MY BIGGEST MONEY SAVING HINT

No matter what list I’m on sooner or later the subject of finances comes up and someone asks for money saving hints.  Money, unfortunately, is the main driving factor of most of our lives.  People, by nature are always looking for ways to save money so they can spend it elsewhere.

Millions of words have been written on how to save money.  This entire blog is devoted to just that subject.  My Patterson’s Pantry blog is devoted to helping you save grocery dollars by making your own mixes and cooking at home.  See the USA the Mystery Shopping Way blog is about saving money while traveling as well as mystery shopping.  Outside a Dog reviews movies and books to help you decide where to spend your entertainment dollars. In the Princess Plan I give suggestions on organizing your home and your life to not only save you money, but to help you possibly make money.  So I write a lot about saving money.

However, after opening my mail yesterday I realized my biggest money saving hint I could give others is not for making homemade cleaners, or making your own yogurt, but for hard earned words of personal experience and the mistake of ever using a charge card.

I’ll cut to the chase right now to save those of you who aren’t interested in a financial discussion that could save you thousands of dollars the time of reading this.  My post today is about not paying “Stupid Tax”, as Dave Ramsey calls it, interest and fees on buying “on time”.  In other words not using charge cards—ever.

 Yes, it can be done and the money you will save by not using them will astound you.  If your eyes glaze over when faced with math I’ll warn you right now there is going to be some math later on in this post, but I’ll keep it simple and hopefully not too boring.

First let me address a few issues people always bring up when this subject is brought up.  I’ll list them and then go on to dispel them as this post goes on. Please keep these myths in mind.

1.     “I save money because I can buy items I need on sale at a good price by using the charge card.”

2.     “I can purchase items on same as cash and NEVER pay any extra.”

3.     “I pay my charge card off EVERY month, so I’m not spending extra.”

4.     “You MUST have a credit rating to survive in today’s world.”

5.     “You should always use a credit card for purchases for “insurance” that will let you dispute/return and item.”

So let’s get started on how these are truly myths by looking at those words written on the back of your charge card statement, or terms section online. 

My husband and I were slow learners about charge cards and therefore are busy now paying them off as fast as we can and the amount of money we are saving just blows us away.  Yesterday I opened the envelope for what we call the “pet” bill.

This is our current snowball bill, it shall remain nameless here, but those of you who are on the Dave_Ramsey_Debt_Beaters@yahoogroups.com with me already have a good idea what bill it is.  

The quotes from the website and statement are for this particular charge card.  Different charge cards have different statements and terms, so read your terms either on your paper statement or online. If you can’t find an answer to your questions in either place, contact the creditor.  Do not take for granted that all Visa cards have the same terms, read each accounts terms separately because they do vary.

Because I am a math nerd I am always working the numbers on the fastest way to get rid of a debt.  So I decided to look at how my payments would be applied and if there was any advantage to paying this bill as soon as I have even an extra $5 or if it would work just the same to pay it once a month.

So I flipped the statement over to read the following: how to avoid paying interest (Grace Period): To avoid additional interest charges, pay by the Payment Due Date indicated on the front of your bill statement: 1) the New Balances of your regular and Reduced Rate Credit Plans, plus 2) The new Balance of any Same as Cash Credit Plan with and expiration date within the next three billing cycle Payment Due Dates, plus 3) the New Balance of any waived Interest Charge Credit Plan that is expiring in the current billing cycle plus 4)any Minimum payments Due on other same as Cash or waived Interest Charge Credit Plans

HUH? But, but, but, that’s not what most people think.  Most folks think if they pay off their recent charges in full, and the minimum on their same as cash no interest is being charged, not so.  Because interest is still being charged on your same as cash charges—just in case you don’t pay it off in that same as cash time period.  Notice what number 2) statement says—ones that are expiring in the next three billing cycles.  Most same as cash “deals” are only good for 3-6 months. They gotcha.  Somewhere in all that paperwork you signed for that same as cash deal it said they could do this.

Ok, so you meet all those requirements, you are fine right?  Maybe not.

After looking at the paper statement for several minutes for the answer to the question “How are my payments applied” and not finding the answer on that page I went to the website and finally found it:

• How are payments applied to my account? Click to Collapse

The amount of your payment (equal to the Minimum Payment Due) is applied at our discretion, but generally applied to the Minimum Payment Due calculated on each credit plan. Any payment in excess of the Minimum Payment Due on your account is applied to higher APR balances before lower APR balances.

If you have a Same As Cash (SAC) credit plan, payments received during the final two complete billing cycles and up to the date of expiration are automatically applied in the following order:

First: to the required Minimum Payment Due.

Then: to the plan that is expiring ? in the order of expiration. At other times, we will treat your Same As Cash Credit Plan as having a 0% APR for purposes of determining payment application.

• How is my payment applied to my account when I have one or more promotional purchases? Click to Collapse

Federal Law requires that we apply any payment we receive in excess of the Minimum Payment Due to the credit plan with the highest APR first. However, if you have a Same As Cash Plan that expires within two months of that payment, we will first apply amounts in excess the Minimum Payment Due to that balance. This will give you the opportunity to pay off the Same As Cash Plan before the Same As Cash promotion expiration date

• If I have a Same as Cash plan, can I request that my payments be applied to a particular balance? Click to Collapse

Federal Law requires that any excess payment over and above your Minimum Payment will be applied as stated above. If you have a Same As Cash plan and would like payments made above the Minimum Payment allocated in a different fashion, you must make that request by calling….

Okay, put your waders on we’re going in to decipher all of this.  The very first sentence shows you how tricky they are.  They can apply your extra payment you are including to pay off that same of cash payment that is expiring soon at THEIR discretion-What the? So that means they can put that “extra” you pay basically wherever they want, which might not be the same as cash account you thought you were paying down each month so you don’t have a huge balloon payment at the end of the designated time period.

In fact it goes on to say that they will apply it to the same as cash deals with the highest apr balance.  The highest interest rate/balance.  If your soon to expire plan is lower guess where your payment is NOT going.  They gotcha again.

The only way the nearest expiration date same as cash deal is getting that extra payment is if one of two things happens a) it is expiring within the next two billing cycles or b) you call them. 

And this is legal…I know, I know you purchased that same as cash item because it was a good deal and you had the money, but you thought you would earn a little extra interest in your savings for a few months and if you make the phone call it’s all good right?

Maybe, but maybe not.  Life happens.  Your intentions are good.  You need a washer and dryer, you have the money saved for them, they are on sale and the store is generously offering you the same as cash deal.  You can work this deal and come out ahead.

As you talk to the sales person they point out if you move up to the next better unit it will only cost you a few dollars extra a month and you will have a far better machine.  They suck you in, it’s only a few dollars right, you can handle that.

Then there are delivery and haul off charges, don’t you think you need a maintenance agreement and soon that few dollars extra is more than a few dollars, but it’s same as cash and you will be making monthly payments to go with the money you have saved, so it’s all good.

But life happens.  You have a flat and it’s a week until pay day.  While you could wait on getting that new tire, or getting the flat fixed until then there is that “washer and dryer money” just sitting there.  You would feel more secure on a new tire, or maybe four and you still have six months before that same as cash is due and you are making the minimum payments on it, you have time to replace that money—maybe…

So you go ahead and buy 1-4 tires, thinking you’ll put the money back, only next pay day little Johnny breaks an arm, so the “replacement” money goes to pay your medical co-pay.  You still have time, but….

Or if you don’t have all these Murphy moments you go to pay the debt off in time to save all the interest and discover your mate has been dipping into that saved money.  Before you say “not my mate” know we are all human and life happens.

Either way you suddenly find yourself up against the due date to pay off that same as cash and no money to pay the final payment. So the interest starts then right? 

Nope, go back and read your contract.  It is retro-active to the day you first purchased the item! Also, it is most likely on a variable rate which depending on all number of factors could be as much as 39.99% compounded DAILY.  Suddenly that on sale, same as cash washer and dryer has ballooned in cost well beyond the amount you had originally planned on paying by an enormous amount.

These same life events can easily prevent you from paying off the charges of even one month.  Why take the chance?

Speaking of interest, let’s go back to that paper statement. How are they calculating that interest.  Hang on, grab your barf bag, because you are going to be ill before this is over.

I’m going to use round numbers for this to make the calculations as simple as possible—I am a lazy person after all.  So we are going to work with a balance of $4,500 and an interest rate of 10% apr with a minimum monthly payment of $83 in descending minimums due as you pay on that bill on each due date—how most people pay.  So based on that it would look like you would pay roughly $450 or slightly less in the first year in interest and less each year thereafter until the balance is paid off.  With a max of say six years.  WRONG!  Using those numbers with the way this charge card does interest instead of it taking six years to pay off it will take SIXTEEN years to pay off and you will end up paying an estimated total of $7,483 for that $4,500 or nearly twice as much as you currently owe.  Talk about incentive to not have a charge card.  That washer and dryer are really expensive now aren’t they?  

Even if you pay $148 per month it will still take you 3 years to pay it off for a balance of $5,319, still a pretty big chunk extra.  

These numbers are of course based on paying minimums or a set amount of $148 each month on the due date.  But say you can’t afford that $148 to cut off 13 years of payments you can still cut it down considerably by paying your minimum, plus whatever you can each month as soon as you can. 

In other words if you get paid on the first and the fifteenth and your payment is due on the 28^th, pay it on the 15^th.  You have a garage sale and make $50 on the 17^th, pay that $50 on the 17^th. You save $5 in coupons on the first of the month buying groceries, put that $5 on the bill on the first.  Pay all you can as quickly you can the savings could be hundreds to thousands of dollars.  Here’s why.

From the back of that same statement.

Annual Percentage Rate: if your account has a variable rate, your annual percentage rates may vary.  This means those numbers above are for the rate 10% apr, those numbers could go up considerably if you have a variable rate.

Balance Subject to Interest Rate:

(a)  Interest Charges are calculated separately for each Promotional Credit Plan and each Regular Credit Plan (each a “Credit Plan”) Promotional credit plans with different promotional due dates or terms are treated as different credit plans for this purpose.  The Balance subject to Interest Rate on a Credit Plan is the Average Daily Balance.

(b) The “Daily Balance” of a Credit Plan is determined by taking the opening balance of the Credit Plan for that day and adding 1) any new purchases made on the Credit Plan that day 2) the previous day’s Interest Charges. 3) any credit insurance premiums or debt cancellation fees (if applicable) incurred on that day and 4) any late fees, over the credit limit fees, returned check fees or other fees incurred on that day and subtracting any payments or credits applied to the Credit Plan that day.  If your account is subject to a grace period during the billing cycle, payments made during that cycle will be subtracted from all daily balances in the current cycle.  For a same as Cash Credit Plan, credit insurance premiums or debt cancellations fees (if applicable) are not included in the daily Balance of that Credit Plan during the Promotional Period.  If a transaction for a returned payment or a dispute resolved in our favor posts after the beginning of the billing cycle te applicable daily balance and any related Interest Charge calculations will be adjusted retroactively to include the transaction amount as of the date of the original transaction.

(c)  An Average Daily Balance is determined by adding the Daily Balances for a Credit Plan and dividing by the number of days in the applicable billing cycle.  Periodic Interest Charges from a Credit Plan (may be determined by applying the Daily Periodic Rate to an amount equal to the average Daily Balance of the Credit Plan times the number of days in the billing cycle.  You can determine your Daily Periodic Rate by dividing the APR by 365.

WHEW!  Did your eyes glaze over with all that?  Mine Did.  Basically what it all says is they are calculating interest on EVERYTHING daily and compounding it so your average daily balance will be higher.   But they do take off the payments you make when you make them.  Hence the money savings, made by making those small payments in addition to your minimum payments all month long. Even if you only save a few dollars that first month in interest, think about how much that few dollars would be if it was still rolled into the account balance and being compounded daily.

So I’ve covered most of those five myths—let’s hit the last two quickly now. First the one about the protection offered by a charged purchase.  From that same statement under the segment titled: Your Rights if You are Dissatisfied with Your Credit Card Purchases.

#2 You must not yet have fully paid for the purchase.

WHAT? So if you pay the charge off to avoid being charged interest you can’t dispute the charge.  If you don’t pay it off and they deny your dispute you are hit with the compounded daily interest, plus paying for the disputed charge.  Plus if that was your only charge, and you don’t pay at least the minimum on that charge you could be charged late fees and the compounded daily interest. They gotcha again.

Now the biggie—you can’t live without a credit rating or a charge card.  This simply isn’t true.  We’ve not used a charge card in over four years with absolutely no problems.  We either pay cash or we don’t buy the item. We have not felt the least bit deprived by not using charge cards.  In fact we have learned many places will give you a DISCOUNT if you pay cash.  You simply have to ask.   Guess what many places consider a debit card the same as counting out the dollar bills.

In most instances you can use your debit card with the same protections of a credit card for any purchases, deposits or such.  Occasionally you will find a car rental company, or similar establishment that will insist upon a charge card.  Guess what, they might not agree to waive the charge card requirement and take your debit card (don’t offer up you are giving a debit card number and not a charge card number and most times they won’t even question it).  If the company won’t work with a debit card or cash, then tell them thank you very much and go to another company. OR if you are determined to use that particular company then purchase a “pre-paid” card from Wal-Mart or similar locations and use that.  The $6.95 you might have to pay for that card will definitely be cheaper than the “Stupid Tax” on a charge card.

As for having a needed credit rating to purchase a house, there are ways around that too.  For how to do this I’ll refer you to Dave Ramsey’s book “The Total MoneyMake Over” book, which I reviewed here.

If you don’t currently have charge cards, never get them.  If you do I highly recommend following the plan laid out in “The Total Money Make Over” book to rid yourself of the stupid tax called interest.  We’ve been following it for four years now and are thrilled with the results and all the money we’ve saved because of it. 

Jan who will be screaming “We’re debt free” in less than a year in OK