The Credit Card Trap (Part Two)
There's more to managing the way you handle credit cards than paying your bills in full and on time. To be a smart cardholder, you need to remember four words: read the fine print.
Stick to two cards. One common denominator among delinquent cardholders is they're holding on to so many cards. The average person in the major cities has 2-3 cards.
Rana recommends two cards, with one for backup (make sure at least one is an international card). For a lot of people, however, the number of cards is for bragging rights. Having high credit limits give a sense of pride as well. Even the color of the card is a status symbol.
But Rana advises that cardholders review their total credit. "It's not advisable to have so many cards," he explains, "The annual fees on those alone [are prohibitive]."
And if you receive yet another pre-approved card in the mail, don't activate it. Cut it up to prevent identity theft. If you're not using a card, cancel it. "If it has no usage or payment history, it doesn't serve any purpose," says Rana.
Be wary of credit limits. Having a high credit limit or receiving a notification that your limit has been increased may give you a, well, high. But remember some aggressive card companies will very high credit limits, even if it doesn't match your capacity to pay, forcing you to revolve.
In the same way, they offer introductory lower rates (which they then jack up), freebies, huge rebates, and attractive rewards points to get to switch. Don't be easily tempted. Before biting, remember to…
Read the fine print. You need to read the terms and conditions. If you don't understand some items, and I'll bet there'll be some, call the company to get a clarification.
Figure out how interest is computed. One vague area that needs a clear explanation is the interest rate. Rana says Equitable Card charges 3.25% on your outstanding balance, based on simple interest computation (principal x rate x time).
Other companies hide the total effective interest rate. They may charge 3.25% but based on your average daily balance, not your outstanding balance. They may also compute interest based on a shorter number of days, instead of a full 30 days. So, instead of looking at the nominal rate, check the annual percentage rate or APR.
Figure out how the balance is computed. If your balance is P10,000 and you manage to pay P9,000, you'd think you'd be charged an interest for your remaining outstanding balance of P1,000, right? Think again.
Many card companies use your average daily balance or ADB as the basis for interest charges. So they take into account your beginning balance, new purchases, payments, and ending balance.
Figure out when your payment is posted. Some companies post your check payment when it clears, not when you deposit it. Equitable Card considers your bill paid when you deposit it on the due date. Others will consider it late. Check the same when paying online. If you pay on the due date but after banking hours, some cards might post it the following day.
Learn when to transfer balances. When should you transfer balances to another card? If the new card has better features and rates. In most cases, however, revolvers are the ones who like to transfer to take advantage of lower rates offered for transferred balances. Some card companies even waive the annual fee. Just make sure the interest on your succeeding regular purchases is competitive.
It doesn't hurt to ask. If you're ordinarily a transactor and was late on a payment once, such that you get charged a late penalty fee, call your card company and ask for it to be waived. Most likely, they'll comply.
Learn about billing cycles. Some cards don't charge a penalty even if you pay after the due date, as long as you do pay a few days before your statement date. Why? Because of the way their systems work. For instance, if your due date is on the 25th and your statement date is on the 5th, if you pay on the 30th, you won't get charged anything because the system will check your balance perhaps a few days before the 5th. It's an industry secret, but it doesn't apply to all credit card companies.
Learn what causes red flags. Credit card companies track several parameters, such as usage, payments, and delinquencies. Don't get paranoid however if you're late with a payment or two, or if you just pay the minimum, or max out your credit limit. "The important thing," Rana says, "is paying it."
What to do when you can't pay. However, if you're delinquent, a collection mechanism kicks in. A reminder is sent when you're 30 days past due. A telemarketer may call you to remind you of a missed payment. You'll get a stronger note if you're 60 days past due. And your account is automatically suspended. If you're 90 days past due, you'll receive a stronger letter and the card company sends out its collection agents.
The worst scenario is when the card company files a suit to force you to pay. When your card is reported as a delinquent account, you take the risk that won't be given a loan facility like a car or housing loan when you apply. And this is not erased from your record. And as Rana points out, it will take a lot of convincing again before you can avail of a loan from a legitimate creditor.
If you find yourself in this situation, try negotiating with your card company to come up with an acceptable restructured payment plan that will fix the numbers years you can pay off your balance, the minimum amount you're expected to pay every month, and the interest rate you'll be charged. You may be asked to issue post-dated checks and a stop credit facility will be enforced, such that you can't charge new purchases to your card anymore.
If you have a spending problem, cut all your cards altogether and pay cash for purchases.
The Credit Card Trap (Part One)
Plastic. For a growing number of Filipino consumers, credit cards have become the preferred mode of payment, from dining out in a restaurant to paying for the wide screen TV on installment.
It's also becoming a major problem for regular people who find themselves tens of thousands of pesos in debt. In the first quarter of this year, credit card bills that were past due topped P13.8 billion.
We talked to Fol Rana, Jr., Vice President for Sales & Marketing - Retail of Equitable Card, one of the major players in the industry, on how to manage our use of credit cards.
It's just a tool. Rana stressed that credit cards are just an aid in your finances. "If you don't have cash, it allows you to purchase items." Combining the billing period and the grace period before you're charged interest is the equivalent of 30-45 days of free money (that is, if you pay the balance in full when it's due).
But it's still a loan that you have to pay. Unfortunately, there's a certain detachment when we charge for purchases, as if there's no tomorrow. It's just not the same as when we grudgingly pull out cash from our wallet. Says Rana, "With cash, you see value. With a credit card, you see plastic."
Have a good credit record. Keep this in mind when you miss a payment…again. Your credit card payment history affects your credit record, which is a factor when you apply for other loans, like a mortgage or housing loan.
Although there's no credit bureau in the country, credit card companies have an arrangement to check balances of their customers. They also check the banking industry's negative file information system.
So it is a good idea to use a credit card to establish your credit record when you're just starting out. "A person with a credit card history has a better chance than someone with none," Rana points out.
Get rewarded. The other good thing about using credit cards is the payoff like free airline miles, rebates, discounts, and reward points, which you can use to claim items or waive your annual fee. If you're a good customer, you can get invited to special events and promos. However, these extra features should not be your top priority when choosing among credit cards, particularly if you're not the type who pays in full.
Study your finances. Find out how much you're earning and spending every month to give you an idea how much you can afford and how much credit you really need. Rana explains, "If your card can cover your expenses, then don't ask for more cards." More cards and higher limits mean greater temptation to overspend.
Track your expenses. The problem with credit cards is you'll only find out your bill once a month. Often, you get shocked by how much you charged. There's another way. Use the phone or the Internet to track transactions and balances, if your credit card company offers such facilities (perhaps this should be one of your criteria in choosing a credit card provider).
Control your expenses. If you track them, you can better control them. Don't exhaust your credit limit. Rana says you can even request the card company to decrease your limit. He also suggests you just carry one or two cards instead of all.
And if you really want to keep your credit card costs low, don't do cash advances, which charge you an interest the moment you get the money. Pay at least the minimum to avoid late payment charges. In fact, pay more than the minimum to lower interest charges. Better yet…
Pay in full. Rana explains there are two types of cardholders - revolvers, who pay the minimum amount due, and transactors, who pay in full.
Card companies love revolvers more, because they earn from interest charges. They are also less likely to cancel, as they always have a balance to pay. If you're a revolver, don't worry about being seen as a bad customer. Paying just the minimum doesn't trigger concerns as long as your credit limit is commensurate to your capacity to pay. Just don't expect to get an automatic increase in your limit or an upgrade.
But don't feel guilty if you're a transactor and want to help your friendly neighborhood credit card company. Card companies still make money off you through annual membership fees. But even if you manage to have this waived, they still earn from their member merchants.
Pay on time. Even if you can afford to pay the minimum, pay it on time. Late payments trigger red flags if they happen regularly. There's no excuse for not paying. Rana says, "Even if the bill arrives late, as a responsible cardholder, you have to keep track when to pay." Besides, he adds, there are many methods of paying, including auto debit, the ATM, phone banking, and online.
Watch out for part two where I write about the fine print.
Six Feet Under
It may sound morbid, but the topic of death, particularly the expenses related to burial, is quite fascinating. The costs can really kill you and the rituals can sometimes be ridiculous.
Nowadays, you can have a fancy burial with photo and video coverage, a band, balloons, the works. A party when you're dead.
But even the basics can be quite steep. A casket, for instance, sells for as low as P20,000, made in wood, and can go upwards of P850 thousand for solid brass.
A cemetery lot can go for P45,000 to more than P800,000 while a mausoleum costs about a million and upwards of eight million.
No wonder cremation is becoming a more popular and more practical alternative. The cremation cost about P9,000. A wooden urn goes for just P1,500, although brass ones cost P25,000 to P65,000. And if you want a bone or ash niche in a columbarium, it would cost P50,000 to P65,000. You can, of course, just keep it at home.
You do get freebies from package deals. Otherwise, you have to consider other related expenses:
Viewing room: P3,000-P5,000 per day
Flowers: P500-P5,000
Garden: P1,500-P8,000
Hearse: P5,000
Police escort: P700-P1,200 per policeman
Burial: P18,000-P25,000
Headstone/Marker: P700-P5,000
Grave diggers/Niche watchers: P500-P2,000 per person
Sandwashing: P7,000-P15,000
Obituary space: P2,000-P50,000
As you can see, dying can cost you an arm and a leg. You can say the funeral services industry is making a killing. With these expenses, who wants to die?
I know it's something you and your loved ones would rather avoid but part of a financial plan is anticipating for the cost of your or their funeral. Here are some things to remember:
1. Shop around.
You won't have the luxury of comparing prices if a loved one suddenly dies, or worse, if you die. Not all funeral homes or cemeteries are the same. Compare prices if the likelihood of someone in your household dying soon becomes apparent, such as due to old age or serious illness. At the very least, ask around and be aware which ones are reputable and recommended.
2. Don't be pressured.
Remember, it's not called the funeral industry for nothing. So don't think of funeral directors as clergy. It's not that they're vultures but it's still a business for them. So don't buy products and services you don't need or want.
3. Avoid emotional overspending.
You don't have to buy the most expensive casket or the biggest mausoleum you can (or can't) afford to honor a loved one or cure guilt pangs. Show your love when the person is alive. A simple, dignified memorial and funeral service is sufficient.
4. Plan ahead.
If you can to buy a memorial lot or casket in advance, it would not only come cheap, it will give your loved ones peace of mind.
But even if you don't purchase ahead, at the very least, talk to your family about your wishes (and solicit theirs if they're open about it). Why buy an imported solid brass casket when your loved one really just wants to be cremated and doesn't want any viewing?
5. Consider a pre-need plan.
Memorial plans today are really just another form of investment. Pre-need companies sell packages that pay out an agreed-upon amount in a lump sum. They do offer value-added services like professional assistance. And memorial parks also offer plans that you can pay in advance.
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