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Last time on Credit Card 101, I addressed what types of options are available when it comes to credit cards (and the like).  This time I’ll be taking a look at how credit card companies make their money, which is really just another way of saying that you are wasting yours.

This series is a way to hash out the basics of understanding really how credit cards work.  These are the things that I wish I would’ve known when I first got a credit card because they may have kept me out of debt at such a young age.  Then again, maybe I would’ve still used unwisely and shopped like a madman (woman).  Either way, what may be common sense to some, may be useful info to others.

How do credit card companies make their money?

Most of us know that credit cards come with an interest rate.  If you’re like me and carry a balance from month to month on your card(s), then you’re all too familiar with the interest charge.  Interest is the primary way that the credit card companies make their money.

The periodic rate is the interest rate at which your daily balance is subject to.  This periodic rate is then multiplied by 365 to get your annual rate, which could be as high as 24% (or more).  The average interest rate of a credit card is 17.5%.  Of that total, 12.5% is pure profit for the credit card company since they can borrow money from the government at around 5%.

Because interest is the main income for these companies, if you’re the type that pays off your balance in full every month, they earn nothing from you.  They don’t like this.  Good for you, bad for them.  If you DO carry a balance, the sooner you make a payment for the month, the better.  This is because your average daily balance goes down, so not as much interest is applied.  This would explain why some people make multiple payment per month, sometimes on a weekly basis.  Each payment decreases your average daily balance, which helps you.

Another way that credit card companies earn money is by charging fees. These come in a few different varieties.  Some companies charge a membership fee, which isn’t as popular now as it used to be.  More common is the late fee, which can range from $15 to $40 for being just one day late on your monthly payment (and can be used as an excuse to raise your interest rate).  If you go over your limit by just $1, some companies will charge an over limit fee.  And, believe it or not, some places even charge you for paying your balance in full every month!  Watch out for this and don’t apply for any card that has that as a stipulation!

If you get slapped with these fees, don’t hesitate to call and ask for a fee reversal. Some companies will allow a fee reversal one time if you have been a good customer over the long term.

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So there you have it.  The sometimes sneaky and not-so-sneaky ways that credit card companies make their money.  Don’t let them take any more of your hard earned money than need be (meaning: pay your credit card bills, but don’t get stuck with those fees!).

Next time I’ll talk about some ways you can reduce your payments.

Woo!  When I logged into Dave’s Bank of America credit card account, I noticed that the $75 signup bonus was finally applied to the checking account we opened for that reason alone.  Nice!  It took just over a month, which isn’t bad.  So now I’m waiting for my checking account to be verified, so I can transfer the money out and then have it transferred over to our HSBC Direct savings where we have our emergency fund.

You can imagine my shock when I got our most recent cable/internet bill and it was hovering around $170.  Yes, you read that right.  Somehow, it went up another $20 from last months, which was ALSO shocking to me.  So I finally took the bill and went into the local Charter Communications office to see what I could do to save some money.

Now, I know some people can’t fathom paying for anything more than the basic channels.  We bought a new HD television back in March, so we added some HD channels, plus an HD DVR box (since my old TiVo didn’t record in high-def).  We have digital cable, the HD bundle with DVR, movie channels and high speed cable internet.  It obviously adds up.  We didn’t want to get rid of everything, but we were willing to drop movie channels (other than HBO and Showtime, which air some of our favorite shows).

So after posing my dilemma to the nice lady behind the counter and telling her I wanted to drop movie channels, she did some magic on her computer and said that I could actually keep ALL of the movie channels but get rid of the family tier (about 40 channels that we don’t watch) and it would save us $38 per month for 6 months.  At the end of the 6 month period, I will go in and negotiate again and see what their current deals are.

So we still have digital cable.  We still have all the movie channels (regular AND high-def) and all the channels we didn’t want to lose (including the HD tier of regular channels).  We got to keep our DVR that records in high-def (since we sold my old TiVo to my father-in-law).  Still have the high speed internet.  And we’re now paying $132 per month.

Yes, I realize that is still a lot, but we have not been able to break and get rid of our cable service (or drop it down to basic) because we enjoy watching a few shows each week together.  This is one of our simple pleasures.  Cable and internet will probably be one of the last things to go, if need be.  Before we upgraded to all the high-def channels and DVR box, we were paying around $110 per month, so we’ve always paid more than what most people would consider “okay”.

To each their own.

At least I saved us $38 per month and we didn’t have to sacrifice anything that we love!  That’s really what counts, right?

The opening chapter of Debt-Free by 30 by Jason Anthony and Karl Cluck talks about something called the 7 debtly sins.  I thought this was interesting and it caught my interest so I thought I would share with you some of what I took away from reading this.

#1: Thou Shalt Not Count on Future Earnings to Pay Present Debt

As much as this makes sense, I think it’s something a lot of people get caught up in, especially in their college days.  I know I was of the mindset that charging that new outfit or meals out would be easy to pay off down the road because I’d be making good money.  Or at least, that was the plan.  And as we get better jobs and make more money, our spending tends to increase proportionally with that income.  Without commiting to changing your habits when you get a raise, you will only accumulate more debt and more stress.

#2: Thou Shalt Not Be A Slave to Immediate Gratification

I am one of those people who gets that rush of adrenaline when I slap down my credit card and purchase all of those “things” that I “need” so badly.  But that gratification and spending-high comes crashing down when the bills come rolling in.  Falling into this trend of retail-therapy is never a good thing.  Learn to live without all those expensive shopping trips and impulsive buying.  You will benefit in the long run.  All the money I spent on frivolous things in my past could add up to quite a hefty savings account right about now.

#3: Thou Shalt Not Try to Keep Up With the Joneses

I think it’s practically human nature to want to compete with those around us when it comes to buying and having the best of the best.  The big house.  The fancy car.  The brand name clothes and designer purses.  Having these things is often a status symbol, but one that can come with quite the cost.  If keeping up with your friends and co-workers is putting you further and further in debt, is it really worth it?  Face it: some people can afford this lifestyle while others can’t.  And most likely, many of the people you’re trying to keep up with can’t even afford that lifestyle.  Don’t put yourself in a situation that will take years to recover from just to save face and get an extra compliment or two.  Living smart and frugal now will practically guarantee you a better life in the future.

#4: Thou Shalt Not Pretend to be Too Busy to Think About Money

If you find yourself spending money left and right without a single thought as to why or how you can afford it, but making the excuse that you don’t have time to look at your financial picture…you may have a problem.  When you become consciously aware of your financial situation, you are often more apt to make changes.  When I realized that we were over $44,000 in debt, it shocked me into submission.  I knew I had to make life changes and that paying the minimums on our credit cards weren’t going to get us out of debt any time in the near (to late) future.  The longer you ignore your finances or tell yourself you’re too busy to get it all straight, the harder it will be to turn around and get on track.

#5: Thou Shalt Not Waste

All the money you’re bringing home for your hard work should be used wisely.  Instead of squandering every single penny you earn on all the “things” you think you “need”…find ways to become a bit more frugal and stop wasting your hard earned money!  Cut out your $5 per day Starbuck’s fix and start making your own coffee drinks at home for a fraction of the price.  Cut back on extras on your phone plan or cable plan that you don’t REALLY use (or need).  It’s the little things that can make a huge difference over the long run.  Don’t waste your money!  Make it work for you by investing it in high-yield savings or other investments.

#6: Thou Shalt Not Forget to Set Goals

Think back to how motivated you were growing up: You were bound and determined to some day move out of your parents house, go to the college of your choice, and land your dream job.  You had goals, even then.  So why should you stop there?  By simply dreaming of your financial goals rather than setting them and taking steps to achieve them, you’re not getting anywhere.  Having a $30,000 down payment for a home is a great dream…but it won’t happen on its own.  You need to set goals and find ways to get there, one step at a time if need be.

#7: Thou Shalt Not Be Ruled By Your Social Life

Rather than thinking “work hard, play harder” maybe you should follow the “work hard, play cheaper” method.  If the money you are spending to go out with friends and have fun is causing your budget to cringe, you’re doing something wrong.  If too much of your money is going towards leisure and limiting your ability to get out of debt (or create a hefty nestegg), maybe finding cheaper ways of having fun is in order.  Instead of dropping $100 at the bar on a Friday night, have your friends over for a night of drinks and socializing for a fraction of the price (especially if everyone brings a snack or portion of the alcohol!).  Plus you won’t have to yell over the loud music or cough from the cigarette smoke that is almost inevitable at the bar.

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Well, there you have it.  A great set of rules to live by (or rather, sins to avoid).  Most of them seem like common sense, but even when things are common sense…that doesn’t always mean they’re easy to adhere to.  It takes dedication and motivation to keep trucking along on the path to financial freedom.

Sometimes we find ourselves caught up in wanting “things” and we may struggle with whether or not it’s ok to justify our spending even though it’s not an immediate need.  Here are 4 steps to evaluate and hopefully help aid you in your decision.

1. How badly do you want it? If you find yourself wanting something because you saw it advertised or hear a friend talking about it, ask yourself how badly you really want it.  Are you willing to save up for the item so you don’t have to charge it on a credit card or disrupt your budget?  The immediate sense of wanting something can often cloud your judgment, so give yourself a week or so to think about whether or not you really want it and how much use you would really get out of it.
2. Do you want the thing or the BRAND? You convince yourself that you need a new iPod because you love music and want to be able to compile all your music into one central spot for ease of listening to.  Is it that you want an iPod (a brand) or simply an MP3 player?  There are a variety of MP3 players that do essentially all the same things as an iPod, and priced much lower.  Are you paying for the brand or can you settle for an item of the same concept without the brand loyalty?
3. How long will the item last? Sometimes you’ll see something that you just HAVE to have right NOW.  Step back and take a closer look at it.  How long will this item last you?  Will you be able to get your money’s worth out of it?  There are some things that are priced quite high and yet are made cheap.  Wouldn’t you hate to spend $x.xx on the “thing” only to have it fall apart a month later?  Make sure you’re getting what you pay for.
4. Do you already have plenty of things just like it? The best example of this is clothing.  I’ve caught myself before trying on a super cute pair of jeans or a jacket that I love and feel that I just have to have.  Yet, I have 10 pair of jeans and 3 jackets at home in my closet.  I really don’t need another pair of jeans.

If you can answer all these questions while being honest with yourself and possibly even coming to a compromise, you may find that you aren’t spending as much money on “stuff”.

Just a quick update to say that I’ve been a little behind on my RSS feeds, commenting, and posting this week.  My doctors switched up my meds on me, so I’ve been a little out of sorts.  I hope to get back on track with everything on Monday.  Even my Friday Round Up yesterday was rather weak because I haven’t checked my RSS reader hardly at all since we’ve been back from Chicago.

Enjoy the rest of your weekend. 

Another week has come and gone and once again I’m here to share some of my favorite links with you!  First of all, I was in two blog carnivals.

My tips on maximizing grocery shopping got chosen for the Festival of Frugality and my woes with my IRA got chosen for the Carnival of Money Stories.  Now, on to the links I found noteworthy!  Have a great weekend.

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Money Ning wrote a great article about how you should find your passion in life - find and do what you love.  He hit the nail on the head with this one.  I can’t wait until the day I have a job/career that I feel passionate about and love and don’t wake up dreading the workday.  Isn’t that what we all hope for?

Karen from Living Well On Less shares her experience in trying to figure out if her and her hubby can afford to buy organic produce exclusively.  She was sadly disappointed at her findings.  Why is it that all the healthy stuff costs so much more?

Bob from Christian Personal Finance shows us how to calculate our miles per gallon the easy way.  I wish our car got better MPG…I think we average about 21-23.  Eek!  We drive a 2006 Pontiac G6 GTP.

Just checked my PayPal account and had another $39.62 in miscellaneous income to snowflake!  Here’s the breakdown:

• PayPerPost - $10.00
• ExpoTV - $15.07
• Associated Content - $11.48
• Back to School Aerie.com rebate for using paypal - $3.07 (20% of my purchase from last week, which really means the bra I bought only cost me $12.30 when the original price was $24.50)

Went through all my coupons last night and decided to go use a majority of them (like the amazing Kraft ones where you can buy 3 packs of Kool Aid and get free cheese, hot dogs, Crystal Light, salad dressing and Wheat Thins).  Here’s the breakdown of categories of spending:

• Household - $22.25
• Beer - $16.29
• Pet Supplies - $12.85
• Pet Food - $.18
• Groceries - $33.53

That’s a total of $85.10 and our original total before coupons was $166.35!  We saved $81.25 in coupons. Not too shabby.

• 2 packs of tortillas: $1.56 each
• 4 boxes of Orville 100 Calorie Popcorn Snacks: $2.32 each - 4/$1 coupons = $1.32 each
• 4 boxes of Wheat Thins: $2.50 each - FREE with Kool Aid purchases (12 packs)
• 4 containers of Crystal Light: $2.98 each - FREE with Kool Aid purchases (12 packs)
• 2 Friskies Cat Treats: $1.52 each - FREE after coupons (paid tax)
• V8 Fusion Strawberry Banana: $2.98 - FREE after coupon
• Maple Syrup: $1.92
• 4 Kraft Salad Dressing: $1.58 each - FREE with Kool Aid purchases (12 packs)
• 2 Glade Oil Plugins: $3.94 each - 2/$4 coupons = overage (but I paid tax)
• 2 Visine: $3.62 each - 2/$3 coupons = $.62 each + tax
• 5 packs of Trident gum: $1.28 each - 5/$.75 coupons = $.53 each
• 8 Giant Chewy Nerds: $.58 each - B1G1 coupons = $2.32 total
• 60 packs of Kool Aid: $12.00 (we don’t even drink Kool Aid! Looks like we need to start.)
• 4 packs of Kraft cheese singles: $2.98 each - FREE with Kool Aid purchases (12 packs)
• Sour cream: $.77
• 4 Oscar Meyer Premium Beef Xtra long hot dogs: $2.50 each - FREE with Kool Aid purchases (12 packs)

[Not pictured that was included in total prices is 3 birthday cards, toilet paper, light bulbs, eggs, beer, and cat litter.]

I got my first credit card when I turned 18.  I remember feeling like I was part of some elite club when I got the envelope in the mail, and despite my mom’s warnings to “be careful” and “don’t get in over your head”…I didn’t listen.  Big shocker, right?

I figured one credit card wouldn’t hurt me.  But then I went shopping out of town for my birthday weekend and all the stores I was buying from had special offers of 10%, 15% or even 20% off when you get approved for their store lines of credit.  I couldn’t resist.  I got approved and saved money at stores such as American Eagle, Old Navy, and Victoria’s Secret.  I was in shopper’s heaven!  Or so I thought.

I should’ve just used my Capital One card to buy all the things I bought, rather than signing up for another 3 credit cards at 22%+ interest each.  The only thing that saved my butt was that none of those stores were any closer than 3 hours away from where I lived at the time.  After paying them off, I promptly closed them and to this day, I refuse to open a store line of credit.  (Wait…I have a Best Buy card that can only be used in store, but that has saved me so much money over the years on things we actually planned on buying.  Another post for another day.)

Anyway, I used my credit card throughout high school and college and before I knew it, I was way in over my head and didn’t know how to fix it.  We lived off credit cards and they were used to furnish our apartments, fill my closet, and stock our bookshelves.  I should’ve listened to my mother when she warned me to be careful and be responsible.  See, I actually was a responsible teen, but when it came to shopping…I couldn’t tell myself no.  And I loved to spoil my sisters and boyfriend (now hubby!) and buy great gifts for the holidays.

Maybe I just didn’t know how the whole credit card system worked.  Maybe I didn’t care to know.  Here’s the quick rundown in something I like to call Credit Card 101.

What different types of cards are there, really?  Aren’t they all the same?

No, they aren’t all the same.  First, you’ve got your credit cards…the most popular.  These are the ones that allow us to carry a month-to-month balance and rack up all that lovely interest.  They even allow us to pay only a MINIMUM payment so as not to really make a dent at ALL!  How nice, right?

Then you’ve got charge cards, which require you to pay off the balance at the end of each month.  They’re good for convenience, but only if you really know you can pay it off when the bill comes.  I know that I would’ve only gotten myself into trouble with this, because I used to charge way more than I was willing (or able) to pay off at the end of the billing period.

The next group of cards are your store and gas cards, which are typically only accepted at whichever store or gas station that you get approved through.  There really is no reason to carry these because the stores and gas stations will most likely also accept any major credit card.  The only good reason to have one is if you are young with little to no credit and wanting to establish some.  These cards are normally very easy to get, so your best bet is to get one, use it for 6 months or so, and then cancel it and apply for a standard one if you feel you need a credit card at all.

Finally, you’ve got your debit and secured cards.  This is probably the best way to go if you need to use something akin to a credit card.  Debit cards are issued through your bank or credit union and link straight to your checking account, so the money you’re spending when you swipe that card is really already YOURS to spend.  This makes it easy to shop online because they are issued under the Visa or Mastercard name, which can be used anywhere that credit cards are accepted.

Secured cards are for those who have really messed up their credit and are unable to get any other line of credit.  With a secured card, the issuer requires that you have money set aside in a separate account.  You can normally carry a balance that is equal or maybe even possibly a bit greater than what you’ve got in the savings account.  These cards come with higher interest rates than a traditional credit card, even though they have collateral.

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Next time on Credit Card 101, we’ll talk about how credit card companies make their money, which is in turn wasting YOURS.