This week we welcome Beverly Harzog, a frequent source of mine when it comes to credit card issues and author of the new book, Confessions of a Credit Junkie: Everything You Need to Know to Avoid the Mistakes I Made. She was nice enough to welcome me to her blog last week and I am happy to return the favor. Here she is with five credit card mistakes to avoid:
Credit cards can be a really useful money management tool. If you take time to understand how to use credit wisely, you can even make a profit from your credit cards.
But if you don’t know the rules of the game, you can end up in trouble in no time at all. Here are five credit card blunders that you want to avoid at all costs.
Mistake #1: You open several credit cards at one time. This mistake is often common among those who are new to credit cards. How do I know this? Because I made this exact mistake when I got out of college.
You open the envelope and pull out your first shiny card and see your name on it. It’s a rush! More offers start rolling in and you don’t see why you shouldn’t apply for all of them.
Well, there are plenty of reasons to stop yourself. Each time you apply for a card, the credit card issuer does what’s called a “hard inquiry.” This can knock two to five points off of your FICO score.
Another good reason to say no to multiple cards? When you’re new to credit, you need to gain experience when it comes to managing a credit line. So take your time and build a good credit history slowly.
Mistake #2: You don’t have a budget. One of the biggest contributors to credit card debt is the lack of a budget. Without a spending limit, you could easily charge more with your credit cards that you can cover with your monthly cash flow.
Remember, a good budget isn’t a constraint that ruins your fun. A budget actually puts you in the driver’s seat because you’ll be able to see a clear view of your expenses and cash flow. And most importantly, you’ll have control over how much you spend.
Mistake #3: You don’t track your spending. This is a detail that often falls between the cracks. You might think this will be a pain, but these days, there are so many options and many of them are even fun to use. You can choose from oodles of smart phone apps, free money management software on the Internet, or create your own spreadsheet if you’re tech savvy.
Be sure that you have a limit for the amount you plan to put on each credit card and then stick to the plan. Check your credit card accounts online every week just to make sure you’re on top of everything.
Mistake #4: You don’t pay your bills on time. Make sure you pay not just your credit card bill on time, but all of your bills on time. If you don’t, your credit score will suffer.
A lot of folks don’t know that a bad credit score can increase the rates they pay for health insurance, car insurance, car loans, and more. An excellent credit score actually helps you save money in many areas of you life.
There are a variety of ways to set up reminders, such as text or email alerts. So do what it takes to pay all of your bills on time and protect your score.
Mistake #5: You carry a balance. Sometimes this starts innocently and you think you’ll carry a balance just this once. But then, before you know it, it’s six months later and your balance is getting bigger due to compound interest.
Look, life can get awful messy at times and emergencies happen. But unless you’re in dire straits, make a vow that you won’t carry a balance.
So pay your bill in full during the grace period. For those who don’t know, when you use your card to make a purchase, the grace period is the amount of time you have to pay the bill before interest charges kick in.
About Beverly: Beverly Harzog is the author of Confessions of a Credit Junkie: Everything You Need to Know to Avoid the Mistakes I Made. She is a nationally recognized credit card expert, author, and consumer advocate. She’s appeared on Fox News, CNN Newsource, ABC News Now, and top media markets across the country. She is a frequent guest on syndicated radio shows, and her advice appears regularly in print and on major websites, including the Wall Street Journal, The New York Times, USA Today, SmartMoney, Money Magazine, U.S. News & World Report, New York Daily News, Washington Post, MSNMoney.com, CNNMoney.com and more. Beverly runs a popular credit card blog on her website and has coauthored two books, The Complete Idiot’s Guide to Person-to-Person Lending and Simple Numbers, Straight Talk, Big Profits! She lives in Johns Creek, GA.
FORTUNE — In the last two days, I have read two newspaper stories that have me worried.
The first, from Washington Post syndicated columnist Kenneth Harney, pointed to a huge rise in the amount of debt being taken out in the form of home equity lines of credit. “New home equity credit line borrowings soared by 42% in the final three months of 2013 and were up sharply for the entire year, to $111 billion,” he wrote. As for the reasons behind the increase, Harney singled out the comeback in home prices in the last couple of years that sent equity soaring, combined with the fact that teaser rates on HELOCs make them more attractive than a cash-out refi (and that’s before you consider a refi’s closing costs).
The second story, in Monday’s Wall Street Journal, focused on the rise in people taking out student loans not because they want to earn a degree, but because they need the money — and student debt is cheaper and easier (i.e. no credit check) than getting a loan from a bank or leaning hard on your credit card. “College officials and federal watchdogs can’t say exactly how much of the U.S.’s swelling $1.1 trillion in student-loan debt has gone to living expenses,” wrote reporter Josh Mitchell. “[A report from the Education Department's inspector general] also found the schools disbursed an average of $5,285 in loans each to more than 42,000 students who didn’t log any credits at the time.
For more head over to Fortune.com
Hi Jean. We bought our home in 1982 for $67,000 and refinanced in 2001 for $85,000. This company sold our mortgage without our knowledge in 2013 for $72,000 @ 8.5% interest. Unfortunately things happened that were beyond our control. For the past ten years I took care of my parents. They both passed away last year. Our whole life we’ve taken one step forward, three backwards. It seems when we get caught up something else happens that takes us back. Our credit is poor. We have never asked anyone for help; that’s why we are in this mess. We don’t know where to turn. Can you please point us in the right direction. Thank you.
Hi Toni. I have to admit, I can’t tell from your letter exactly where you are right now – but I can sense that it’s somewhere very difficult. And having lost one of my parents, I cannot imagine losing both – let alone in the same year. I’m so sorry for all you’re going through. In situations like these, fixing everything quickly is just not an option. The world of money just doesn’t yield results that dramatic that fast (if it did, I’d have a television show like The Biggest Loser). Rather, it’s the smaller, habitual changes that add up to something meaningful over time. Focus on controlling the things that you can control. The top three things I’d do? 1. Look at your spending and see where you can cut back. 2. Take that money and pay down high interest rate debt if you have it, or save it if you don’t. And 3. Pay your bills on time. Even if you’re just playing a little more than the minimum (a number you should try to nudge up) paying on time will help move your credit in the right direction.
This week’s column is the second part to my two-part series on credit scores. If you missed last week’s on the murky waters of credit scores (i.e. FICO vs. Vantage), you can catch up here. As for this week’s piece, I tackle the misconceptions surrounding millennials and credit, and how both parents and twentysomethings can get started on building (and maintaining) solid scores.
You can see the full column on Fortune.
Aimee Shaffer had to make it work. After years of working as a public service news director at a radio station, her employer downsized, leaving Schaffer jobless, and unable to seek radio jobs at competing local stations (the fine lines of her contract). Left without a steady paycheck for the first time, Shaffer started saving.
By paying her bills with unemployment money, and cutting back on spending altogether, she made it work. For example, for her entertainment, Shaffer purchased a $10 pass to her local parks, and took to hiking and biking. She also steered her way onto a different career path and started her own business as a professional pet sitter. Shaffer even saved for retirement along the way. As she shared with America Saves, “I didn’t think I had enough money to save but I started by putting $25-$50 away with each paycheck and now I have a nice little fund.”
Shaffer’s story on saving, along with others’, can be found on the America Saves Week website.
As it just so happens, next week is America Saves Week (February 24th – March 1st). I know, it certainly doesn’t sound as fun as World Bartender Day, which is also next Monday, but it’s a week worth observing…and an action to start taking if you aren’t already. Since 2007, the week has been an opportunity for organizations to promote fruitful saving practices, and for individuals to confront their own savings habits (or lack there of).
Maybe your story is similar to Shaffer’s, or perhaps “saving” to you means scoring a great deal on a fabulous pair of shoes. Chances are you could be saving more. Don’t by it? The organization’s website also has a test you can take to assess your savings IQ. For instance, how much do you think the average American spent on the unexpected (i.e. emergencies) last year? Hint: It’s a lot.
For more on America Saves Week – what it’s all about, how to pledge, and above all, how to save more – head over to the organization’s site.
Al Roker’s solution to solving the Royals’ spending habits:
Do you have appointments for individual consultations for financial planning? I live at the Jersey Shore and will travel anywhere to get the financial help I need. I am 59, a teacher and divorced with a low credit score and significant debt from a high mortgage and poor choice of loans. Facing major decisions, and I need help!!
I don’t, Sue. But you’re an excellent candidate for Money School. Specifically, you should take The Debt Diet, which is designed to help you do two of the very things you mentioned you’re struggling with: pay off debt, and increase your credit score. By the end of the class, you’ll also be prepared to start building an emergency fund, which can help keep you from falling into debt again the next time money gets tight.
A new schedule of classes can be found here — this semester’s live schedule starts on February 11. I teach these live classes via webinar, and they come with a live Q&A period at the end, as well as a week of chat-based Office Hours, so you can ask me all of your questions and come back for more info if you realize something from the lessons wasn’t clear. It looks like this:
This year, I’m also offering recorded versions of the same classes — including The Debt Diet — through an online education platform called Udemy. This is a great solution if our live course schedule doesn’t mesh with your own schedule.
And as debt is usually tied to other areas of your financial life that aren’t working, you may want to take some of the others (particularlyBudgeting Bootcamp, A Crash Course in Saving More and Spending Less, and Yes, You Can Retire) as well.
I hope that is helpful — and I hope to see you in class! If you decide to attend, I look forward to hearing what you think.
This morning we have a new approach to reaching your financial goals from Maria Nedeva, the blogger behind The Money Principle. She writes about how making a switch from working harder to working smarter helped her dig out of an enormous amount of credit card debt. Following her advice is a nice goal for 2014!
I love my life and all that is in it. I also love that one thing isn’t in it — debt. Four short years ago we were in about $160,000 consumer debt. Today we are on our way to financial independence.
When the story got out, people started asking how we did it. I told them we had a strategy; they asked me to be more specific. I told them that frugality is not the answer; they asked what is the answer. Here is my answer: To be financially healthy and build sustainable wealth increase your income.
But your ability to work harder — by taking on more baby-sitting, stacking shelves or doing cleaning and gardening — is limited. Your time is limited; opportunities are limited. Working smarter by increasing the level of pay you command is the winner on two counts:
- It gets you to your financial goals much faster. Remember the shameful amount of debt I was telling you about? Well, we paid it off by increasing our combined income by about 30%. Yes, we worked hard but we also worked smarter.
- It doesn’t get you ill from exhaustion. Not a joke. Working over a certain number of hours per week and not getting enough rest has many negative consequences for our health, including high blood pressure, constant fatigue, clouded judgement and weight gain.
To do this, you should realize that working hard is about selling time; working smart is about selling reputation.
How much you’ll be able to charge depends on the “reputational capital” you have amassed.
These are the main differences between “selling time” and “selling reputation:”
Being technically good
A good seamstress can make you a black cocktail dress.
Being an artist
Coco Chanel created THE little black dress.
You are in the realm of the replaceable
Your competencies and skill are easy to replicate and there are many who can take your place/job.
You are in the realm of the unique
You have gone beyond the reproducible and your competencies are unique; there is no replacement. No one can replace Kurt Vonnegut.
You are likely to replicate things and your “products” are for the mass market.
You create something new and unique; you are not part of a trend, you are creating trends.
It is likely that people find you when searching for the product or service you offer; in other words, you rely on “passing trade.”
People look for what you offer.
One can switch from “selling time” to “selling reputation” in any occupation. How to get there? Try these six ingredients:
Choose wisely. Yep, you’ve guessed it: this is about choosing the area/field in which you can make the switch from selling time to selling reputation. Worn out as the “find your passion” mantra is, there is some sense in it. But I don’t believe in finding passion, I believe in creating passion. So choose wisely and remember that the area where you could sell reputation will likely be at the cross over between talent, interest (yours and others), inspiration and loads of hard work. It pays off, I promise.
Education. You should note that I said “education,” not “a degree.” What will get you to the reputation summit is the systematic gathering of varied knowledge.
Learning. Education is the knowledge you have acquired, learning is the process through which you acquire it. To be able to sell reputation you have to keep on top of your game.
Patience. This switch can happen overnight but usually there are many nights involved. Be patient.
Focus. Long-term endeavors often fail because somewhere along the way people lose sight of what they were looking to achieve. A technique to keep your focus that works for me is to plan backwards: I start with an image of where I want to be, work out the conditions to get there and then prepare these with the dedication of a cult follower.
Self promotion. You could create unique artifacts but you are not an artist, and would never be sought, if people don’t know about it. Self promotion is important. But, please, don’t tell people who and what you are; show them.
About Maria: Maria Nedeva is the blogger behind The Money Principle: a personal finance blog that will “make your head hurt and your wallet sing.” There she writes about money management, wealth and the changing rules of money.
I have two children in college (and one in high school). We have exhausted their 529 accounts. I have already taken out Parent Plus loans to the extent I can afford at this point due to other financial setbacks. After financial aid, we still need to borrow to cover all the tuition/room and board costs. What are the best options, or what should we look for in obtaining loans for our children? Anything you can provide would be appreciated. I’m overwhelmed at this point.
Hi Nicolette. I get where you’re coming from – it is overwhelming. And you’re smart to recognize when you’ve come to your own limit in terms of borrowing. At this point, the borrowing will fall to your children and the rule to stick to is to make sure they’ve exhausted their ability to take out federal loans before even considering private ones.
I also want you to take another look at your financial aid situation and call the financial aid offices at the schools your children are attending. Talk to a financial aid officer about the financial setbacks you’ve faced – particularly if they occurred after you originally applied for aid – and ask if there’s anything the school can do to help. Then have a very frank talk with your children about borrowing and how much they will have to repay when they graduate from school. Break it down for them so they can see what their monthly loan payments will look like. And if they’re overwhelmed by the thought, talk to them about the fact that they have options. They may want to consider transferring to schools that will offer them more in aid or working while they’re in school (and perhaps taking a lighter course load) to minimize borrowing.
Finally, the website fastweb.org has a terrific database of scholarships and grants and you’ll want to pore through it together. And when your next child goes through the process of selecting a college, make sure a good value is one of the criteria on your list.
When credit card expert Jason Steele reached out to me about a post on credit card sign-up bonuses, I knew he’d be able to answer the questions I get all the time — namely, how does adding a new card to your wallet impact your credit score? Read below for a clear-cut, easy-to-understand explanation of how this process works.
Big credit card sign-up bonuses of miles, points, or cash back seem too good to be true, but are they? For example, Chase is currently offering 50,000 British Airways miles as a sign up bonus. A quick search at CardHub.com returns similar offers for customers with excellent credit. With such valuable points and miles hanging in the balance, credit card users need to know if their credit score will suffer if they accept one of these offers.
How do sign-up bonuses work? Even during the depths of the great recession, when the banks were being bailed by the government, they were still making healthy profits from their credit card businesses. Credit card users are so valuable, that card issuers are willing to spend hundreds of dollars to acquire a new customer. The banks offer that money to the cash-poor airline industry in exchange for frequent flier miles, which they purchase by the billions for a fraction of what some travelers pay to buy miles.
Those miles are then offered to new credit card applicants, just for the opportunity to earn their business. Frequently, cardholders will have to meet a minimum spending requirement in order to qualify for the sign up bonus, which generates merchant fees for the banks as cardholders get in the habit of using the card – and possibly get into debt as well.
What happens to your credit score when you apply for a new card? The first thing that happens is that the bank pulls a copy of your credit report, a process often called a “hard pull.” One or two hard pulls by themselves will have a negligible effect on your credit score, but a large number of recent inquiries will cause a small, significant, but temporary drop in your score.
Once approved for a new card, your credit report will reflect an increased credit history and larger total line of credit extended. For a given amount of debt, a larger amount of credit extended helps your credit score by decreasing your debt to credit ratio. So for most people, receiving one or two new credit cards will raise their credit score, not lower it.
Some words of caution. Those who would use a new credit card to spend more or incur debt should not apply for one. Anyone who carries a balance on their cards should focus on paying it off, not chasing rewards. And beware of annual fees, which are often tacked on to cards with high rewards potential.
In addition, I find that most people make the mistake of over-thinking their credit scores. By worrying too much about minor factors such as recent inquiries and debt to credit ratios, they can lose sight of the big issues that determine the bulk of their credit score. Pay all of your bills on time and carry very little debt, and it is difficult not to have a great credit score.
Once applicants discover that credit card sign up bonuses, indulged in moderation, will not hurt their credit scores, then they can enjoy some of these tempting offers.
About Jason: Jason Steele is a full-time freelance blogger who is an expert on credit cards and reward travel. He writes about credit cards and travel for The Card Journalist and several other leading personal finance sites.