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.
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:
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.
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
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 28th, pay it on the 15th. You have a garage sale and make $50 on the 17th,
pay that $50 on the 17th. 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
