Mailbag!

September 16, 2010

Actually, it's a European carry-all. Not gay in the least

Dear Control Your Cash:

Hi, my name is Kari (with a “k”!) J I’m a stay-at-home mom (most important job in the world LOL!) and part-time volunteer with 3 sometimes bratty kids (LOL!) I’ve been paying off my student loans for my sociology degree for 4 years now, and they’re down to $5,347 (at 6.8%). I’ve also got $13,349 in credit card balances, at 14.29% after we did a balance transfer from a 19.9% card (pretty smart, huh?) We also owe $18,348 on our car, which we bought with 0% financing over 60 months.  Anyhow, my husband and I were watching Dave Ramsey and he said we should pay off our smallest debt first, then the next biggest one, and so on. He calls this the debt snowball. He seems so nice and helpful on TV, what do you think?

Sincerely,

Kari in Corpus Christi

Dear Kari:

Thanks for the clarification on how to spell your name, in case we get the exact same email from someone who spells it with a “c”.

I’m sure Dave Ramsey is pleasant and forthright. However, the man’s mathematical prowess is shaky at best. One thing we preach here ad nauseam is look at each transaction from the other party’s (or parties’) perspective. Let’s say all those loans were with the same lender. If that lender were seeking advice from us, it’d read something like this:

Dear Control Your Cash:

I’ve got an open-ended $5,347 investment that pays 6.8%, a $13,349 one that pays 14.29% indefinitely, and an $18,348 one that’s guaranteed to tread water for the next 5 years. Which one should I get rid of?

Sincerely,

Confused Wealthy Person

Dear Confused Wealthy Person:

How much more obvious could the answer be? Sell the $18,348 investment, hold onto the $5,347 one to the extent that you can, but above everything else, move heaven and earth to preserve the cash cow that is the $13,349 investment. That’s your ticket to riches.

(End of meta-question)

That answer took less than a second to formulate.

Which means that from the original perspective of someone trying to eliminate debt, the investments (debts) should obviously go in the reverse order. Do everything in your power to negate the $13,349 debt, then worry about the $5,347 one, and don’t even think about the $18,348 one while the clock ticks.

Think about what the credit card balances are costing you (i.e. earning for the lender) each month, versus how much the student loans are earning for their lender, versus the $0 in interest that Ford Credit or GMAC or whatever is getting for the car loan. This is so obvious it hardly counts as an observation, but there you are. Dave Ramsey’s advice is counterintuitive, bad, and rooted more deeply in psychology than in finance.

———————————

Dear Control Your Cash:

My friends and I are traveling to Las Vegas next weekend. I bought my ticket well in advance on Southwest ($119 round trip) and got the hotel room on Orbitz (Caesars Palace, $59/night, double occupancy.) Because I’m saving so much money before even getting there, I decided to up my daily gambling allowance from $120 to $200. The moment I hit $200 each day, I’ll quit and hang out by the pool. Thoughts?

Sincerely,

Brandon in Burbank

Dear Brandon:

So you’re committing to lose money? Awesome! Here’s an equivalent scenario:

“My friends and I are going to Camden, New Jersey next week. We’re from Detroit, so as far as we’re concerned Camden is a vacation spot. Anyhow, I plan to walk through the worst parts of town with $20 bills hanging out of my pockets, asking people for directions and reminding them that I’m not from around here while keeping my back turned as much as possible. As soon as I get mugged for a total of $200 each day, I’ll stick to major streets during daylight hours, start putting my cash in my wallet (or better yet, depositing it in an ATM) and keep the wallet in my front pocket. Thoughts?”

The relentlessly sanctimonious anti-tobacco lobby has spent hundreds of millions of dollars convincing people that it’s idiotic and suicidal to smoke, yet still haven’t gotten through to 23% or so of American adults. No anti-gambling lobby is quite as vocal, even though gambling is as moronic as smoking (although the former won’t turn your lungs black.)

A gambling “budget” makes zero sense, as long as you’re competing against a house that can’t possibly lose in the long term. The slot machines will beat you. The roulette wheels will do it almost as quickly. As will the blackjack tables, only they offer some false sense of camaraderie while bleeding you dry.

Your savings account will return at least 100% of the money you deposit into it. Your gambling “budget” will not.

Nothing will convince people of this, even their own losses, so it’s all a non-gambler can do to remind them of the foolishness of putting up your money against someone who holds a permanent advantage. If you’re that addicted to trying to defy the laws of probability, then play fantasy football or something. Or make straight-up sports or poker wagers with your friends, where no one takes a cut and in the long run, everyone’s winnings (and losses) hover around zero.

P.S.: As Nevada residents who enjoy not having to pay state income tax, we encourage you to ignore all the above advice given to Brandon in Burbank. Come to Vegas, or Laughlin, or Winnemucca, and spend as much as you possibly can. Split that pair of 10s at the blackjack table: you could win twice as much! Don’t just bet on football, play the parlay cards! You could win 1000 times your bet! And always take 23 red in roulette: a guaranteed winner.

Filed Under: Making Smart Choices Tagged With: , , ,

Invest in Sylver or Platynum before Zync.

February 22, 2010

Ysn't thys clever? Yt's a good thyng our comedyc ynstynct ys so childysh.

We’re still having this discussion?

Listen, the credit card companies don’t owe you a thing. You owe them. That’s how you got stuck in this mess, remember?

You applied for a card. You signed an agreement. No one “preyed” on you. Coyotes prey on ground squirrels. But the ground squirrels never initiated proceedings with the coyotes.

If a credit card company promised you a 7% interest rate, then started charging interest on your balance at 15%, then you can consider yourself preyed upon. Even though you’re idiotic for carrying a balance in the first place. One problem: no issuer has ever arbitrarily raised rates without notice. They’re not going to blatantly lie and run the risk of losing customers.

But they lost me, you say. I refuse to pay their confiscatory interest rates. I’ll never get out of this mountain of debt. Even the White House and Congress want to keep them in check, so clearly the issuers are doing something nefarious.

Then where’s the court willing to hear the inevitable class action suit filed on behalf of millions of defrauded cardholders? Fine, if you’ve got conclusive proof that a credit card issuer dishonored the terms of its agreement with you, let us know about it at info at control your cash dot com. Include a copy of the agreement.

Neither American Express nor Visa nor MasterCard nor Discover has ever held a cardholder at knifepoint and said, “Buy stuff, preferably more than you can afford.” Diners Club and Carte Blanche, we can’t vouch for. Ask your great-grandfather.

Governments routinely change the rules in the middle of the game, but do you seek redress for that? Your elected representatives and executive branch raise tax rates, and your only recourse is to emigrate. Which is somewhat less practical than cancelling a credit card.

In Control Your Cash: Making Money Make Sense, we endorse Discover and American Express Blue Cash as the only credit cards you should look at (and even then, pick only one of them.) Sure enough, the moment we sent the manuscript to the publisher, American Express unveiled a new card: Zync.

It’s got a contemporarily misspelled word and it starts with a Z…the young folks will love it! Zync is intended for people in their 20s and 30s, as evidenced by the patronizing marketing campaign. (Hey, that’s Control Your Cash’s demographic! Only we try to talk to you like adults.)

Anyhow, here’s how Zync works. You pay $25 annually, which immediately sounds like a bad idea, but keep reading. You have to pay the card balance every month. (Until the ‘90s, this was how every American Express card worked. The company made a lot of money on annual fees, and even more on services available only to cardmembers. Convince people that they’re special and you can rifle through their pockets indefinitely.)

On top of the $25, you can pay an extra $20 for what American Express calls a “pack”. “Packs”, just like the way they expand the video games.

Anyhow, packs: (This feels like explaining Twitter to my grandmother.) The Go Pack, the Social Pack, the Connect Pack, the Eco Pack. That pretentious-sounding last one waives the $20 fee, because encouraging something as noble as global-mindedness should never come with a price tag.

The Go Pack earns you double rewards on airfare, an annual $50 credit if you book a vacation via American Express (don’t, Orbitz is free), 20% off Hertz car rentals, and 25% off Avis and Budget. (We’d love to know which Hertz employee stood firm on that 20%. Don’t kid yourself: they really are #1.)

Then there’s the Social Pack (social, like networking! This isn’t your grandfather’s credit card.) Double rewards at restaurants and shows, and first crack at seats for the latter.

Followed by the Connect Pack. Double points on your cell phone, cable and internet service; and you get 1/3 more points on cell phones at MembershipRewards.com.

For the insufferable among you, and those who just happen to prefer the illusory to the tangible, get the Eco Pack and American Express will buy $1 of carbon offsets. Amass enough of them, and you too can get a Sri Lankan farmer to metaphorically dig himself an early grave by continuing to plow his yam fields with oxen and a hand tiller instead of saving up for a tractor. As if that’s not enough, you’ll earn double reward points on any item deemed sufficiently holy by American Express’ green-rating service. This includes Chevy Volts, Olive Green loofah dog toys, Aleutia solar-powered desktop computers (we’d never heard of them either), and other stuff we wouldn’t be caught dead buying.

You know what were the first companies to offer reward points for buying more of their product than was good for you? Cigarette manufacturers, and not by coincidence.

American Express gives you “one point for virtually every dollar you spend.” So charge $432,000 to your Zync card, and you can earn a 17” MacBook Pro with a 2.8GHz Intel Core Duo processor, which is a wonderful computer that retails for about $2000. Of course, this assumes you haven’t redeemed any of your reward points for anything else in the time it takes you to spend that much.

Don’t be confused by the hijacking of a word. A “reward” is what you get for lassoing the horse thief to the cactus and holding him there for the sheriff. Credit card “rewards” are really incentives. They’re encouraging you to buy a particular product or service that you wouldn’t have otherwise.

You don’t want that. You want cash. (You really want gold or real estate, but credit card companies don’t offer those.)

So does Zync make sense? Only if you’re in that small group of people who know you’re going to rent $225 worth of car from Hertz this year (or $180 from Avis or Budget.) American Express’ own Blue Cash is a better deal. Blue Cash is not only free, it refunds you $1 for every $200 you purchase. Once you buy $6500 worth of stuff with it every year, they’ll refund $1 for every $80 you spend. You’d have to spend “only” $163,900 to earn that MacBook Pro. Which you should buy on eBay anyway. To paraphrase AC/DC, sink the Zync.

Fortunately, we don’t have to change one word of credit card advice in Control Your Cash: Making Money Make Sense. (And while you’re here, scroll up and to the right and buy a copy or two of our still up-to-the-minute book.)

Filed Under: Credit Cards Tagged With: , , , , , ,

Why Target thinks you’re stupid

May 31, 2009

Woman in the process of being offered a Target card

You stop by your local Target to pick up gardening supplies, a new bike, or a flat screen TV. The clerk asks you if you want to apply for a Target charge card and save 15%.

Should you do it?
$800 x 15% = $120.

Were you planning on paying cash for that TV? If so, open the account, pay the balance in full and then close the account. This will affect your credit score*, so only do it if it’ll save you at least $100. And plan your purchases so that you’re not opening new accounts every weekend. The road to debt-free living is paved with good intentions and department store credit cards.

Let’s see how much an idiot Target customer “saves” when she takes the discount and pays it off at typical American consumer speed.

The original balance was $680 with an interest rate of 18.5%. If you make only the minimum payment each month, it’ll take you just over 6 years and cost $1,110.

* The formula for calculating your credit score is the closely guarded secret of Fair Isaac & Company, a publicly traded company that makes money selling its scores to companies that lend money and assess potential borrowers. Having lots of revolving debt (e.g. department store credit cards) reduces your score. If you’ve recently taken on debt, or had someone inquire about your credit, that’ll also lower your score.
Up to a third of your score is determined by your ratio of debt to available credit. Carrying a zero balance on a credit card with a $5000 limit isn’t quite as good as carrying a zero balance on a card with a $10,000 limit. It’s this ratio that makes people hesitate to close accounts. If you’re Controlling Your Cash, charging your expenses to one card & paying it in full each month, your debt-to-available-credit ratio should be fine.

Filed Under: Credit Cards Tagged With: , , , , , ,