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Debt Management Guest Post

Should You Avoid Cash Back Credit Cards?

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Most people think of reward cards as a good thing, but in today’s guest post Michael from CreditCardForum will be discussing why they’re not right for everyone. Besides writing credit card reviews on his forum and blog, Michael also has a lot of personal experiences to share about his use of cash back credit cards and why they can lead to problems.

Twenty to thirty years ago, cash back credit cards were for the most part non-existent. But nowadays, it seems that just about every card out there is offering cash rebates, miles, points, or some other gimmick. Many assume this to be a “good thing” but that’s not always the case…

Why reward credit cards might lead to problems

Have you ever been at a store and saw something you kind of like (and don’t really need) but since it was on sale, you bought it anyways? Of course you have! Almost everyone falls for this marketing trick at least once in a while. Studies show that when something is on sale or discounted, the consumer is more likely to buy.

To a lesser degree, without a doubt there are some people that take up this “on sale” mentality when using cash back credit cards. If their card is giving a 5% rebate on gas, groceries, drugstores, or whatever category it may be, they may be inclined to spend more. I consider myself extremely disciplined when it comes to finances, but even I am guilty of doing this once in a while.

For example, I was at Staples a few weeks ago and I knew I could have gotten the paper cheaper at Target, but I said to myself “Well my AT&T Universal credit card gives 3% at office supply stores, so I’ll get it here.” Thinking like that is actually quite ridiculous – the computer paper would have been about 15% cheaper at Target, which definitely trumps the pitiful 3% rebate from my credit card!

The lesson?

The bottom line is reward cards encourage many people to spend more than they normally would. Or, as in my case, they can lead to people shopping at more expensive stores (i.e. buying supplies at a drugstore because of the higher rewards there, when in reality a place like Target, Wal-Mart, etc. would be significantly cheaper for those items).

If you reward credit cards cause you to do these same things, it may be best to avoid using those cards altogether. Remember, saving 5% does not make sense if it’s causing you to spend 20% more!

When are they okay to use?

If you’re extremely disciplined with reward cards, they can be a useful financial tool. For example back a few years ago when I was dirt poor, I had no choice but to be disciplined with every penny spent. I definitely fell under the income bracket that would be classified as poverty, so for me it was all about coupons and discounts when buying necessities. I would use my credit card for the 5% rebates on groceries and gas, but that would never encourage me to buy or spend anything extra, because my money was so tight I simply didn’t have that luxury even if I wanted to do so. In that situation it totally made sense, but not everyone would have handled it the same. If the rewards would have encouraged me to spend more, the outcome could have been disastrous.

Have reward cards ever influenced your spending?

photo credit: peapodsquadmom

Banks around the world are beginning to get the message. HSBC Australia can set up a low credit limit and an automatic notification if you hit the limit. Get the limit low enough and it becomes an early warning signal.

Debt Management Guest Post

Everything You Need To Know About Credit Agencies


Creative Commons License photo credit: paalia

Today, Mr Credit Card is going to give us a quick run down on credit bureaus and credit scores. Aside from reviewing credit cards, Mr Credit Card has also written about identity theft protection reviews. Please check out his site for the latest credit news

A couple of hundred years ago if you wanted a loan you might have to present your case to the lender for why you are “good for it”. If the lender didn’t know you, they might ask about you around town to see what your financial reputation was. Today, the Credit Agencies fill that role in an electronic way. Virtually all people in the United States have a file with Equifax, TransUnion, and Experian, the three major credit agencies. For a long time, the file consisted solely of the details of the accounts you hold with lenders that report to one of these agencies. For instance, your bank might report your credit card account, when it was opened, what your balance is, what your credit limit is, and what your payment history has been. Quickly interpreting all of this information became a challenge for financial institutions and the credit agencies boiled it down to a single number known as a credit score.

What This Means To You?

Every time you apply for credit, a record is sent to the credit agencies. If you take out a loan, or obtain a credit card they are informed as well. Over time, a picture of all of this information, including your payment history becomes your credit score. Your credit score is used by lenders to determine if you will be granted loans in the future. For that reason alone, it is important to maintain a good credit score. Unfortunately, credit scores are now being used for all sorts of reasons that have nothing to do with loans. Employers are increasingly using credit scores to screen applicants. Insurance companies have also been known to set rates based in part on customer’s credit scores. While I am strongly against such uses, everyone needs to be aware of this reality when making decisions that can affect your credit score.

How Your Credit Score Is Determined

The credit agencies actually have a policy of specifically not telling the public the exact formula they use to generate credit scores. Nevertheless, observers have deduced an approximation of how the score is computed. As one might expect, payment history is the most important factor making up 35% of the credit score. 30% is determined by debt ratio. Debt ratio is the amount of debt you have relative to the amount of credit your currently have. It might not be intuitive, but having more available credit actually increases your credit score as it lowers your debt ratio. 15% of your score is determined by the length of your credit history. Therefore, it is best to keep credit cards open for a long time, rather than cancel unused cards, especially if there is no annual fee. Of the rest, 10% is composed of the types of credit you have been extended, and 10% from the number of recent credit inquiries you have.

How To Increase Your Credit Score

Obviously, paying your bills on time is by far the most fundamental thing that you need to master to improve your credit score. Less obvious is the strategy of hanging on to your accounts for a long time. This will improve your credit history and debt ratio. Also, do not apply for credit too frequently. Many shoppers cannot resist the lure of the 10% discount frequently offered when opening up a store charge card a many chains. As a rule of thumb, I limit my credit card applications to situations where I am offered a sign up bonus worth at least $200. Anything less simply isn’t worth the hit on my credit. Finally, double check your credit reports regularly. Errors in credit reports are extremely common, and credit bureaus have little incentive to correct them. When requesting a copy of your credit report, go directly to the three major credit bureaus or through www.annualcreditreport.com, the only site that will actually offer you a free report (though the credit bureaus will always be trying to sell you their “credit monitoring services”). Many other similarly sounding sites exist to sell you some product or service in addition to supplying you your credit report. By law, you are required to be given a copy of the report every year, and you do not have to purchase anything to get it.

Having a Good Credit Score Saves You Money

With the huge impact that the three main credit bureaus have on society, it is worth noting that having a good credit score can save literally thousands of dollars in your mortgage interest for example. Even if you are not a credit addict, it always pays to maintain a good credit score as soon as you can.

The easiest way to build a credit profile is simply to use a credit card. But there is a big caveat here. You have to use it responsibly. That means paying your bills in full and using it for expenses you would have to make anyway (and not on impulse purchases). A college student (if responsible) can start building their credit with a student credit card. If you have no credit, you can start of with a secured credit card.

Your credit report is an important part of your reputation, and a good credit score is an extremely valuable asset. Learning how to maintain a good credit score is a key skill for financial survival in today’s economy.

Debt Management Guest Post

Is Debt Snowball An Effective Debt Reduction Strategy

This is a guest post by David Brown, a content writer with Oak view law group. He writes on a variety of finance related topics with a strong focus on debt.

Are you submerged in debt and desperately looking for a way out of the debtors prison? Well, it is certainly possible for you to get out of the red zone without filing bankruptcy or consolidating your debt. The modern era we live in offers far too many strategies to combat debt. One of the better known approaches to eliminate debt is debt snowball. Can this approach really lead you to a debt free destination? Let’s discuss.

What is debt snowball?

The concept of debt snowball has been popularized by financial guru Dave Ramsey. Debt snowball is a process by which you list all your debts from lowest to highest and attack the lowest debt first. You need to pay minimums on each bill except for the lowest one. Pay as much as you can towards the lowest debt so that you can get rid of it as soon as possible. Next, you move on to the second lowest debt and the process continues till you are free from the rib crushing, spine tingling clutches of debt.

What are the advantages of debt snowball?

“Personal finance”, Dave Ramsey correctly points out, “is 20% head knowledge and 80% behavior”. Debt snowfall is based on this view. It rightly assumes that paying off smaller debts gives a sense of victory which motivates people to pay off all other debts.

It is relatively easy to pay off bigger debts using debt snowball method. Here you clear the smaller debts first. So by the time you reach the bigger debts, the extra amount that you can pay towards them increases. Consequently, it is possible to eliminate them quicker.

Another advantage of debt snowball method is the reduction of the total amount owed to creditors in a single month. This can save your neck in case you encounter an unforeseen situation like loss of job or medical emergency.

Debt snowball has often been compared with debt avalanche theory by which you try to eliminate the debt with the highest rate of interest first. This approach is mathematically better than debt snowball as you have to pay the least amount of interest. Nonetheless, the debt with highest interest rate can also be the one with the highest balance. This means it will take a long time to pay it off which can have a psychological impact on you. It is highly possible that you will try to get rid of it for several months only to give up because of a feeling that you are getting nowhere. This is where debt snowball scores over debt avalanche. The “quick wins” you get with the former, gives you hope-something very important, sometimes more important than money.

Some criticisms against debt snowball

It has been pointed out that by emphasizing on human psychology, debt snowball puts mind over matter which can result in monetary loss. As you focus on the debt with smallest balance instead of the one with highest interest rate, you have to pay more money in the long run. Thus, your “motivation” comes at the cost of some extra bucks.

Secondly, debt snowball does not take into account the difference between secured and unsecured debt. Problems often follow if secured debts are not addressed at an initial stage- foreclosures and repossessions being at the worst end of the spectrum.

Is debt snowball the right choice for you?

Debt snowball is a simple debt reduction method which is suitable for people who have a wide range of balances. It gives you tangible results and motivation which is missing from other similar approaches. While is it most effective for people who need some encouragement in the form of quick results, individuals with a lot of patience will benefit more with avalanche approach because it is cheaper.

Debt snowball can certainly help you to climb up from the trenches. However, you should remember that it cannot make you debt free with the wave of a wand. But if you stick to it till the end then your patience will be certainly rewarded.