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There are substantial differences in the credit card offers that banks extend to different potential customers. Less-sophisticated borrowers receive offers with more back-loaded and hidden features, as well as more upfront rewards, visual distractions, and fine print at the end of the offer letter, according to Hong Ru and Antoinette Schoar in their new study, Do Credit Card Companies Screen for Behavioral Biases? (NBER Working Paper No. 22360). Banks also ratchet up these hidden features when their cost of funding increases, and when the credit risk of consumers is lower, which reduces the risk for the banks that customers default once they are hit with the unexpected charges. Hidden fees go up when state unemployment insurance benefits become more generous.
https://www.nber.org/digest/sep16/w22360.html
One more way in which Big Data is used against Little Guys.
(Score: 3, Funny) by PizzaRollPlinkett on Wednesday September 07 2016, @11:11AM
The best investment I ever made was a high-quality paper shredder. Credit card offers and other similar things go into it and get chopped into tiny pieces. That shredder has been a workhorse for a long time, probably over a decade by now.
(E-mail me if you want a pizza roll!)
(Score: 2, Interesting) by Anonymous Coward on Wednesday September 07 2016, @11:35AM
Seriously. I have borrowed money exactly once in my life (home mortgage, subsequently paid). It always seems like credit card companies are always up to "secret background checks", "reporting information to employers", "predatory practices", and other despicable items. I don't know that I've ever really regretted opting out.
I know that this post comes from a position of power/privilege. I lived on $750/month for 4 years (2004-2008). I lived on $1200/month for the following 6 years (2008-2014). Yes, we now make ~190K/year, but we still live on $35K/year ($2800/month). Neither of us has had a major medical expense (3+K). We should be able to retire at 33 (me) and 37 (her). Bloggers like Mr. Money Mustache show that it can be done on most middle-income salaries nowadays.
Seriously. STOP BORROWING MONEY. It is making you broke.
(Score: 3, Interesting) by rondon on Wednesday September 07 2016, @12:26PM
In all seriousness, how did you live on $750 a month for 4 years? That gives absolutely no wiggle room for unexpected expenses, in my experience.
Other than that, good job. Much respect for financial responsibility. Unfortunately, that is a tough lesson to learn for many people who have only bad role models for $$ management.
(Score: 2, Interesting) by Anonymous Coward on Wednesday September 07 2016, @01:46PM
True story. College. You never forget it when you (have to) do it. The gross budget was:
$400/month - rent (included internet/water/electric/maintenance). 3 roommates. Same place nowadays runs $520/month. It was notably on the college bus route.
$100/month - food (eat very little meat, rice with every meal, lentils/bean frequently)
$100/month - car (insurance/gas, reduced insurance rates for driving infrequently... $50/month in gas, BIKE)
$150/month - "wiggle room" (bike repairs, clothing, but usually going to the movies or dates)
(health insurance was covered by tuition)
I worked on/near campus for $12/hour (later 13, closer to $850/month for the last year now that I'm running the exact numbers) for ~17 hr/week. Notably did not have a phone (internet phone before it was cool!). Additional props to Dominos pizza, which had "Two For Tuesdays", where a "anything you want" pizza was $10, and you got two. This is 4 days of food (one meal a day, half-pizza at a sitting) for $10. Slightly above the $2/meal threshold, but "any way I want it" is "with all of the meat, extra meat, omg protein".
Nowadays of course, the budget is a bit more generous (figures adjusted for individual values, double everything to get household values):
$175/month - food (eating good now!)
$90/month - gas
$160/month - house repairs
$136/month - taxes/insurance/HOA (house is paid for)
$250/month - general 'fun money'
$80/month - general 'dating' (my half anyways)
$44/month - car repair
$80/month - car insurance
$12/month - power (solar panels FTW)
$43/month - water/trash/sewer
$27/month - cell phone
$14/month - internet
-----
$1111/month - current "self only" budget. Looks like we are budgeting $27264/year for the two of us (her 'fun money' is $50/month higher than mine). Need roughly 818K to retire. Currently have 278K in asset, making $180K/year (after taxes/fees). 3 years left (retire at 33/37) on current path assuming investments make 0. 30 months left is probably a more reasonable estimate. Wife gives birth next month, which /could/ affect the numbers, but hitting it before 40 is almost inevitable now (investments alone should cover half our spending).
My divorced parents always had to work for a living. They had/have bad financial skills. My mother unexpectedly inherited about $1M, and got to retire miraculously (life is unfair). My father will probably never be able to (unless we help :-/). Ziglar's story of the brothers from an alcoholic father is relevant: "how could I be anything but..." financially responsible when I've seen what irresponsibility leads to? On the current plan, my father will continue to work 50-60 hour weeks in poor health until he is dead and leave nothing to his children. He has visited something ~8 states. I have visited 40ish states and 12ish countries (you can actually hack it together with the above budget, believe-it-or-not). I will not have to work at 35. This is the power of financial responsibility.
(Score: 2) by rondon on Tuesday September 13 2016, @12:14PM
I respect what you have done on that budget, but as you have indicated - health insurance was covered by your school. This is a very, very large expense for many individuals that makes that $750 a month unworkable in my humble opinion.
Still, kudos to you for making a difficult situation work for you! I have been in a similar situation, but I was able to work about 25-30 hours a week and the budget fit wasn't as tight.
(Score: 0) by Anonymous Coward on Wednesday September 07 2016, @01:47PM
The parent didn't say they MADE $750 per month, just that they LIVED on that. Just because you make $XXX per year doesn't mean you need a X sq ft residence, new car etc. When you get over how others perceive your status, in other words, the stigma of "that is for poor people" and focus on optimizing what you get for your money, you will be pleasantly surprised on how much you can save. Cable TV is overrated and expensive, you will get used to the current seasons heat/cold, so keeping the thermostat at X degrees isn't necessary. This years gadgets don't offer much more than last years. Driving safely and maintaining property will keep your chances of an insurance claim low, so you don't need a .30 cent deductible. Unless you are disabled, riding a bike or walking is more fun, better for your health, and much cheaper than driving. Your local library has lots of books you haven't read yet. The internet has tons of free content to read, play, or watch that you have already paid for with your connection. Good clothes last a really long time. You can wear the same garment you didn't sweat in several times before washing. I can go on and on about how to cut costs. The point is, you need less than you think, and having the peace of mind of being able to handle a job loss, health problem, law suit, or major repair, and retiring young enough to be healthy enough to enjoy it is FAR more valuable than a fancy house, SUV, or gadget.
(Score: 0) by Anonymous Coward on Wednesday September 07 2016, @02:05PM
Heh, at the time I was making close to that. A month where I made $900 was a good month (20 hr @ 12/hr). Maximum was 20hr/week for 4 weeks, so $960 (_minus_ taxes) was about the max.
(Score: 0) by Anonymous Coward on Wednesday September 07 2016, @01:21PM
I am glad there is at least one other card carrying mustachian here!
The parent is right. Stop borrowing money, stop outsourcing, and stop buying shit. You need a lot less than you think. It makes compound interest work the wrong way.
I love Mr. Money Mustache. It is basically a how-to manual for getting rich, with the positive side effects of being environmentally friendly and a healthier lifestyle! Getting rich is actually very simple, but requires discipline, confidence, self-esteem, and perspective. Getting rich is nothing more than very simple math (compound interest).
Basically:
Step 1: Make your expense to income ratio as big as possible.
Step 2: Pay off any debt with an interest rate higher than 3-4% or so ASAP
Step 3: Invest, mostly in index funds. Do not sell! Businesses make money. You don't own a ticker, you own a business. In the case of indexes, you own a lot of businesses. Indexes work because more publicly traded businesses make money than lose money. As long as businesses are making money, don't sweat the stock prices. You will make an average of 7% per year over any really long period. Other investments can be considered once you have a lot of money already in (mostly stock) stock indexes, bond indexes, and REIT indexes (I prefer Vanguard). The intelligent investor and anything Buffet has said or written will help with this - be warned, doing it right takes a LOT of time.
Step 4: Do this for several years.
Step 5: You are now rich. Enjoy not working and/or fancy cars and houses.
Credibility: I am in the top 10% of wealth for my age group. My retirement will be 2-3 times as long as my working career.
(Score: 4, Insightful) by TheRaven on Wednesday September 07 2016, @01:25PM
sudo mod me up
(Score: 0) by Anonymous Coward on Wednesday September 07 2016, @02:41PM
I posted my monthly budget above, with it working out to roughly $1111/month in total expenses. As such, if I was able to move 100% of expenses (city taxes, lol!) over to such a credit card with direct debit, it would represent approximately $11/year in income (assuming 30 days on everything). Additionally, I might be able to get 1% cashback, resulting in $11/month in income. Thus, the /maximum/ that this financial move would be worth would be 11*13=$143/year. On, what amounts to, a $200,000+/year income. It is near-certain that I wouldn't be able to move many of the primary expenses onto credit (city tax, home repairs, etc.), further reducing its benefit.
I'm not saying it isn't worthwhile ($143/year is real money!), but the complexities in the operation of the account (another account, another direction that money moves, another account to track and link into accounting software, another place where automated payments can break, etc.) easily exceed its value. Of higher value (double!) and lower complexity is the "$250 bonus for opening up an account at Chase!" reward for banking. We have very simple finances (one checking, one savings, one investment with multiple tax-protected sub-accounts), which makes management easy/automatic. I don't know that it is worth $143/year for me to change the system away from its super-simplicity.
(Score: 0) by Anonymous Coward on Wednesday September 07 2016, @08:24PM
Posting anonymously due to personal data.
We make about the same as you do. However, our outgoing is much higher, partially because we aren't as frugal as you (wish we did better) and partially because we have a more complicated lifestyle. There are kids, mortgage on a farm, some expenses due to my software consulting, tractors to fix, animals to feed, etc.
In the past year we've racked up about 75k credit card points. I'm not really sure how we did that as generally 1 point == C$1 spent on the credit card but we did. We put everything we can on the credit card, minus purchases from local merchants where we know cash would be appreciated. So that amounts to a little over one "free" transatlantic flight per year in points, as I think it's 65k points to fly to Europe. And those are real, usable points: we flew our family to Europe last year on points.
Using a credit card in this manner requires discipline, but it also isn't borrowing money as it's paid off in full every month. And this I think is the point of the article: people in my position are using premium cards which cost us money every year but offer us more benefits. We understand the risks and benefits better and a headline advertisement of "low introductory APR" is an immediate flag that the product being advertised is much better for the bank than the consumer. Run away.
Sort of on topic, I was having a conversation with my mechanic this morning. His assistant just bought a used Jeep Compass for something like $35,000, at something like 18% interest. Shocking. He would have sold her a good used Volvo for $2k and fixed it right there in the shop but she bought this Jeep. She could have financed a NEW Jeep for 0%, and driven a new vehicle (well for 1 minute anyway) at much lower TCO. It's poor decision-making like this, combined with immoral and predatory lending practices, that keep poor people poor.
(Score: 2) by TheRaven on Thursday September 08 2016, @09:14AM
I'm not saying it isn't worthwhile ($143/year is real money!)
It's often more than that, as I also put a lot of business expenses on the card. That's also ignoring the interest that you get on the extra money. If your monthly expenditure is $1,111, then that's an extra $1,111 that lives in a savings account at all times, earning compound interest. There's rarely a good reason to turn down interest-free credit for things that you can afford to buy without credit, because you can always lend the money to someone else (such as your bank). The important thing is not to avoid using credit, it's to avoid needing credit.
Oh, and the other benefit of having a credit card for a long time and paying it off every month is that it helps bump up your credit rating. The first mortgage that I had was quite difficult, because it was at the height of the credit crunch when the banks had a bunch of new rules about lending, and I was self employed. Having almost a decade of responsible borrowing on my credit report made the bank a lot less nervous. After buying my first house, my expenditure on mortgage payments was about half of my expenditure on rent previously - and I was living somewhere nicer.
but the complexities in the operation of the account (another account, another direction that money moves, another account to track and link into accounting software, another place where automated payments can break, etc.) easily exceed its value
The account credit card bill is paid automatically from my current account. It shows up in the mobile app my bank provides alongside my other accounts. I've had the card cloned a couple of times (both when I visited America) and the transactions were flagged by the card company and reverted before they every touched a real bank account.
I get far finer control for tracking my spending than when I use cash and a lot more buyer protection and other benefits than if I used a debit card.
sudo mod me up
(Score: 1) by houghi on Wednesday September 07 2016, @03:00PM
People should understand the difference between a loan and a credit. If you use a credit as a loan, you are stupid. If you use a loan as a credit, not as stupid, but still not smart.
Short version. Credit (cards) are very nice for short term and flexibility. You take up your credit and pay it back as fast as possible. e.g. you see a nice tv or PC or a bed and you buy it and pay it back in 3-4 months. See to it that your credits are at 0 at least twice per year and more often if possible. I use my credit card as a debit card with the difference that I pay it off at the end of the month, instead of directly. This means that I pay later and the CC company is losing money.
A loan is better if you are intended to pay back money over a longer period. The downside is that amounts are fixed and you are not able to pay back sooner without paying a penalty, as you pay back your interest first and the rest at the end.
If you have several credits, it will be better to put them all together in a loan. Your interest will be lower and you will pay either less per month or over a shorter period or a combination of both. That will mean that you have more to live on per month and that will increase your quality of life and it will give you a bit of a buffer if things turn bad.
If early retirement is what you want, great. If you are like the majority, live a little in the mean time as well. Not everybody is the same. And don't buy shit you don't need. Step 1: make a shopping list when you go shopping for groceries and stick to it NO MATTER WHAT. The first few times you will have forgotten some things. After three times you will notice that the things you thought you had forgotten where things you did not wanted in the first place and would have been impulse buys.
I also make a weekly menu so that I know what to buy. That means I seldom throw away food, because that is throwing away money.
But first of all : a credit is NOT a loan and if you use it like a loan, you are robbing yourself.
Numbers from Belgium : Credit around 13% per year. Loan at the same credit company: around 6% per year. That's more than half. Not sure what the numbers anywhere else will be, but unless you are able to pay a credit back FAST, it is better to look at a loan.
(Score: 1, Informative) by Anonymous Coward on Wednesday September 07 2016, @04:05PM
> I use my credit card as a debit card with the difference that I pay it off at the end of the month, instead of directly. This means that I pay later and the CC company is losing money.
I mostly agree with the gist of your post, but for the above sentence. Two words: merchant fees. Some mom'n'pop places (e.g. my mechanic) will knock off a few percent of whatever they're about to charge me as soon as I offer to pay cash. Mostly, everyone just pays higher prices for stuff specifically to cover the credit card companies' would-be losses you're talking about...
(Score: 1) by houghi on Thursday September 08 2016, @12:00PM
Stores in Europe around pay 2% to the CC. So if you are talking about several percent it will be more then that. That means they are doing it to not have a trace and not pay taxes. It has nothing to do with the card and most likely they will be making MORE than with the taxes.
(Score: 2) by Thexalon on Wednesday September 07 2016, @03:49PM
You certainly need to do your absolute best to avoid borrowing money. I also have done it exactly once in my life, to buy my first car (and I wish I hadn't and instead bought a cheap beater).
On the other hand, not everyone is in a position to do that. Debt can certainly happen from profligate spending, but that's frequently not the issue. Instead the story is frequently something more like:
"I graduated and got a job earning $1200 a month, and my living expenses are $1150 a month ($750 for rent, $100 for utilities, $100 for a bus pass to get to work, $200 for food and entertainment and clothing). I was being responsible and socking away that remaining $50 for a rainy day. I figured I was being financially healthy. 6 months later, I broke my foot, which cost me a $500 medical bill due to my insurance deductable, and I lost another $250 for the time I missed from work because disability insurance didn't cover 100% of my pay."
And just like that, that person is now $450 in debt. And while that person has a decent chance of working their way out of debt in about a year, it's going to cost them dearly, and if *anything* else goes wrong they're going to sink even further into debt.
So yes, you both were responsible and smart, and deserve to retire in your 30's. Happiness to you and yours. But also recognize that you were lucky: No major medical expenses, no nasty divorce, no major period of unemployment by all appearances, and careers that allow you make approximately 4 times what the average American family pulls in.
The only thing that stops a bad guy with a compiler is a good guy with a compiler.
(Score: 0) by Anonymous Coward on Wednesday September 07 2016, @04:53PM
Oh, no doubt I was lucky. Shit happens. Many of the things you mention above happened to me. You may have noticed that many of my expenses are cut-to-the-bone to live on roughly $1111/month.
2007 I dislocated my shoulder/ankle (at the same time :-/) in 2007 during the super-lean times and it was a huge PITA. College health center took care of me, but it put a dent in my finances. I had enough savings to cover the few hundred bucks (school health insurance, wtf!).
2008 I was in a car accident, which totaled my laughably-$500 car. This was during year 4, so I had enough savings to get a $5000 car in cash (essentially wiping me out, cheapest non-craigslist car I could find). Luckily no real injuries.
2008-2009 I/we spend paying of my girlfriend's student loans ($40K, wtf?!),
2010: Made a downpayment on a house that we got together (MISTAKE - borrowing money)
2011: That nasty divorce you mentioned. Wipes me out to ~$2000 cash, but I get a 3-bedroom house with $40K equity... That is entirely too large for me and maintenance is completely unmanageable while I'm going for my PhD. HOA starts proceedings to forcibly take it about 3 months before my dissertation defense in 2013 due to my maintenance inability/underperformance.
2013: New wife, age 31. New wife comes to the table fresh after being wiped out (failed business, owes $17K to the IRS get back to $0, no savings/retirement). Good news is that she is also a saver, and that this is her first experience being wiped out.
I have my PhD in STEM, my new wife has her MS in STEM. She now owns her own business (because we could afford for her to earn $0 for the time that it took to get it off the ground). We certainly bring in money (now).
That said, I've never forgotten that debt is right around the corner. I've been back-to-square-1 ($2K in bank) on two occasions. My parents aren't particularly helping (they gave me the $500 car I guess). That said, I _worked_ for full scholarship to go to university. I _worked_ through my BS to put food on the table, and tried to get a full ride MS (failed, couldn't do it). I _worked_ full time while going to school part-time (at night) for my MS (which boosted my salary by nearly 50%). I _worked_ full time while getting a PhD (boosting salary another 30%). You are right that I've been continuously employed through this period/recession, and that has been very fortunate. I have also had employers at the door, even during a recession. Making $100K nowadays is pretty good. My wife will eventually make more than me after the business gets off the ground.
I know how lucky we are. Don't get me wrong, I/we have been very lucky. That said, we will succeed _in_ _spite_ of the difficulties. Since graduation, I have _always_ been at 50+% savings rate. "Difficulties" of various kinds (divorce, poor investment choices, unexpected car accident, unexpected home repair, etc.) have imposed somewhere near a $50K blow to the overall retirement effort over the last decade, but these things happen. Losing the first wife (and 3 years household income) set plans back by ~$100K. However, never do I forget that I/we could be forced to go back. The first step towards "broke" is spending more than you make, and "credit" is the second step.
(Score: 0) by Anonymous Coward on Wednesday September 07 2016, @05:00PM
Since graduation, I have _always_ been at 50+% savings rate.
Fuck you. Since my ex-parents threw me out, I've saved all I can. It usually amounts to about 2-5%, and that's quickly wiped out by shit happening.
I'm better off fucking playing the lottery.
(Score: 0) by Anonymous Coward on Wednesday September 07 2016, @06:09PM
Maybe you missed the part where, in 2008, I had nothing? Sure, I was saving 50+%, but I didn't have anything.
Maybe you missed the part where, in 2009, I had nothing _again_ after paying on my then-fiance-but-now-ex-wife's loans? Sure, I was saving 50+%, but I didn't have anything.
Maybe you missed the part where, in 2011, I had just started a PhD program, had a house which had "$40K" of equity, and just wrote a check for all of my money to my now-ex-wife? That is close-to-nothing (certainly it was 1 paycheck in my bank after writing a divorce check), as $10K goes towards closing costs (if you sell) and houses themselves bleed money in required maintenance (close to $9K this year, gross).
Maybe you missed the part where my wife got wiped out and had to restart from nothing (I helped, but its not like it was a great time)?
Maybe you missed the part where we set up a business that now makes $50K/year (hoping for $100K next year) from literally nothing?
Yes, I have been very fortunate. I don't deny this. However, if you are interested in help, I'd be happy to give a point of advice or nine. Much of the "real progress" has been made in the last 5 years. I get it. Life is hard. That is why incredibly careful planning is terribly valuable.
(Score: 2) by LoRdTAW on Wednesday September 07 2016, @12:06PM
You should seriously consider using it to heat your home: https://www.youtube.com/watch?v=2aLZ88_DZz8 [youtube.com]