The Dollar Stretcher : credit cards

Unavailable Credit

Gary — Tue, 17 Mar 2009 16:40:00 GMT

When I was young, one of the things that was most likely to cause a fight was when someone changed the rules in the middle of the game. Generally someone else was a victim of the new rule and wasn't too happy about it. Fortunately, it was just childish stuff. Even if there was a fight, everyone would make up the next day.

But, it does remind us of an interesting point that's relevant today. We make plans based on how we understand the rules of the game. A change in those rules could work against us. And, as adults, unlike kids, we're playing for keeps.

A couple of articles brought this home to me. The first is "Credit Card Issuers: Buy Something or Else!" by Kelli B. Grant. She points out that credit card companies are actively reducing the number of customer accounts. Especially those that haven't been used lately. According to Grant issuers including Chase, Bank of America, American Express and Citibank are reducing available credit lines.

This poses two big problems for consumers. First, their FICO credit score could drop. One factor in the credit score is the percentage of available credit available to the consumer. Reducing unused credit lowers your score even if you do nothing wrong.

The second problem is that many consumers use available credit as an emergency fund. Instead of having savings sitting in an account, they plan on using credit cards in case of a job loss or other emergency.

How important that can be to consumers (and ultimately the whole economy) becomes clearer if you read "Credit Cards Are the Next Credit Crunch" by Meredith Whitney. According to Whitney, there is approximately $5 trillion in available credit to all consumers. And, about $800 billion is currently being used.

In the last quarter of 2008 banks reduced available credit by $500 billion. And Whitney estimates that half of all available credit will be eliminated by the end of 2010. To put it another way, that's $2.5 trillion that was available to be spent, that is no longer available!

What can you do? Frankly, there aren't many easy options. All of the easiest choices should have been started years ago. But, there are some things that you can do to minimize the damage.

First, choose which credit cards you want and use them periodically. You don't need to carry a balance. But, use the card to charge something. By making a purchase on the card your account will show recent activity. That's one of the triggers to close an account. When the bill comes pay it completely.

Limit unnecessary expenses now. Build up your cash reserves. Unless you could survive for six months on your current savings, it's time to get real serious about cost cutting. The internet (including stretcher.com) can provide you with all kinds of tools to reduce expenses. Remember that no one can suddenly decide to reduce your savings account. It's your's.

Pay down any credit card balances. You can create more unused credit by reducing the existing balance. Obviously, this takes time and should have been started before. But, better to start now than to not start at all.

Don't count on your credit lines. Expect them to drop. If Whitney's projections are right you could lose 50% or more of your credit lines. What will you do if you run out of savings and available credit? What steps would you need to take? Who's help would you seek? Think through these things now.

Don't wait until you lose a job to take action. This could be very serious. Experts say that one of the major causes of the 1930's depression was that the supply of money shrank. Cutting available credit lines has the same effect. And, as more people default the banks will have additional reason to reduce even more available credit. So the noose gets tighter.

Now is not the time to panic, but it certainly is time to make responsible preparations.

Keep on Stretching those Dollars!

Gary

FADD?

Gary — Mon, 01 Sep 2008 15:00:00 GMT

If you Google "attention deficit disorder" you'll get 3,150,000 returns. Leading the pack is the Attention Deficit Disorder Association. As near as I can tell, it was about 1980 when doctors first started talking about people who had "attention deficit disorder". Move forward a few decades to today and you'll hear the phrase frequently. Not only in relation to children, but also to adults. there are a variety of similar disorders and ways to describe it: ADHD (A.D.D., ADD/ADHD, ADD-ADHD, A.D.D.) according to the add-adhd.org

I think that it's time for a new designation: FADD. It will stand for Financial Attention Deficit Disorder. Hard to say how many people suffer from FADD, but based on my email and the headlines in the local paper it's a lot.

There are a variety of symptoms. An inability to see the financial consequences of a decision. The need for immediate gratification regardless of cost. The overwhelming desire for an immediate solution to a financial problem. These are the most common of symptoms. Let's look at them one at a time.

Many people are inable to see the financial consequences of their decisions. In fact, that's why credit cards were invented. You can see FADD at work at malls and other places where people shop. Many who suffer with FADD begin with smaller items. It's not uncommon for them to spend an entire day at the mall shopping. Those suffering from advanced FADD will be carrying multiple shopping bags from various stores in the mall. Acute sufferers sometimes take purchases out to their car in the parking lot and return for more shopping. When challenged as to how they'll pay for their shopping sprees they can become dangerous. Be cautious approaching someone displaying this type of FADD behavior. They've been known to ridicule the financial status of people who don't share their urge to shop.

Another similar FADD behavior is the person who compelled to make a purchase now without thinking of the costs. Any time that you hear someone convincing themselves that they can afford the payments you're probably dealing with a case of Immediate FADD (or IFADD). It's unfortunate, but salespeople are prone to encourage FADD behavior. Initially people exhibiting this type of FADD limit themselves to small items and they make an attempt to delay purchases. Some IFADD victims are able to limit themselves to buying knives and costume jewelry on the shopping channel or internet. But most find their IFADD is progressive and they soon move to larger items. Most commonly they'll progress to electronics/appliances, then automobiles/boats/recreational vehicles and finally to overly large homes (sometimes known as "McMansions").

The third most common symptom of FADD is the inability to pursue a long-range financial plan (sometimes known as LR-FADD). This sufferer requires an instant solution. The symptoms vary from case to case. In one variation victims are unable to save for the future. They're unwilling to put money away today for a need later. IRAs and 401k plans are especially vulnerable to the FADD sufferer although the symptoms differ. Someone with LR-FADD will be unwilling to fund an IRA ("I'll never live long enough so see the money"). If they have funded a 401k account (typically with an employer's encouragement), they'll borrow the money out to buy a car or to pay off other debts ("I'm only borrowing from myself").

There are other very similar LR-FADD symptoms that can be hard to identify. In one strain the victim who is in debt because of his FADD behavior expects that any solution will be immediate and painless. Any solution to their debt problem that takes months or years will be rejected as taking too long and being 'impossible' to complete. Unfortunately in these cases, bankruptcy has been the only solution that's proven effective (and then only under supervision to prevent the victim from returning to previous FADD behaviors).

It's unusual for a FADD victim to recognize that they have a problem. Usually it's up to a friend, loved one or financial advisor to identify the symptoms and suggest treatment. If you see someone you love exhibiting FADD approach them cautiously. While not prone to violence, they have been known to terminate long-standing relationships when confronted with their FADD symptoms by a friend, relative or co-worker.

Drug and alcohold therapy does not appear to work. Typically self-administered in moderate doses, only a very temporary reduction of symptoms is produced. And, in some cases, the patient can become agitated while self-medicating. Therefore drug and alcohol therapy is to be avoided.

Counseling appears to provide the best opportunity for the FADD sufferer to recognize their condition and embark on a course to reduce or eliminate FADD symptoms. Many patients report that by studying their habits and seeking out alternative behaviors they can lead a normal, productive life. In a majority of those cases patients demonstrate no propensity to return to FADD behavior patterns.

Friends and relatives are encouraged to addess the topic of FADD with those who demonstrate the symptoms described. A non-confrontational approach emphasizing alternative behaviors is generally perceived to be the best method (sometimes called "informational therapy"). Suggesting written resources (like The Dollar Stretcher ) is often used as a first step. As with all interventions, care for the victim is paramount. Fortunately the new information therapies appear to be making a difference for many FADD sufferers and may offer great hope for the future.

Keep on Stretching those Dollars!

Gary

Specator Sports

Gary — Thu, 15 May 2008 15:46:00 GMT

Heard an interesting phrase at a conference I was attending. It came from Tom Evans, President and CEO of Bankrate. He said that "money is no longer a spectator sport" and I think that he's right.

When we bought our first home the choices in mortgages were pretty simple. Unless you were self-employed you took out a 30 year mortgage. There was a little difference in closing costs and points, but nothing too dramatic.

Credit cards were also pretty simple. You had gas, store and bank cards. But no 'cash back' or points cards. Everyone had the same payment due date. And, interest rates on most cards for most customers were the same.

Back then you could put your finances on autopilot. Sure you needed to know how much you owed on your credit card. But there weren't too many decisions to make.

Sure is a different world today. Much, much more complicated. Not only do you need to know how each different credit card is handling your balance, but also how they're handling new purchases. And, your mortgage, well that's another whole topic.

Tom was right. Money is no longer a spectator sport. Whether you like it or not, you're a part of the game. And, that means reading more and learning more. No doubt, that's a challenge for many people. Fortunately, there are a lot of good resources available to you. We hope that you consider The Dollar Stretcher.com and our newsletters to be one of those good resources.

Keep on Stretchin' those Dollars!

Gary