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All about department store credit cards...

By request, today’s post will discuss why department store credit cards may or may not be the best type of plastic for you. Have you ever been offered an opportunity to shave off 15% or 20% of your first purchase with a newly-opened department store credit card? Though these cards do come with perks, let’s look into this credit card type more closely.

As a general rule of thumb, opening several (or even as much as 2) credit lines at one time or within the same general time period may lower your credit. Credit bureaus may question why you need that much capital (money) available to you all of the sudden and may perceive you as a higher-risk person, lowering your credit score as a result.

You should also know that department store credit cards, though attractive on account of the initial discount they come with, can be the most expensive way to pay for something. Especially if you don’t pay off your entire balance once the bill is due. Many department store credit cards charge as much as 26% interest! And this is for people with good credit!

If you pay your entire credit card balance each month (a HIGHLY recommended and HIGHLY responsible practice…), the interest rate shouldn’t bother you because you’ll never be paying it. But if you choose to finance your purchases from Macy’s or Bloomingdale’s or other retailers, be prepared to see big numbers representing the interest you’re paying on that purchase. In my opinion, this is a stupid practice and one that you should avoid.

Having a big credit line open at Nordstrom or some other retailer could help your credit score, too. Let’s say you have a credit line of $5000 open and available at a retailer. You charge your Christmas purchases and immediately pay off the balance once the bill comes, making your $5000 available to you again (this is called “revolving your debt”). This will improve your debt-to-limit ration. That means that the debt you have outstanding on all credit cards, car loans, mortgages, etc…has decreased.

Here’s an example. I have 3 credit cards with a total limit of $15,000. Let’s say I have $300 in balances that I have to pay off. I open another credit card for $3,000 and now my total limit is $18,000, but my balance is the same. So my debt-to-limit ratio is better at 300/18,000 (0.017) versus my old debt-to-limit ratio of 300/15,000 (0.02). This shows I am less risky with more of a limit and the same or less debt. This does NOT mean that you should go and open more credit cards. Stick with what you have and pay down your balances to 0.

Scenario 2: Let’s say I have 3 credit cards with a total and combined limit of $15,000. I am having trouble paying down my balance of $800. My interest rates are between 20% and 26%, however, so I know I need to pay these cards down. Instead of paying more money than usual to my student loans that only have a 6% interest rate, I pay off as much as I can on these cards. This month, my balance falls to $400 (yay!). So my new debt-to-limit ratio is 400/15,000 (0.027) which is much better than the old debt-to-limit ratio of 800/15,000 (0.053). Credit bureaus look at this and smile. And as a result, your credit score improves.

Read Suze Orman’s The Money Book for the Young, Fabulous and Broke for more information. 

Have You Heard?

I was recently told about a wonderful company online called LearnVest.com. Founded by a Harvard alumna, its mission is to make information and tools for personal finance readily available for women. I believe, however, that this website could help both men and women tremendously.

My favorite feature on the website (one of SEVERAL features) is the online bootcamp programs. Some of the programs are free, and some cost $14.99. They vary in topics from beginner's basics to getting out of debt to living frugually. Daily blurbs, action plans and to-do lists are emailed to you on your topic of choice once you enroll. I enrolled in the free bootcamp called "Personal Finance Basics," and I'll post my reviews once I've completed it.

The website also boasts of powerful tools such as the credit card finder, monthly payment calculators for simple loans and mortgages, retirement calculators and plenty of articles on important and fun topics (e.g,. party planning on a budget or how to get freebies all over town).

Be forewarned, however. Part of LearnVest's business model is affiliation fees paid by companies such as TD Ameritrade and other retailers who advertise on or obtain patronage from LearnVest users. This website is geared towards women in their early 20s and LearnVest's advertisers and affiliates are leveraging their exposure accordingly. Before you shovel your money into an "LV approved account" or apply for an "LV approved credit card", be sure to check BankRate.com for information on these accounts, cards or investment vehicles.

Here's the website! Now go get smarter!
http://www.learnvest.com/

Where Does My Money Go?

We’ve touched on tracking your expenses on a monthly basis to estimate how much you should realistically allocate to each category of your budget (food, housing, student loans/ debt, clothing, entertainment, etc…). In her book, The Money Book for the Young, Fabulous & Broke, (I know, laugh it up…!) Suze Orman offers a powerful tool to track your monthly expenses by category that will take the guess work out of it. The link to this PDF file is below.

http://www.suzeorman.com/downloads/CashFlowWorksheet.pdf

If for some reason the link doesn’t work, go Orman’s website: http://www.suzeorman.com/igsbase/igstemplate.cfm?SRC=SP&SRCN=yfb1&GnavID=21&SnavID=59&TnavID= and search “cash flow worksheet.” This will download a document to track your income and expenses, and will let you visualize where your money flows each month (or each week, if you’d like).

This is a powerful tool to get a rein on your expenses or to observe your spending habits. If you’ve ever been on a diet and used (or heard of people using) food journals to track what they eat, you know that using this tool will make you think twice, if not seven times, before the next time you spend money on non-essentials. Just having to write it down makes a difference.

Rules accompany using this worksheet.

1)   Be honest with yourself. Don’t curb your spending during the month you track your expenses. Don’t go spending crazy, either! The goal is to get a realistic and representative snapshot of your monthly spending habits.

2)   Keep your receipts and file them away (if they’re debit or credit card purchases). I keep all my receipts and file them by month, anyway. This makes it easy to find a receipt for an electronic item that broke (a phone, or an iPod, for example) and will help take the stress out of proving a warranty that’s still in effect. Just a thought…

3)   Take action once you’ve recorded your expenses by category! Create a monthly budget! Aim to NOT meet the budgeted dollar amount allocated to some items. I’m not recommending deprivation. I’m just recommending reining in expenses so that you can do more responsible things with that money! And trust me, we’ll get into allocating responsibly in the weeks to come.

Spending problem? You don't need a 12-step program!

Before we expand on any further budgeting tools, I’m going to give you some tips on how to better discipline yourself, in terms of spending. I’m also going to assume that you all have spending problems without the incomes to support those habits…(I can identify!).

1. Situation: You’re in a store and you see something you must have. You grab it and approach the check-out counter. Or you grab and hold on to it, looking for other items to add to the impulse basket. Peter and Jennifer Sanders offer this bit of advice in their book, “Living on a Budget” for such a situation: Delay the purchase for 1 week and see if you lose interest in the item. This is painful (especially for me), but extremely cost effective! I’ve actually done this twice already and saved myself a lot of money by not giving in to the temptation to spend.

2. Cut your television consumption by ½. Also, for some of you, a painful piece of advice. But you MUST become aware NOW of the myriad product placement strategies that networks employ. Not to mention, advertisements and commercials are extremely persuasive these days. For example, I did not know that I absolutely needed an iPad until last week! Thank you, strategic advertising, for making me aware of my lack! If you reduce your TV consumption, you reduce advertisers’ power over your emotions and your wallet. And you save yourself from permanent brain rot.

3. Resist the urge to “fritter away” money. What does this mean? If you total your 4 trips to Yogurtland this week, your coffee consumption, packs of gum every time you fill up on gas or go to the grocery store, or make other small purchases, two things happen. A) You make business owners VERY happy because they make money on high-margin items.

(High margin à e.g. A pack of gum costs me $0.20 to purchase, and I sell it to customers for $1.89. I have just made $1.69 on your inability to resist the urge to buy gum from a cheaper retailer.)

B) Your small purchases add up very quickly to total a large chunk of money spent irresponsibly. I’m guilty of this too often! But let’s work together to cure “financial stupid-itis”!