Credit Card Myths

AZCentral.com has a story on understanding credit cards.

It answers some questions on some common credit card myths :-

• Myth: “As long as I make my credit-card payment, the interest rate won’t change.”
• Myth: “Card issuers need my consent to change key terms.”
• Myth: “Interest rates on credit cards stay the same for people who pay their bills promptly.”
• Myth: “It’s important to report lost cards immediately to minimize financial liability.”
• Myth: “The federal government caps the amount of interest that can be charged on credit cards.”
• Myth: “My credit-card problems won’t affect my ability to buy insurance or other services.”

While some of the points are only valid for my North American friends, quite a few apply to Australia as well.
Read the full article Here

Another Little Credit Card Payment

I paid $220 off Gold Visa Two on Friday, just a token contribution really, as I posted before, paying down my debt isn’t my greatest priority at the moment. The annoying thing is that my small business income has dropped to the point where I’m going to have to use my day job salary to make a payment on my smallest credit card debt, but that’s okay, it will all work out in the wash.

I’m going to respond to the comments on my Emergency Fund post in the near future. I’ve submitted it to the Carnival Of Debt Reduction, so I’m going to wait and follow up on all the comments at once.

I’m trying to talk myself into another interstate trip before the end of the year. It’s been a mildly stressful few months and I could do with a break. I’ll look into it once Dad’s a bit better. I will probably use my credit card for the airfare and fund the other related expenses from my normal salary. Though I think I have some frequent flier miles to use somewhere, I’ll have to look into that a bit more. I could just go camping for a few days, but that would require car hire, and with the low price airfares being offered at the moment I dont think it would effect my credit card either way.

Emergency Funds Are Bullshit

I read quite a few personal finance blogs and a lot of them talk about putting aside a few months expenses in a savings account as an emergency fund.

Well if you’re carrying any debt, then I think Emergency Funds Are Bullshit.

Let’s look at some basic math. (I’ve based this on Australian rates and circumstances, it’s what I know)

In my case I’ve got around $20,000 in credit card debt. Based on my current interest rates I’m paying around $3,400 a year in interest, now if I was to have about three months basic expenses put aside as an emergency fund in a savings account, I’d have around $6,000 sitting there. Over a year in a 5.5% return savings account I’d earn around $330 a year in interest. However as my government has decreed, Interest I earn is assessable income. So at my current marginal tax rate I’d lose 30% of that in tax giving me a net return of $231 for the year. Have I lost anyone yet ?

Now if I used that same $6,000 to offset my credit card debt I’d be reducing my interest bill by $1, 020. If you take away the $231 net return from my theoretical “Emergency Fund” It would actually cost me $789 a year to be carrying that money for a “what if” situation.

Now on my wage I think I could actually purchase an income protection insurance policy that would pay out more than two years of my wages for less than that. (I’ve sent in the online quote form and I’m awaiting a response.)

UPDATE: The most expensive quote I received was less than $360 a year for 75% of my normal wage and the premium is also deductable against my tax so take 30% off that amount again.!

Let’s look at another example, Say you have a $200,000 mortgage at 7.5% over 25 years. According to Bankrate over the term of the loan you’d spend $243,394 in interest payments. Now let’s say you offset that loan by the theoretical $6,000 you’d set aside for your “Emergency Fund.”

If you maintained the same repayments as for a $200,000 mortage you’d cut 2 years off your mortgage payments, pay only $213,480 in interest and save a massive $29,914 in interest, which over a 25 period works out to a massive saving of $1196 a year saving. After you take into account the interest you’d recieve on having a savings account for your “Emergency Fund” you’re still infront to the tune of $965 a year.

Just take a moment to think what you’d have to do to earn an extra $965 a year.

If you think I’m making this up run the figures through Bankrate yourself.

Now I’ll admit I’m no financial guru, read my site and you’ll see that, but you can’t ignore the basic maths. Who ever came up with the concept of an Emergency Fund must have been working for the lenders.

I’m not arguing that everyone should have some funds set aside for unexpected events that place a strain on your financial resources. But to say you need to set that money aside in a savings account for a rainy day is financial negligence.

If you’ve got credit card debt, then make sure you have sufficient a credit limit to cover emergencies. If you’re carrying a mortgage then make sure the extra funds are set up into some sort of offset account so you can access the funds at short notice.

I’ve just looked at a couple of common situations for my part of the world. Do the maths for your own situation and work out for yourself if sitting “Emergency Funds” in a savings account is the right thing for you.

For me it’s just Bullshit.