How I don't overspend on a CC

As I drew up a complete budget, I've tracked my spending for 2007, detailed all money spent on a CC or cash, and finally I understood what my percentages are. I realized why I always say people can use a credit card but not overspend if you are controlled. Because we have a built in control using our budget. What?

Well I've realized that 55% of our income is gone pretty much before we see it. Then another 30% is gone to housing, a conscious decision. So 85% of our income is gone before we have a chance for it to really be seen even as cash from auto-debits. It is invested, saved, gone to bills.

So I have 15% of our income to really play with in our checking account. We now take home less than what we did when we were both graduate students and making 1/3 of what we make now! Crazy! Of that 10% goes to fixed monthly bills. Bills which we've agreed to pay and decided is important to our lives. So we spend 5% of our income a month as choose in "fun".

Our 10% includes things like homeowner's dues, car insurance, car tax, electricity, cable/internet/phone, natural gas heat, cellular phone plan, pet health insurance and food, and blow allowances. The electric and gas are on budget billing with it's respective company so I use that amount and it works out well.

Now some of these bills are auto-debited on a credit card, but they are budgeted as a fixed amount. So I have 10% of monthly fixed obligations, which can be decreased if we lost our jobs and needed to tighten our belts, such as cable, internet, etc, but which we have deemed currently as important and necessary to our current lifestyle.

Strangely it's even how I ranked them in our budget unthinkingly. Our budget goes Income, pre-tax savings/deductions, taxes, after tax savings/deductions, fixed expenses, and variable expenses. Everything I mentioned goes in the fixed expenses with the mortgage, property taxes, insurance.

Food, eating out, entertainment, fun, personal care, clothes, etc are all variable amounts. I get 5% with which to prioritize my spending. These are charges on the credit card. I have a dollar amount monthly with which I can spend on whatever categories I see fit. I have "budgeted" amounts but I don't have to stick to them as long as I stick to the monthly 5%.

I realized this is something we've done since forever. This is how we've always budgeted and paid CC in full. We never really have had a lot of variable expenses. Most of our expenses have been "pre-set" even if paid for by a credit card. We view them as a monthly obligation and not "our" money.

During my 2 month cash experiment, all our fixed bills were still paid by credit card or auto-debit. Nothing changed except my 5% was in cash. It made me way more frugal in a negative way, because I refused to buy groceries then ended up spending more $$$ to compensate afterwards to restock the pantry. A more appropriate behavior would have been to just use the cash naturally and grocery shop every week instead of trying to go 4 weeks without shopping (I spent less than $100 for 3 adults in a month, it was ridiculous). I also specifically did not eat out because we didn't want to spend the cash.

But now that I have my cash data, my budget percentages, I realize that I don't have a real problem overspending because I don't have much money to overspend with. I consciously have $X/month. I know I have $X going to savings for specific target funds (tuition, property taxes, etc) and those funds are untouchable.

Because of this I don't have large CC bills. On average probably $1k/month including all fixed expenses charged and variable expenses. But my budget busters come when we pay for DH's tuition on a credit card and slam down $25k/year (but at 5% back who wouldn't use a credit card?).

So while CC aren't making me rich, they are helping with my frugal behavior. So I guess this is my personal plan on how not to overspend on a credit card. I have a lot of fixed expenses, hence 95% of my income is gone before I can have fun. I do realize that part of my fixed expense are for fun and it's ironic I only consider 5% fun money.

My plan is to one day have 50% fixed expenditures and 50% fun money. But I'd have to make a lot of money to do that!

Store Credit Cards - Yea or Nay?

I guess as a follow-up to "my secret shame" is the question "are store credit cards - yea or nay?" I've got 4 and I am not sure I should cancel them or not. I don't use any but I do get some nice coupons from them.

I know exactly why we got two of the cards, we had just bought our first condo and needed to buy a washer/dryer/fridge and paint supplies. So we got a 10% discount on both purchases from Best Buy and Home Depot respectively. We saved $100 on the washer/dryer/fridge and had 18 months 0% interest. We paid it off on schedule. For our home repairs we saved $75 and had 1 year of 0% interest. This was back in 2002. I think we didn't cancel the cards after we paid them off because they kept sending us coupons. We still do get coupons like $10/50 at home depot, or $5/15 at Best Buy. So though nothings been charged in many years on the cards, we still have them.

The Gapcard I have no excuse. I think I got it back in 1998 and haven't used it since. But again they have lovely coupons. Though I'm less likely to use the coupon than either BB or Home Depot.

Finally we just got a furniture card this summer with our new couch. We had $100 coupon savings on the couch and 0% interest. It's paid off but they wouldn't take the coupon without using a credit card and no I asked they wouldn't give discount for paying cash. I either live where people don't give cash discounts or they don't give discounts either way. Anyway this card is still open because it too gives nice coupons. I have coupons for $100 furniture, and for cheaper IMAX movie tickets and food. Nothing I want to see, but I'm hoping to get more movie tickets for Batman this summer.

But are these the reasons people like store cards? Are they not using them but hooked on getting the coupons? Or do they actually shop there? I have to say we actually shop a lot at home depot. The other stores not so much, although everytime a $5/15 comes our way I buy DH a itunes gift card at Best Buy.

So I'm undecided whether store CC are yea or nay. What do you think?

My Secret Shame

So I have a secret shame. One which I hadn't even realized until yesterday. I am an avid credit card user and have been very responsible about using it like a checking account. No late fees, no overcharges, no interest. All bills are paid in full.

But the secret shame? Well guess how many credit cards I have? I decided to count yesterday, drumroll please. We have at least 14 cards between the two of us that I know about. Ouch.

My secret shame is I haven't cancelled a credit card in years. I don't exactly know why not either. We've got 4 store credit cards (BB, HD, Gap, Jordan's), none are in use, but I do get coupons for having them.

For the other 11 cards, well DH and I each have a individual american express, discover, and visa, probably because we were trying to build his credit so he got his own cards years ago when we first meet. That's 6 cards, and the other 4 are joint cards. We definitely use 2 mastercards, one exclusively and the other as a backup if we max out our rewards for the year.

I think that's the problem. We couldn't settle on a backup card for our usage. I am considering getting a Citibank CashReturns Card which gievs 5% back for 3 months. Because I am charging DH's tuition to the tune of $15k. Hence 5% back is $750.

But until I sit and discuss with DH what we should keep or cancel, I guess I have to live with the secret shame. Also I will probably need to pull our credit reports to check everything out. So how many credit cards do you have?

Declaring Bankruptcy?

Since I ranted already today, I thought I'd continue with declaring bankruptcy. On the savingsadvice message board, there is a woman choosing to declare bankruptcy. I'm okay with that because she has a lot of bills she cannot seem to pay.

However, she writes about declaring bankruptcy here, but in her post she says "At this point my expenses are really low – cell, student loan, cable bill, food, braces and riding lessons for dd, that’s it. I bring in more than enough to pay all those, pay myself (envelope system) put some in retirement and still have some walking money. So right now I’m doing so much better than I was a year ago. I really have to thank the hard hitting members of this board for that. It was difficult to face my debt, and hard to admit, but I’ve taken quite a bit of advice here, working the second job last year really helped also. "

Um, how can you declare BK when you still have cell phone, cable, braces, and riding lessons? That's a lot of fat in a budget. I am really upset that people like this can just declare BK and buy whatever they want obviously, live a pretty nice lifestyle (I don't have riding lessons), and still walk away?

Excuse me? Where's the personal responsibility for paying back bills you charged? Or paying off a care you choose rather than repossessing it? Where's the responsibility to pay back bills you ran up (medical, dental, etc) than just getting rid of them in BK?

Sorry but if still have cable, cell phone, riding lessons, etc, you aren't doing everything possible to pay off debt. And it's not the CC companies, doctor's office, etc fault. It's pretty obvious it's the person's lack of integrity.

Is Credit Necessary?

A Guest post by Lemony, a friend from a message board. She submitted her thoughts on credit, Dave Ramsey, and whether a score is important.

I'm a big fan of Dave Ramsey's Total Money Makeover. His no-nonsense get-out-of-debt plan is something that can work for the average Joe. While my husband and I were in Canada we paid off $70,000 worth of debt in two years on an $85,000/year salary using Dave Ramsey's method, which we had tailored to our own needs. We cut up most of our extraneous credit cards, we used cash money to buy things, we planned for expenditures in advance and we invested a good portion of our wealth.

Then we moved to America and everything changed.

My husband was offered a lucrative position at a big American company and we thought it was a dream come true. We figured the big move next door would be as simple as going on an extended vacation. But we were horribly mistaken. We've been here a year and the messes keep piling up. We're constantly having to file new paperwork for USCIS, the DHS, the IRS and whatever governing body happens to call on us for kicks. Our biggest problem thus far, however, has been that necessary evil called CREDIT HISTORY.

Being Dave Ramsey followers we figured credit history was unimportant. That credit cards
themselves were unimportant. We were woefully mistaken. Because we have no credit history in America, getting any kind of service has felt impossible. We had to put down $500.00 as a security deposit on our electricity service, $1, 000.00 as a fee for our cell phone service and $2700.00 down on our apartment rental, just as some examples. We still haven't gotten those fees back. We just bought a house and had to pay fees to the mortgage lender to check our Canadian history. We still couldn't get the best rate. If we had an American credit history it would never have been a concern.

Our one saving grace was a local credit union who offered us a credit card when we first moved here. The reason they gave it to us, they said, was because they had a good history with my husband's employer and they trusted that company's employees. So, thanks to the big American company, we got one little Visa card from a small local bank. There are no special features of this card. It's just a standard 18%, no annual fee Visa. But the fact that they report to the credit bureaus has given us a shot at being recognized as real people, with honest intentions to consume huge quantities of American merchandise, and then pay for it. We use our little Visa card whenever we can. We pay in full and then we use it again.

I still adhere to most of Dave Ramsey's basic principles - don't spend more than you earn, save for your future and give, give, give. But the cash cow that made him famous - the Stop-Using-Credit-Cards-Completely mantra he pushes - just doesn't work for the little guy. It's horribly unfortunate, but its true.

I still adhere to most of Dave Ramsey's basic principles - don't spend more than you earn, save for your future and give, give, give. But the cash cow that made him famous - the Stop-Using-Credit-Cards-Completely mantra he pushes - just doesn't work for the little guy. It's horribly unfortunate, but its true.

Best Buy 0% CC

So we don't really do too much CC arbitage, but we've always done the 0% CC offers. I've actually considered doing it for furniture, but haven't been able to find the right furniture. Anyway though this month I just finished paying our 0% CC bill to Best Buy. It feels really nice to be able to not have the payment hanging over our heads.

The very first time we did a 0% CC we had the cash on hand to pay for, but it seemed a better cash flow purpose to use the Best Buy CC. We didn't make a lot of money and were purchasing our first condo together. We had pretty much scraped every penny to afford the 10% DP, closing costs, etc such that it was tough for us to part with our last $1k to pay for our washer/dryer/fridge. We preferred at the time to keep the little money we had as an emergency fund and charge instead those three items.

Turns out it was a good idea. Three days after we closed and the washer hose broke flooded the downstairs unit. We fortunately had home owner's insurance though we were not living there yet. But we did have to pay the $1k deductible. So our little cash money went to that instead of our CC. That's what got us hooked on paying for things with a 0% CC.

Borrowing money from a CC at 0% still seems risky to us. But buying stuff seems acceptable. I don't know what the difference is. DH financed his first car as well $5k, but as a foreigner it was a good way to build credit, and keep cash on hand in case of emergencies. We still have the car 7 years later, though the loan was retired after 3 years.

I've asked DH whether we're done playing with 0% CC deals. He says he's not sure he'll ever pass up a deal to finance something at 0%. Me, I'd like to be at the point one day of affording everything cash up front easily. It may or may not happen. I am not going into debt, but I'm not sure if we could ever part with our money when the opportunity to make more were presented.

But I'm not a CC abuser, so I cannot speak as someone whose experienced CC debt. Our debts have been a mortgage, 1 car loan (no plans of more unless it's 0%), and student loans. So for us personally our debts have been tied to our educations. Thus we've never lived beyond our means, it's just that affording the tuition 100% in cash, while working we haven't been able to accomplish. We don't take out any school loans for living, just purely tuition purposes. And we've paid for part of the tuition in cash as well when I was an undergrad and DH now.

So while we'd like to live debt free, I don't know if we ever will. Yes, sounds crazy, but DH is a major leverage fanatic. I wrote months ago how aggressive he is with investing and has no qualms about losing our investments. And the same risk tolerance is applied to our debt/leverage. I don't think he'd leverage us broke, but he would be willing to gamble.

Our next 0% purchase, I forsee maybe furniture, maybe a car but who knows.

Home Depot 0% CC payoff

Woohoo. I paid off our 0% purchase from home depot yesterday. We had one year 0% interest free on the home depot CC for purchases made for our home 18 months ago. I finally paid it off today, it was due 4/22/07. I always pay it off about a month early to make sure everything is okay.

All we have left is another 0% CC at Best Buy due 8/10/2007. We used it to purchase our computers and washer and dryer about two years ago. It was 2 years 0% so I've been paying it monthly. We had the cash but find it easier just to cash flow it and keep the cash on hand. We did this for the first time in 2002 when we bought our condo in San Diego. This is how we managed at afford our washer/dryer at the time. At that time we didn't have the money saved up. It worked beautifully.

Because of all this CC 0% offers, I wonder if I shouldn't pull money out of our CC and use it to sit in the bank? I'm not sure if I have the stomach for it though, with the number of things that could go wrong. It's a lot more money, and a lot more hassle. Using the 0% interest rate on these two cards haven't ever been a problem. But I wonder if I tried to do what others do if I'd run into trouble? Something to ponder...but for now I'm quite happy with not doing the 0% CC offers and just taking advantage of 0% on purchases.

American Express Cash Back Rebate

Today I got my American Express Cash back rebate of $36.65 for the year. Which is pretty awesome. This was just for spending money on the CC. I know you'll say that I spent more on the CC rather than cash, which is doubtful. I never pay interest and having been tracking our spending, I don't think we really overspend.

I've looked at our CC statement for the year and we didn't buy anything we didn't need. Did we spend money we shouldn't? Yes but even if we had been on a cash-based system we would have spent it. Why? Because mainly our vice is eating out. And whether we ate out on the CC or in cash we would have gone out to eat. Our thing is that we don't buy stuff like normal people.

People talk about going to the mall, we don't. We don't shop even online. I don't buy stuff, but we enjoy eating out. But I limit that to $400/month both on the CC or cash. I track how much we've gone out to eat and put a stop limit on eating out. So we don't really overspend on CC. I'll put stuff back and say if I want it, I'll come back next week. If you have been reading our spending for the month of february, we bought 1 shirt for DH and the rest has been eating out and groceries.

Thus curbing our spending would not be helped by cash because I unfortunately enjoy good food. Whether in cash or CC, I would buy beer, buy meat, seafood, or cheese. I would go out to eat, in fact this month we've only eaten out $100 which is really low for us. Typically I'd say abou$250 easily but we've been sick and busy. I expect march we'll spend a lot more eating out, for sure because we're taking some friends to dinner.

That being said I'm estatic that I earned $36 from my CC, and in 1 week DH should be getting his rebate check of $47. Which is a great amount considering this is not our primary CC, we mostly use it for costco. Earlier in November I wrote about how much cash back last year we earned and it was a ton.

How to maximize Reward Credit Cards

By now you've realized I'm a major cheapskate, I love a great deal. And I'm a major CC user who to quote nervous from Your Money on MSN, "they'll have to pry my CC out of my cold hands." I thought his quote highly amusing. I'm going to write this today and tomorrow follow up with Dave Ramsey's Baby Steps for getting out of debt, because I believe in it. We are not your typical CC user, neither DH or I have ever paid a penny of interest or paid a late fee on any accounts since we were 14. So we've had CC for more than half our lives and haven't misused it ever. When I was young my mom said to use the CC like a check book, every expense had to be tracked against what I had in checking to see if I could really afford it.

But for now I'll explain our current credit card strategy and how much we've earned in rewards this year. If I took the time I know we've saved thousands of dollars over the years in cash back rewards, how do I know? Because when you are two grad students living in San Diego, who can afford to buy a condo with a gross salary of $40k, you are a thrifty penny pincher.

First we typically use our Citibank Simplicity card for everything. It gives us 5% cash back on all gas station and drug stores purchases, and 1% back on everything else. The maximum cash back reward is $300/calendar year. Another bonus is no late fees, never had one, but I thought it was a nice benefit. We autopay everything so nothing is ever late or not paid in full. We got it back in April, but have earned so far $91 this year. Not bad just for using the card. It would have been more, but our other credit cards upped their rewards so we've been using them more. Plus we had an Alaska Airlines card until July. I do not like airline miles typically, but this deal was too good to pass up, I'll explain later.

Second card we use is the American Express True Earnings Card. We picked this card mainly because it works at Costco, where we are die-hard members. Now with the true earnings card you get 3% cash back at eating out anywhere, 2% cash back from any travel related expenses, and 1% cash back on everything else. Great deal, so we've started to use it for eating out and as always costco shopping. I am also planning on buying DH's ticket home for christmas on it, I already bought mine on it for 2% back extra online. This year we've earned $44 in rewards.

Finally we started this summer using Discover card for stuff. 4x a year they have this get more back program where you get 5% back on specific categories. This summer it was school supplies until Sept 30th, and this current quarter it's shopping and eating out. You also get 1% back on everything else on the card. So I paid for DH's tuition and my stupid school stuff on it and wow! Since June our cashback bonus this year is $142. So that pretty much sums up our regular use cards.

Do we have store cards? Yes, three actually that we somewhat use. Gap because every $250 spent you get $10 gift certificate and special coupons in the mail. I shop for me occasionally, it adds up over the years. Home Depot is a huge one we use, I get a 10% off in the mail, then put it on the card for 0% APR 1 year. We did it about 3 times buying stuff like cabinets for our condo in SD, paint, curtains, etc. Sometimes we've forgotten the card and paid on another one so no biggie, but it's a nice bonus. Another great thing is I've negotiated an extra 10% back when I was unhappy with our cabinet order taking so long and saying I was a loyal customer ie CC. Finally we also occasionally use the Best Buy CC. We used it initially in SD to buy a washer and dryer and get 10% when we opened the card. It saved us about $70 at the time, and then when we moved we had to buy another washer/dryer so we just went there. The great thing is we got 24 months 0%, plus tax free day, plus I negotiated free delivery as BB card holders explaining again we're loyal customers. All in all I typically don't like using store cards unless it's somewhere we're going again and these places we've always gone back to.

Finally I want to discuss airline cards. They can be great if you travel a lot and use the same airline. My mom and DH's best friend both have airline cards and adore them. But we don't travel enough, or with enough loyalty to make it worth it. This past year however Aug 2005-2006 we did have an Alaska Airlines card. Because when we got our mortgage they offered us a deal to get 100k free miles if we opened the card and paid for 1 year annual fee. That 100k miles is 3 free round trip tickets, so we figured why not pay $75 for the annual fee. We then decided we would max out usage on the card for the year we paid for and then cancel it. We did exactly that and now on Alaska Airlines have about 120k miles in DH's account. It's not a bad airline for us because DH is from Canada so using it isn't as big a deal as for other people.

That about sums up my experiences with reward and store credit cards. Guess you can see why they'll have to pry it out of my cold hands...but seriously CC are not for everyone, nor should they be used to live a lifestyle you cannot afford in cash. They are just a tool for cheapskates like me who need to squeeze a penny out of everything. I like looking at my itemized statement, I can easily reconcile it with our budget, and I enjoy seeing how much I've made back. Maybe CC don't make you rich, but in my experience people who use CC responsibly are the type of people who max out their retirement accounts, save for a rainy, and in general very conscious about how they spend money. So it doesn't make you rich, but maybe it's a sign of how diligent you are about your money.

Any opposing views, or people in agreement should feel free to comment.

Car Loans versus CC debt

Okay so over at LLNOE, I asked the question why do people seem to think that car loans are not as bad a debt as Credit Card Debt? It had come up on another board that people can easily classify CC debt as bad, but car loan debt is justified. Yet car loan debt is 3x as much national average (approximately $24k) versus the average CC debt of $8k. This to me seems to say that people are buying way more cars than spending it on foolish things.

Does buying a new/used expensive drive CC debt? Is it having the expensive car that causes someone to use CC and fall into a vicious cycle of debt? Or is it the rolling over of car loan into car loan that you are "upside" down the real reason? It's a tough call.

But consider this, it's a lot easier to hide your CC debt in the stuff you buy, yet people will probably wonder how does this guy afford a BMW on his salary? The explanation he leased or took out a car loan. But how many people really have car loans versus having CC?

It has been stated 25% of people out there do not have CC, 30% pay it off in full every month so 55% of the population do not carry CC interest. The remaining 45% have an average of $8k in debt. However when looking at the statistics of car loans 3 out of 10 are upside down in their vehicles, average car loan is $25k, and 40% of buyers have loans greater than 60 months.

So where does this put us as a society? I have no idea if we'll have a car loan again, we had one initially when DH bought a car, 3 years 0% to build credit after arriving in the states with no credit. He decided to pocket the money and build credit, and keep more cash on hand. Turns out a better deal all around. But now we're not so sure, but of course it really depends on when we need a new car.

However this was eye opening enough for me to determine I have to really plan for the future of my cars.

Are Credit Cards to Blame?

I guess I should start with my first rant about whether or not credit cards are really to blame for the debt people are in. I think no, but I am willing to hear other sides of the argument. My viewpoint is that people create debt, be it credit cards, mortgages, car loans, student loans or what not. But it should be personal responsibility that decides how much to borrow.

That being said, no one is holding a gun to someone's head and saying spend, spend, spend on the credit card. No one is telling someone if they don't buy the item they will die. It's a personal decision that you must have someone you cannot afford. How do I know you can't afford it? Well then you would be able to pay for it either in cash or in full when the credit card bill comes. I think it's the mentality that buying stuff on the credit card isn't cash. To me, how I was raised and have always thought about it is that whether you purchase it with cash or credit, it's still money you already spent so stop spending if you haven't got it. I luckily married a guy who feels the same way.

I don't understand how people say they didn't understand how credit cards work. Did people grow up in cave? Does the idea that you have to pay for what you charged seem outrageous? Or is it more likely that what you bought should pay for? It's a really strange thing occurring where people blame lack of financial knowledge, yet have used CC for 10+ years. They never felt like waking up before?

But I have to also say that some people can't keep credit cards because they are unable to manage their finances properly. And for those people the temptation will always be to great. My grandfather is one of those people, and probably the sole reason why everyone in my family is anti-debt, but not anti credit card. Everyone uses it, but to imagine owning after what they all went through. No way!

But for everyone in debt try finding Dave Ramsey. I will post on his baby steps which I think are great for people who are terrible with money, in debt, and need some serious straightening out. I also like Suze Orman, Mary Hunt, and a few others.