Beating Broke

Personal Finance from the Broke Perspective

The Skinny On: Credit Cards

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Get The Skinny on Credit CardsThe Skinny On: Credit Cards

By Jim Randel

I’m sure a few of you have heard of this series of books by Jim Randel.  He was kind enough to send a few of them my way for review purposes.  <– That’s my way of disclaiming that I was given these books specifically for review.  My review remains honest, but the FCC says you gotta know that.  The first book that I decided to review was the Credit Cards one.  Seemed like a good topic to cover here and if the book was valuable to you, then it would be even better.

The Skinny On books are a somewhat novel idea.  They are put into a narrative and the narrative is given to you by stick figures in a layout that is reminiscent of a comic book.  The language used is simple and easy to read and understand.  Any jargon is explained, either with a definition or a short dialogue.  And, they’re short books.  This one is one of the larger ones and it’s only about 160 pages.  A quick read to be sure.

The content is incredible.  In less than 200 pages, Randel was able to give the basics (and even a few not so basics) on getting and using credit cards as well as the effect they have on your credit score.  He takes several pages to discuss paying off cards for those who are already in trouble.  The books remind me a little of Cliffs Notes.  All the highlights and none of the filler.  Well, except for a terrible joke about a guy with bananas in his ears.  😉

The one downside to these books is their size and format.  It’s not even really a downside, but I think that some might discount the books because of their size and format.  Which would be a mistake, but it could happen.  Overall, the book is well thought out and put together.  The information is up to date and well given.  This would be an excellent book for a teen or a less personal finance savvy person.  I did get a few things out of it, however, so give it a quick read before you gift it.

You can buy the book directly from theskinnyon.com or at Amazon.

Sometimes Saving is Wrong

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Invariably, every few months, we get a wave of posts talking about “what would you do if you won $x,xxx,xxx?”  Or, what you would do with a smaller windfall.  And invariably, a majority of the people talk about how they would save the money.  And in some cases they are right.  But, most of the time, they are wrong.

Why are they wrong?  Because they’re looking at saving from the wrong direction.  I wouldn’t save a dime of it.  I would use every last cent of it to pay off debt.  And until I have no more debt, that’s what I would do every time.  Sure, maybe I’d by a few things that I needed, but the rest goes to debt.  Saving in a savings account doesn’t do you damn bit of good if you have debt.

If you have any debt at all, you really should think twice about having any savings at all except for an emergency fund.  Why?  Because, there is no savings account in the world that will guarantee you more interest than what you are paying on your debt.   If you pay off $100 of your credit card debt, you’ve just earned the 19% interest that you would have paid.  You “saved” more with that $100 than you would have in years if you had put it into a savings account.

Don’t fool yourself into thinking you need to have anything more than an emergency fund in the bank.  All the rest is just money that could be making you 19% interest instead of the paltry 1.30% that you’ll get at that high-yield online savings.  When you get rid of your debt, then is the time to start building your savings!

Some of you will likely ask “what about retirement savings?”  That’s a gray area.  There are some that would argue that if you don’t get that debt paid off, you’ll end up taking that money out early anyways.  Others would argue that due to the tax benefits of retirements accounts, and the magic of compound interest, you really should be putting money into your retirement too.  My current opinion is stuck somewhere in between.  I think that you should be putting a little into retirement, just so you have something going.  But, I also think that you should keep in minimal until your debt is gone and then ramp it up like gangbusters.

So, what would you do if you won $x,xxx?

Unused Credit Cards are Being Closed

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According to J.D. and several other places I’ve seen, Credit Card Companies are Being a lot more pro-active about closing unused Credit Card Accounts.  Why would they do that?  And why does it matter to you?

First, they do it because every open account costs them something.  It may not be much, but they still have to process the data and maybe even send out a statement.  Many have moved to not sending out statements on accounts that haven’t been used, but some still do.  Most importantly, any open account is an open credit line.  It’s a potential liability for the credit card company.  If you go from having no balance to maxing out a 5000 card, you’ve just added $5000 in liability to the company’s bottom line.  Not to mention that doing so is a likely red flag for impending financial trouble and that makes the liability a risky liability.  Any way you look at it, that isn’t good for the company.

Of course, if you continue to not use the card, it really doesn’t cost them much.  It’s just the potential that they are not willing to risk.  It’s a sign of increasing risk aversion on the part of the credit card companies.

So, why does all this matter to you?  Part of your credit score is based on your credit history.  The longer you have had an open account, the better it looks on your credit report.  It’s a sign of good credit management.  Another part of your credit score is the ratio of available credit to credit used.  So, if you have a $5000 credit line, and have only used $2500 of it, it looks better than if you had a $2500 credit line and had used $2000 of it.  If you have a credit card that you aren’t using, it’s adding to that unused portion of your available credit.  That’s good for your credit score.  But if the credit card gets closed, you don’t have that unused credit available anymore and your ration goes down.  And so does your credit score.

In both cases, the dip in your credit score is likely to be fairly small.  And it is likely not a huge problem.  But it is something you should be aware of if you had been planning on applying for any type of loan and have had a dormant credit card closed recently.  Also, if you are holding a card that you haven’t used recently and doesn’t have a balance, and want to keep it from closing, you can make a purchase with it once every couple of months to keep it active.  Just make sure to pay it off right away.