..?”

Me: “Did you just get what I was telling you…. the part about her being dead?”

CitiBank: “Sir, you’ll have to speak to my supervisor!”

(Supervisor gets on the phone)

Me: ”I’m calling to tell you, she died in January.”

CitiBank: “The account was never closed and the late fees and charges still apply.”

Me: “You mean you want to collect from her estate?”

CitiBank: “…..(stammer)”

CitiBank: “Are you her lawyer?”

Me: “No, I’m her great nephew.” (Lawyer info given… )

CitiBank: “Could you fax us a certificate of death?”

Me: “Sure.” ( Fax number is given )

( After they get the fax. )

CitiBank: “Our system just isn’t setup for death…”

Me: “Oh…”

CitiBank: “I don’t know what more I can do to help…”

Me: “Well… if you figure it out, great! If not, you could just keep billing her…I suppose…don’t really think she will care….”

CitiBank: “Well…the late fees and charges do still apply.”

Me: “‘Would you like her new billing address?”

CitiBank: “That might help.”

Me: ” ( Odessa Memorial Cemetery #### Hwy 129 and plot number given. )

CitiBank: “Sir, that’s a cemetery!”

Me: “What do you do with dead people on your planet?!!””

Is This A True Story?

Here is the page on Snopes investigating its veracity. The result are inconclusive. I would not put it past an untrained customer service agent to make up stuff like this. I am reminded of the infamous case of the New Mexico resident who was told that he could not purchase tickets for the 1996 Olympics in Atlanta because New Mexico was not part of the United States.

Ultimately, it doesn’really matter if the story is true or not, it is funny because we feel as if it could be true.

What Do Credit Card Companies Do About Your Debts When You Die?

I have touched on it here, but the short story is that they will try to collect from your survivors. I have mixed feelings about this. On one hand, survivors often have no legal obligation to pay debts. On the other hand, I almost can’t fault the companies for trying. Two of my favorite expressions are: “It can’t hurt to ask” and “You will never know if you don’t ask”. Look at it from the company’s standpoint. They are owed money, and they have an obligation to their share holders to at least ask for repayment, even if the survivors are not legally obligated to do so.

Here is a New York Times article on how they are trained to ask nicely, a courtesy generally extended only by those with no other legal resource. On the other hand, there is the approach described here, where the bank guilt trips the survivors and even pins the blame for the worldwide financial crisis on them. I really have no sympathy for that approach. I can hardly think of a more vulnerable point in a person’s life than the aftermath of the death of a loved one.

I don’t mean to be all morbid, but the time to consider these things is now, hopefully long before you experience any kind of tragedy. Properly informed, you may one day be in a position to be able to assist others when they experience the loss of a loved one. The best advice I could give would be not to mail any checks until you have spoken with a lawyer. Credit card debt is unsecured debt, and thus has a higher interest rate than secured debt, such as a mortgage. One of the reasons why you pay a higher interest rate is because your debt does not necessarily have to be paid back in the event of your death. Fail to pay off your mortgage, and the bank merely forecloses and repossesses the property.

The credit card companies will always take their rights up until the limit of the law, and I recommend you do the same with your rights.

Bonuses And Other News

By: Jason Steele

05/28/2009

From the One Mile At A Time blog come this bonus for Starwood Amex holders. Until July 31st, you can get a 50% bonus on transfers to USAir’s Dividend Miles program. The upside is that 20,000 SPG points can be redeemed for 37,500 Dividend Miles. USAir has a less than sterling reputation as an airline, however their frequent flier program is one of the least devalued out there. As the article points out, unlike United, they don’t block from partner award availability within the Star Alliance. Furthermore, they have a relatively generous award chart.

Foreign Transaction Fees, Again

Looking forward to the Credit Card Bill of Rights becoming effective next February, it is not hard to imagine ways that the credit card companies will try to create new fees and “enhance” others. The most worthless fee out there is the foreign transaction fee. Not only is this being increasingly applied to US Dollar transactions with foreign companies, (read here and here), but I am expecting them to increase. These fees represent no cost for the banks, and provide no value for their customers, they are a pure scam.

The USA Today, which has an excellent travel section, has a rundown on foreign transaction fees that are charged by some banks. It is far from comprehensive, leaving out the super duper Schwab Visa for example. Nevertheless, it is easy to see how choosing one card over another can make a drastic difference in the price of goods and services overseas. Lets say you are checking into your hotel for a week in Tahiti. The bill is $1,500. Part of you wants to pay with your Citi card and accumulate their Thank You points. On the other hand, you have a Schwab card as well. Choose wisely and you will save $75 dollars. The Scwab card will give you a %2 cash back reward, while the Citi card will charge you 3% for the privilige of using your credit card outside the United States. That is a 5% or $75 difference, worth far more than 1,500 Thank You points (which are worth about $15).

Yes money is important, but I harp on this over and over again because it is a pure scam, one of small yet growing number that have not yet been outlawed. I am expecting banks to increase these charges dramatically next year, and there I will always keep a Capitol One or Schwab card with me when I leave the country, even if I never get to visit Tahiti.

Finally, Under Silly Things To Do With Your Credit Card…

Someone, somewhere thinks that it is cool to make a bracelet out of your old credit cards. I don’t know why. It is not very practical, and can’t really say I find it attractive, but that is why I am the Reward Card Guru, and not the fashion guru. But wait, there is more. You also get instructions on how to tailor your old cards into other jewelry, such as rings and earrings. These are the same people who are promoting dumpster diving, er.. scavenging for all sorts of your daily needs. I am a frugal guy. I drive used cars and watch TV with an antenna, but I am not at the point where I do much scavenging. Come to think of it, I did see some discarded building materials at a construction site the other day, I wonder if they are still there?