Author Archives: admin

Gift Cards? Did Cash Become a Problem?

Leave a reply

A recent survey by the National Retail Federation found that 57% of us would like to receive a gift card this year. OK, but hands up if you’re also fine with receiving cash.

Last year we bought billions of dollars in gift cards in North America, and 95% of people bought at least one of them. But this year, we’re in a new economic reality and I want to make sure you’re really careful and think twice before buying them.

When you buy a gift card you’re paying the merchant real Canadian money. What you get in return is a piece of plastic or paper that’s nothing more than an I.O.U. That’s all it is, and you gotta hope they’re still in business when you, or the person you gave it to, want to use it.

When the retailer or restaurant goes bankrupt, your gift card is worthless. That’s a huge risk you’re taking. A year ago, who would every have predicted the Bombay Company would go bankrupt, or Circuit City, the parent company of Radio Shack, or Linens ‘N Things, to name just a few really big ones?

Sure, you’re safe with a bunch of retailers from Tim Horton to Wal Mart, but better safe than sorry. This year, give them some real Canadian cash. It doesn’t go bad, has no fees or expiry date and it’s not impersonal – merchants have marketed that and it isn’t true at all. It’s safe and the same thing as a piece of plastic. But the cash is good forever.

Last week I found a $20 bill in the glove box of my car. It was an emergency $20 and had been there for over a year. Because it’s been out of circulation a year, should I send this back to the Bank of Canada and get them to shred it? Are you nuts? Of course not!
Yet, that’s exactly what happens when almost every pre-paid credit card, also called stored-value cards, and gift cards, which don’t get used for a year. They’re either void, deduct a ton of inactivity fees each month, or simply wipe out the whole balance left.
.
When it comes to purchasing gift cards, the newest trend, and spreading very quickly, is buying gift cards at a discount. It was started by Costco where you can often purchase a $100 gift card for $80.

If you’ve got any store credit or some gift cards around – use them up. Besides, more than 20% of gift cards, or around $8 billion, are never used! That’s a huge amount of wasted money!

Banks love marketing pre-paid credit cards. They make the same fees and profits as they do on credit cards, but without any of the credit risks. Retailers love them, because they’ve got all your money up front, and you, or the recipient, have no choice but to deal with their business. Retailers also know that most people spend more in their stores than just the value of the gift card and they pay retail prices, without spending a lot of time looking for discounts!

In the coming weeks, millions of people will purchase gift cards and pre-paid credit cards for Christmas presents. But did cash somehow become a problem? Cash doesn’t have an expiry date, you won’t be charged an inactivity fee, and fifty bucks really is fifty bucks!

10 Bad Borrowing Traps You Need to Avoid

Leave a reply

The definition of being stuck in debt frustration is to keep doing the same thing over and over, month after month, and somehow expect different results in the future – it won’t happen. You will have to do some different things to have different results.

After more than 20 years in banking, credit and finance management, I’ve literally watched tens of thousands of people make really bad borrowing choices. But they’re not done by choice. It happens when we don’t know the rules, tips and tricks to borrow smarter and don’t know the right questions to ask or the traps to avoid. It was the main drive in publishing the It’s Your Money book. There probably isn’t a page where you aren’t going to find one tip or another that’ll save you somewhere between a few hundred and a many thousands of dollars.

So I’ll keep sharing insights, tricks, tips, hurdles to watch. As well as ways of looking at credit & debt in some different ways, but here’s a short list of bad debt traps that can lead to real trouble. Wouldn’t it be great if none of these actually applied to you?

1. Hurray! – An increase in my credit card limit. More temptation to charge it up and less opportunity to pay off the monthly balance if you ever do charge anywhere near the limit.

2. Not having a low interest credit card when you KNOW you’re going to carry a balance each month. The rate you’re paying is likely twice as much as necessary.

3. Considering only the price of something today versus the total payback of what it will cost with all the interest and fees, when it’s finally paid for. Or even worse: making buying decisions only based on monthly payments and not the price or total cost.

4. Any financing longer than the reasonable or useful life of the purchase, such as putting your vacation on a two year loan or on your credit card at minimum payments for a decade or more.

5. Kidding yourself in the difference between gotta have and wanna have. There is a big difference between what you need to buy and what you’d really really like to have right now! Sales and good deals are like trains – there’ll be another one along any moment.

6. Debt without something tangible: A car in the driveway with payments is quite different than a credit card balance from years ago with nothing left to show for it.

7. Feeling fortunate just to be approved, instead of taking control, shopping around and asking questions to borrow your way and on your terms.

8. Not reducing your term on any borrowing by even just a few months when you can afford a slightly higher payment to make the pain of payments end that much quicker, and with a whole lot less interest.

9. Cash advances from credit cards. Drawing money from your credit card or line of credit is NOT income – it’s debt, and some the most expensive and painful debt you can possible have.

And one of the biggest debt traps we put ourselves in? Buying into the marketing mentality that you’re saving when you’re really spending, and saying to yourself: I can’t afford it right now, so I’ll just charge it.

Yesterday’s U.S. Elections

Leave a reply

Yesterday, the U.S. had their mid-term elections and there are certainly some interesting philosophies and policy suggestions raised when it come to debt and financing.

A number of very conservative Tea Party Republicans were elected as senators yesterday. Their common belief, and quite correctly, is that the deficit (spending) is out of control, and spending has to be curtailed – NOW. OK, but between March and June of next year they will need to vote on increasing the debt limit. That’s the total the government owes, but something nobody really talks about at all. That’s kind of like the U.S. credit limit, and it has to be voted on a specific day when the debt ceiling is reached.

Will these senators stand on principal and refuse to vote for it? If so, you are going to see a huge, immediate, and world-wide impact on the stock market, consumer confidence, the dollar, and many other areas. It will also immediately shut down all but essential government services. Will they do it on principal, no matter what the implications?

What drove me insane yesterday were a bunch of politicians flagrantly refusing to answer direct questions of what spending they would cut. For the entire election campaign, it was nothing but generalities and buzzwords. That sounds nice, but specifically, what would you cut? Pretty much all of them said it couldn’t, and wouldn’t be defense, social security, and medicare. Fine, but there’s a problem: These three areas are around 93% of all federal spending. So what does that leave?

The equivalent is that you can’t or won’t cut your spending on housing, vehicles financed, and utilities. What does that leave where you can have a meaningful impact on your debt? Yup – nothing. Take a $4,000 income, and now work with only 7% that you can impact. That’s $280. Can you work your way out of an incredible mountain of debt when all you can work with is maybe 5 or 10% of that $280? It’s nuts. It’s political talk, and it’s ridiculous.

There are literally trillions of dollars that the U.S. government has in unfunded liabilities. That’s IOUs for pensions and medicare that are not funded and for which there’s no money. Yet, there was no talk about that. They can’t even come up with specific solutions to today’s debt – never mind the next wave that will hit within five or ten years.

There’s a Canadian politician that coined the phrase: Elections aren’t the time to talk about policy. Yesterday’s elections reminded me of that. Or essentially, we’re pretty much too stupid to understand policy questions and meaningful solutions.

Lastly, you know I’m not in favour of debt and borrowing. But in the U.S., and Canada, there are only three groups that can spend in the economy: Consumers, businesses, and the government. In a recession as severe as the one just ending, consumers stopped spending, as did businesses. Who does that leave? Can you imagine how much worse it would have been without the government infrastructure spending?

And ironically, the U.S. Chamber of Commerce heavily lobbied politicians two years ago to vote in favor of the stimulus programs. A year later, they’re spending tens of millions in campaign money against those same people who did! But that’s not much different than what some of the opposition parties did in Canada. Ah, if we could only be like politicians and have it both ways – all the time. Unfortunately, for us, in the real world – that’s not reality.

27 Years to Pay off That Credit Card

Leave a reply

Hurray! Two of the credit card regulation changes are now here and on your statement.

Two months ago, we talked about some of the U.S. credit card regulations coming to Canada. They were effective last month, so you will see them on this months’ credit card bill.

The first one is called a minimum payment notice. On your statement you’ll see a box showing how long it will take you to pay off your balance at minimum payments. I had one faxed to me with a balance of $14,500. But are you ready for this: At minimum payments, it’ll take 27 years and a month to pay it off.

Yes, after the shock of that has worn off, you can react one of two ways:

One way is for you to get so mad when see that box, that you’ll do whatever it takes to pay as much as you can, AND to stop using the card for 90% of the daily crap that runs up your balance the quickest.

That’s the consumable stuff that has no business being financed, such as groceries, gas, restaurant meals, Tim Horton, cigarettes, or a trip to the liquor store. All of those are consumed long before you even get the credit card bill. But they’re all financed now, running up interest, and being owed for years and years. That’s insane. If you just switched those to a debit card, your credit card balance will drop a lot, AND you’ll be paying for things as you’re using them.

The second reaction can be that, well, I never pay the minimum payments. That may be true, but aren’t you also still using your card and increasing the balance? If today’s 27 years seems like a lot, odds are, it’ll increase as your balance goes up.

Paying extra is great, but how much extra do you pay to actually get some traction? This minimum payment warning chart has always been in the back of my: It’s Your Money book. And look at the chart with it. If you keep your payment the same as this month, and add just $20 a month, the 27 years becomes less than four years to pay off the balance. THAT is worth knowing, and worth doing.

The second part of the legislation is that card issuers can no longer just keep increasing your credit limit. That’s a blessing, because this person’s statement I have in front of me is for a $23,000 limit, but that’s more than this person earns in a year! There is a big note at the bottom of the statement now that says: Congratulations! You qualify for a limit increase. To accept this offer, please visit our branch or contact the Call Centre.

Don’t do it. The last thing anyone needs is another limit increase, another temptation to spend more. You know they’re going to contact you, if you don’t get to them. Because the card issuer really really wants you to owe as much as possible to make sure you can only make minimum payments. Why? Because then you really will have to take that 27 years to pay the balance. And that’s how lenders maximize their profits. What? You thought any of them were in business to help you? Get real and wake up.

The New U.S. Foreclosure Nightmare

Leave a reply

What a difference a couple of weeks can make. Two weeks ago, a judge in the U.S. was going through a large number of foreclosure applications. But he noticed something strange: All the applications were executed, and sworn out, by the same person. At that point, he started to ask questions about the validity of the affidavits, and things unraveled in a hurry – nation-wide.

With tens of thousands of foreclosures every month, it turns out that lenders were robo-signing these affidavits. That is, they were just mass signing them, but there wasn’t any of the work done to verify that the lender actually had the right to foreclose, and had the right to the title of the property. Some people were signing legal documents on over a thousand foreclosure applications in a day! Just think about that: They were filing applications to foreclose without even being sure they had the mortgage loan, and certainly without the backup documentation to prove it!

In Canada, mortgages are made by a lender, and held by the lender. So if your mortgage was made by the bank of George that is where the mortgage is held. So if there is a foreclosure, it’s a no-brainer to prove that the bank of George is the lender. But in the U.S., mortgages are administered by third-party servicers who collect the payments, send demand letters, etc. The actual mortgage is sliced and diced, re-packaged, and sold on Wall Street. So a piece of your mortgage is held by an investor in Saudi Arabia, some by a pension fund in Toronto, and another piece by a bank in England. Just imagine that nightmare to prove who the actual mortgage holder is!

Many politicians want all foreclosures stopped. That’s just insane, of course, because it rewards people who aren’t paying their mortgages. But what is happening is that the Attorney Generals in almost every state are now launching investigations and the heat is squarely on lenders who are scrambling like mad, cancelling foreclosures, starting from scratch in others, and giving up on many others.

A few years ago, foreclosures had a bad rap, and pretty much nobody, except high-risk speculators, wanted to buy them. Now, with the majority of all listings being foreclosures, they were hot and selling. After all, it was one way to get a really good deal on a home. People are already being burned badly because of their greed and lack of knowledge. Weekend seminars on how to get rich buying foreclosures charge $3,000 to $10,000, and are a total rip off. Lots of people go to the courthouse steps where foreclosures are first auctioned off, they bid pretty blindly, and discover that they don’t have clear title, and often, that the city, or tax department, has a big lien on the house.

Now, it would be a huge gamble to buy any foreclosed property in the U.S., because the risk is huge. You’ve bought it, but who is to say that the bank had a right to sell it to you in the first place? Yes, there have been sales which have been reversed, where there is proof the lender never had a right to foreclose in the first place.

It is a legal nightmare, and mark my words: The ripples from this will last for a decade.

Prepaid Cards – The Good and the Bad

Leave a reply

Last January, I asked a credit card insider where the growth and focus of their company would be over the next couple of years. Without hesitation, the person told me that it would be in the area of prepaid credit cards.

With recent, and much stronger, consumer and financial legislations, more and more of the emphasis of credit card issuers will be on marketing prepaid reloadable debit or credit cards. For the last few years, we have become used to seeing them marketed as Christmas gift cards, but that will now be year-round.

These cards will be the main tool which banks will use to strengthen their relationship with younger people, and especially students, who cannot obtain a credit card on their own. The bank marketing will also focus on lower-income people, anyone with big credit problems, and those who have no current bank relationship. On the surface, prepaid cards can seem like a good idea, but be careful, because they are heavy on fees, and light on consumer protection.

Prepaid cards do not cover you for the same fraud protection as credit cards. If your card is lost, stolen, or fraudulently used, you are liable for the loss. Each issuer has voluntary guidelines and protections that you’ll need to understand before you get the card, and before something unforeseen happens.

Plus, you are not building, or rebuilding, credit with a prepaid card. You are paying the money up front and receive a plastic card to use up to the amount you have already given them. The issuer is not extending credit to you, so you will not have your activities reported to the credit bureau.

The good news is that provincial legislation, from BC to Ontario at least, now prevents cards from having an expiry date, or a monthly activity fee.

With a wide variety of other fees, here are some of the questions you need to get answered before choosing a card:

Activation fee amount: Most cards charge to get the card set up and activated. The Walmart Money card is one of the cheapest, but others can charge up to $30.

Cash advance fee: All cards will charge you a fee to get a cash advance from an ATM. As a result, you need to commit to never using the card to obtain cash. But do ask, because some have one or two free withdrawals.

Statement fee: All cards will let you check your balance online, but most will charge you for a mailed statement.

Balance inquiry fee: If you can’t wait until you can get online, almost all cards will charge you for a balance inquiry through an ATM. It’ll be their fee plus whatever the ATM provider charges on top of that.

Inactivity fees: The rule of thumb is that these won’t get charged for at least a year or more. If you are frequently using the card, it may not matter as much as someone who only intends to use the card occasionally.

Four Ways to Keep Money in YOUR Pocket

Leave a reply

A large part of our weekly tips involves keeping money in your pocket. So, today, here are four ways to do just that:

Are you interested in getting something done for cheap? These days, what do you actually get for five bucks? Well, there is a very cool new website called fiverr.com. For five dollars, there are a huge number of people who will do anything from critique your resume, to setting up and posting a You Tube video for someone’s birthday, or will build a one-page web site for you. The list of what’s available is endless, and there is also a section for you to post what you want done for five dollars, that someone can choose to take on. Check it out.

Cell phone two or three-year contracts are a really bad financial trap, that’s something we’ve talked about before. In the last quarter, 75% of Americans who got a new cell, or had their contract come up, did NOT sign for another contract, but went to a monthly plan. THAT is exciting, and a wave that will come to Canada with the new players now in the market. With no contract, you are not stuck for three years.

That is exactly why the I-phone is not the biggest seller, not even the 2nd biggest seller, because the only way to get one is to be locked into a contract! Many Blackberry and Google phones don’t handcuff you. Bet Apple isn’t that happy, either.

The reason the big companies want to hook you into a three year contract is that they are afraid. They are afraid that you’ll find a better deal, better service, or just afraid to compete in the marketplace. When the carriers have you hooked, it no longer matters that they’re not the best, cheapest, or whatever the issue, because you’re not going anywhere! I don’t use a cell much and loaded $100 on my pre-paid cell. It lasts me a year – that’s $8 a month!

Wireless cards for laptops are a great convenience. It means you can literally get on the internet anywhere, anytime. They’re reasonably inexpensive – on the surface. But be careful and watch the traps: A caller on the Clark Howard show had a $62,000 data bill. What did he do? He downloaded the movie Wally, for 35 minutes while vacationing with his kids in Mexico. The cell phone company who sold him the plan reduced it to $17,000. Isn’t that a deal? A $17,000 bill so his kids could watch a movie download.

The internet access is charged by megabyte, not by minute, if you do not have an unlimited use plan. Even then, check that you are not paying roaming charges when you are out of your home area. You’ll have to ask, because it’s not something they’ll volunteer to tell you when purchasing the plan.

An equally expensive story was that of a U.S. visitor using his Blackberry internet for 16 minutes at the Toronto airport and getting a $5,000 bill! Be careful and ask first!

Two University professors recently did a study that showed we spend more at Costco than we intended. Gee, we needed a study for that? Yes, it’s hard to get out of Costco for under $100. The way I do it, is to NEVER take a cart. When my arms get full, I stop buying more stuff, or change my priorities. No wonder that the average Costco store does $134 million in volume a year! But the good news is that their mark-up is always 14%, and Costco, on things like televisions, doubles the warranty period from one to two years. I recently bought my LCD using my Amex card, which also doubles the warranty. So I may have just turned a one-year warranty into four years. I’m not sure if the double Costco warranty doubles again with my Amex – and I hope I don’t have to find out.

59% Of Us Can’t Do Without One Weeks’ Pay

Leave a reply

Last week, the 2nd annual survey by the National Payroll Association was released. Unfortunately, it’s bad news – and something we have been talking about a number of times in the last year.

According to the survey, 59% of people would be in financial difficulty if they missed one week of pay. Just think about that for a minute. One week of pay would cause a significant problem for almost two-thirds of workers. That figure is actually much higher for young people and single-parents.

Let’s be honest: If we can’t do without one week of income, we are really close to the edge, financially, and in trouble. With the national average income of around $45,000, take away 20% or so in taxes, and the average net pay a week is really about $700.

In other words, $700 stands between us and serious financial trouble. Just imagine what kind of stress that creates in our lives. It’s not a fun way to live. But we create our own mess, the mess doesn’t just happen to us. No, not consciously, but in the financial decisions we make, the debts we take on, and our priorities with money.

In the It’s Your Money book is a huge headline that says: It might take two minutes to spend it, but it’ll take years to pay off. It’s the debts and bills that are killing us, more so than our incomes, if we were to be honest with ourselves. In order to change things around, we can spend less, or earn more. Either one works, and both together change our financial situation that much faster.

If we wanted to, we can sell our car with the big payments by next week, and drive a $2,000 very used car until we’re debt free. Just not having that car payment is a huge amount of money that could go to paying off other bills. If we wanted to…

People don’t move until they’re fed up and mad with their financial situation. When we no longer want to live in the state we’re in, you’d be amazed how quickly we can turn things around. But until then, we keep confusing our needs with wants, and here we are: almost two thirds of us are on a financial cliff.

In relationships fights over money is one of the #1 issues with couples. It’s the biggest cause of divorces, and a huge contributor to male suicides. We hear this, we experience the fights, and we STILL keep doing what we’re doing? Does that make sense at all?

That’s not a life – that’s surviving, not thriving, and it’s not a fun way to go through life! At some point, all the stuff we’re still making payments on isn’t worth the financial pain we’re saddled with. But it isn’t that hard to turn around, if we focus, if we want to, and if we choose to be really disciplined for a year or two.

Step one: Do a written budget with your partner. Every dollar is planned, and nothing gets spent over and above the budget. It’ll really clearly show you where all your money is going. Right now, you think you know – but trust me, you don’t. Your goal is to cut your expenses by $150 a month – no matter what it takes.

Step two: Set up a separate savings account. The $150 savings, and whatever $20 or $30 you can find goes into this emergency account until you get one weeks’ pay in there. In three months, you’ll now be better off, financially, than two-thirds of the country, and your stress level will be seriously reduced.