Simple Money Solutions
By Nancy Lloyd

Published by Random House/Times Business
Feb. 2000; $23.00US/$35.00CAN; 0-8129-3175-0 

Contact Nancy Lloyd

Taking charge of my money is a snap.  I've done it a thousand times - I just can't stick with it. --Charlie, a classic yo-yo money dieter

If you're like most people, when you think about your credit cards, your kids' college education, or saving for your own retirement, your heart may start to race a bit, your hands may get a little clammy, and feelings of queasiness or even dread may come over you. Those are normal reactions. But the important question is: What do you do next, to allay your nerves and to initiate the steps you and your family need to take? 

Worrying is extremely draining to your mind and body. When worrying occupies your thoughts, it closes you off to opportunities. You can't see the forest for the trees. You're so busy trying to figure out how to deal with your day-to-day money concerns that you can't make long-term plans to reach the goals that matter to you and your family. 

Martha's Story 

Every New Year's Eve, for the past six years, Martha has been setting the same resolution. "Come midnight, I vow to take charge of my money, and each year I get off to a great start," she says. "I'm really motivated, so I come up with all sorts of ways to spend less money." She cuts out every expense that's not a necessity: eating lunches out, going to the movies, buying a cup of coffee at a pricey coffee bar on her way to work, and so on. She packs a brown-bag lunch every morning and, to avoid temptation, she leaves her credit cards at home. 

"For a while, everything is great," she says. "Then something always happens that I haven't counted on. In two of the last six years, I discovered that I owed a lot more money on my income taxes than I had thought. In another year, my college roommate asked me to be her bridesmaid, so I had to spend a couple of thousand dollars on a wedding gift, a plane ticket, and an ugly dress I'm sure I'll never wear again." 

Despite these monetary setbacks, each year Martha would stick with her resolution for several weeks. "Then, without warning, I'd hit the wall," she recalls. "I could be walking by a nice restaurant and the aroma of the food would be so seductive that I would walk in and end up ordering the most expensive item on the menu. Or, I would stroll by a department store and spot some shoes in the window and, I swear to you, they would be calling my name! So I'd go in just to try them on, but I couldn't pull myself out of the store without buying something expensive-much more expensive than I would normally buy. And there went my resolution and all my hard work. 

"After I broke my resolution, I'd get my credit cards out and go on a spending spree. I'd tell myself that I was entitled to a little reward for my hard work," Martha recalls. "Then I would feel really guilty and start the whole sacrifice thing again. Whether I was sticking to my resolution or spending like crazy, I couldn't get past one fact: I was a failure. I couldn't even stick to a simple New Year's resolution." 

But Martha wasn't a failure. She was a yo-yo money dieter. After breaking her promise to herself by cheating on her resolution, she faced a dilemma that is familiar to everyone who wants to improve his or her quality of life. "I wondered what difference it would now make if I cheated a little more," she recalls. 

STEP 1: SET UP A PLAN THAT YOU CAN LIVE WITH. 

Let's face it, making any changes to your lifestyle takes work. Temptation is everywhere. No matter how strong your resolve is when you start, a momentary lapse can cause you to revert to your old habits. Getting back to your resolution can be harder than starting it in the first place. 

What you do at this crossroads-and even how you describe yourself-can spell the difference between success and failure. Here are five common money types. Do any of them sound familiar? 

• Money Type F: The self-described financial failure. You get out the credit cards and buy whatever you want. You've already gone off your money diet and you'll never take charge of your finances, so what's the point of even trying? 
• Money Type B: The bucks binger. You start spending more because you feel you're entitled to a reward - or two, or ten - after making such huge sacrifices. 
• Money Type M: The money martyr. You start out as a bucks binger but then guilt sets in. You feel that you are not worthy of the things you bought. Your closets are lined with pricey clothes you have never worn or costly electronics items that have never been taken out of the original boxes. 
• Money Type P: The penny purger. You're a bucks binger but when your feelings of guilt take over, you decide to get rid of your purchases by giving them away to friends or to a charity. You get rid of the goods, but you're still on the hook for the credit card bills, which may take years to pay off. 
• Money Type C: The cash compromiser. You cut yourself a little slack. By sticking with your money diet, you have made a lot of progress. You feel it's okay to reward your hard work occasionally and in moderation. But you pay for your treat with cash because you don't want to rack up any new credit card charges while you're still paying off old ones. 

STEP 2: UNDERSTAND THAT YOUR DAY-TO-DAY CHOICES WILL SEAL YOUR FINANCIAL FATE. 

How can you keep the yo-yo syndrome from ruining your plans? You need to do seven things: 

1. Set and prioritize realistic goals - goals that are attainable and are important enough to make the sacrifices worthwhile. 
2. Give in to an occasional urge to splurge. Build some inexpensive treats into your spending plan, such as lunch at a nice restaurant with a friend, or a new shirt, or whatever gives you some joy and makes your other sacrifices seem worthwhile. 
3. Boost your money IQ so that you won't be chasing investments that aren't right for you. 
4. Understand the tax consequences before you make any money moves. 
5. At fixed intervals, measure your progress toward reaching your goals. 
6. Recruit your family for help with your work in progress, as well as for emotional support. 
7. Have the determination to "get back on the horse" if you fall or are thrown off. 

Remember, you're in this for the long haul. If you stay on a money diet 100 percent of the time, all you'll think about is forbidden treats. An occasional treat is not a sign of weakness. You can consider yourself weak only if you fall off your new plan and refuse to get back on it. 

Lloyds Law: Your little decisions - the ones you make day in and day out - will seal your financial fate. It's the decisions you may not give a second thought to that determine whether you will ever reach your goals and lead the life you want. The life you could have. 

STEP 3: UNCOVER WHAT PUSHES YOUR SPENDING BUTTONS. 

Almost all of us, at some time, have tried to fill a void in our lives with something material. And credit cards are often used to pay for it. But saying "Charge it" isn't going to bring you true happiness. It may give you a quick spender's high, but, trust me, it won't last long. The high is guaranteed to be ended by the time the bill arrives. The agony of paying the bill-and the accompanying finance charges-will last much longer than the temporary morale boost. 

"I hadn't put two and two together, but maybe my little foray in the shoe department wasn't an accident," says Martha. "Looking back now, it's kind of clear what caused it. I had just been passed over for a promotion earlier that week, and while I pretended I didn't care, I did. My boss had told me that I wasn't ready for the promotion. 'You're not mature enough,' she said. So I guess that when I looked in the department store window, I thought that a new pair of shoes might make me feel better. Maybe my clothes were making me look too young, so if I came into the office wearing a very expensive, chic pair of shoes, maybe my boss would reconsider and give me the promotion after all. It seemed reasonable at the time. 

"I wore the shoes to work the next day. My cubicle mate said that she liked them but asked, 'We both earn the same amount and I could never afford those, so how can you?' I shrugged and said in a low voice, 'They were on sale.' But of course they weren't. Later that day, while I was waiting for the elevator, Marjorie, the woman who got the promotion instead of me, stared at my feet for a long time. She rolled her eyes and sneered, 'You know, those shoes don't go with your outfit.' When I got home, I put the shoes in their box and I haven't taken them out since. But I'm still paying for them." 

STEP 4: LEARN TO BOUNCE BACK. 

What should you do if you have a momentary money lapse? Don't condemn yourself over occasional stumbles. Instead, commend yourself for all the times when you didn't crumble-the times when you stayed on or got back on your financial plan. But if you feel your resolve slipping: 

• Avoid spending triggers. If times, places, or people you are with lower your resistance, ask yourself why, and then steer clear of those temptations. 
• Run your own race. Don't try to keep up with the Joneses or impress someone else. Make purchases for the right reasons - because you need something. 
• Don't shop to drown negative feelings. If you were passed over for a raise, had an argument with a spouse or relative, or are just feeling icky that day (or week or month), stay out of the stores. Instead, acknowledge your negative feelings. Then do something that will make you feel better, such as volunteer work or exercise. 

In the next two chapters, I will show you more ways to stay motivated and reach your goals without feeling cheated. 

Copyright ©2000 Nancy Lloyd

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With smaller banks being gobbled up by bigger ones, truly good credit card offers, as opposed to those that just appear good in the advertisements or pre-approved credit offers, are getting hard to come by. Do you know how to separate the credit card deals from the credit card duds? In this chapter, I will show you what to look for - and look out for - when sizing up your current credit cards, shopping for a new credit card, or even weighing the pros and cons of debit cards.

Vicki’s story:

"‘2.9% interest rate!’ That’s what the credit card mailer screamed, in big, bold letters," recalls Vicki. "They even sent me ‘convenience’ checks so that I could transfer my credit card balance from my old, 8.9% credit card to the new one. Anyhow, I figured that I’d be saving money by making this switch, but that’s not quite how it turned out. While it didn’t say it anywhere that I could see, that low interest rate only applied to new purchases. Interest on my balance transfer came in at a steep 12.9 percent. On top of that they added a 2 percent fee for transferring my balance. The checks may have been convenient, but they sure cost me plenty."

The rules used to be so simple: If you carried a credit card balance you should choose a credit card with the lowest interest rate. And if you paid off your credit card balance each month, you carried a card that charged no annual fee. But choosing a credit card based on interest rates or annual fees alone will no longer get you the best deal. You also need to compare fees, grace periods and how finance charges are calculated.

If your mailbox is brimming with unsolicited credit card offers boasting "Low Interest Rates," "No Annual Fees" or "Rebates with Purchase," beware! With hidden fees and convoluted finance charges, you could end up paying hundreds of dollars more than you’d pay with competing cards - money that would be better spent paying off (or at least paying down) your credit card balance.

Some credit card issuers are even punishing consumers who have used their card too much (or too little), or who have had the audacity to accept a card from a competing company. The stiff penalties include doubling the interest rate on outstanding balances, levying staggering new fees for a variety of "infractions," and closing credit card accounts with no notice.

In chapter 2 we talked about several quick ways to get on top of your credit card bills. Taking charge of your credit can be a monumental task so in this chapter I give more detailed information on many new issues and potential problems facing consumers. I’ve broken it down to six easy-to-follow steps:

Advice in this chapter can not only save you money, but also turn your so-so credit report into one that’s squeaky clean.

STEP 1: TEST YOUR CREDIT CARD KNOW-HOW

Do you know how best to choose and use a credit card? Here’s a quiz to see how savvy you are. The answers offer tips to cut your credit card fees.

Question 1: If you carry a credit card balance of $1,750 on a card that charges 18 percent interest, how long will it take to pay off the bill, and how much interest will you pay if you make only the minimum monthly payment (2 percent of the outstanding balance)?

a) 3 years + 2 months; $627 interest.
b) 7 years + 9 months; $1129 interest.
c) 16 years + 4 months; $2189 interest.
d) 21 years + 11 months; $3647 in interest.

Answer 1: d) 21 years + 11 months. You’d spend almost 22 years and $3,647 in interest to pay off $1,750. (That’s $2 interest for each dollar of purchase!).

Tip: By paying an extra $25 per month, you could wipe out the balance nearly 19 years earlier and pay only $588 in interest—a saving of $3,059.

Question 2: If you are only one day late with your payment, your credit card issuer may:

a) Assess a late payment fee of up to $30.
b) Boost the interest rate on your card.
c) Cancel your credit card.
d) Any of the above.

Answer 2: d) Any of the above. Fees are rising. Credit card companies are boldly changing terms and canceling cards to punish consumers who don’t use their cards in the ways the issuers would like. Credit card issuers can change terms (including interest rates or fees) with just 15 days’ notice. Read the insert that comes with your bill. Be prepared to switch to a cheaper card if the terms on yours become unattractive.

Question 3: True or False? If you accept a "pre-approved" credit card offer with a $5,000 credit limit and a 13 percent interest rate, you may only get a card with a limit of $250 and an 18.6 percent interest rate.

Answer 3: True. Bait and switch occurs in unsolicited offers. Typically, you’ll get a much lower credit limit and/or a higher interest rate. There are disclaimers in the fine print, but card issuers count on consumers’ taking whatever card they get. Cut up the card without using it, and call the company to close the account.

Question 4: True or False? If the card issuer raises the interest rate, it will apply only to new purchases.

Answer 4: False. Most rate increases also apply to outstanding balances.

But if you make no new purchases on your card, a few states prohibit card issuers from raising rates on your existing balance. To qualify, you must notify the card issuer about your plans to discontinue using the card for new purchases. Know when any "teaser rates" expire (the bank won’t notify you), and switch to another card before the expiration date, or ask your bank to continue the lower interest rate.

Question 5: True or False. Cards that offer rebates (cash back, frequent flyer miles, and similar perks) based on your card usage are great bargains for most consumers.

Answer 5: False. Unless you’re a heavy credit card user (charging more than $5,000 per year), fees may exceed benefits and are only a good deal if you pay off your balance each month and you use your cards frequently. (These cards typically charge the highest interest rates allowed. If you don’t pay your monthly balance in full, you’ll pay more in finance charges than the rebates are worth). Most cards charge high annual fees (often $50 or more), so, for most consumers, the fees will exceed the value of the rebates. Count on long waits for big payoffs, and be aware that awards can change or be rescinded with little or no notice.

Question 6: True or False? Taking a cash advance on a credit card that charges 13 percent on purchases may cost you the equivalent of 40 percent or more in interest and fees.

Answer 6: True. This is an expensive way to get cash. First, most cards charge a higher interest rate on cash advances than on purchases, and they don’t have to disclose the rates in the bold or fine print. Second, card issuers often assess fees (typically, 2 percent of the cash advance), so look for a card that caps cash advance fees at no more than $10. Third, there is no grace period. Interest typically begins from the date of the cash advance, even if your account is paid in full. 

Question 7: True or False? Paying for merchandise with a credit card "convenience check" (which bills the check amount to your credit card) is the same as paying with a credit card.

Answer 7: False. You may be hit with a big fee for writing a check, a higher interest rate than on credit card purchases, or interest charges that start sooner than with credit card purchases. Plus, you may not get other benefits, such as extended warranties and consumer protection against defective merchandise or mail-order merchandise that never shows up. Before you write a convenience check, ask about the fees and interest charges, and find out when the interest starts accruing.

Question 8: True or False? Department store credit cards offering "deferred billing," with no finance charges for six months will charge retroactive interest if you don’t pay off the balance within six months.

Answer 8: True. Interest goes back to the date of purchase. The store will forgive the interest if you pay off your balance before the offer expires (within six months, in this example). Otherwise, you’ll owe interest from the date of purchase, and many store cards charge the highest interest rates allowed by law. "Deferred Billing" is only a good deal if you pay off your balance before the offer expires.

Question 9: True or False? If your credit card issuer sends an offer to "skip a payment," you won’t owe finance charges for that month.

Answer 9: False. They send these offers to customers who usually pay their bills in full to get them to carry a balance from month to month. Finance charges, of course, begin the day your payment is late.

Question 10: True or False. If you carry a balance you’ll pay less in finance charges if you make your payments earlier in that month.

Answer 10: True. Most finance charges are based on the average daily balance, so the earlier you make a payment, the lower your average balance will be, and therefore the lower your finance charges will be. (More of your payment will go to reduce your balance, not just to pay interest.)

Question 11: As few as one in five consumers who apply for a low-cost credit card is accepted. The main reason for rejection is:

a) Applications for more than two cards within six months.
b) A credit report that contains errors.
c) A job change within the past two years.
d) All of the above.

Answer 11: d) All of the above. Get a copy of your credit report before applying for a low-cost card. (See Step 3: Check Your Credit Report)

Question 12: True or False? If your credit card is tied to your home’s equity and you miss payments, the bank can foreclose on your house.

Answer 12: True. For these cards, your credit limit is based not on your credit history, but on the value of your home’s equity (your home’s market value less your mortgage balance). If you fall behind on your payments, the bank can foreclose. If you have credit cards that are tied to your home’s equity, save them for important purchases (such as home improvements or tuition), not vacations, restaurant bills or anything that will be used up before you’re finished paying for it.

Lloyd’s Law: The squeaky wheel gets the best credit card deal.

Copyright © 2000 Nancy Lloyd

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