Mastering Money

Credit Card Interest Rates

When interest rates are decreasing, credit card companies prefer to charge fixed rates on their cards because the lower rates can be passed along to the consumer (you) more slowly.  However, in June, 2004, the Federal Reserve began increasing short-term interest rates, specifically, the Federal Funds Rate, which is the rate banks charge one another for overnight funds. In June of 2004 the Federal Funds Rate was 1%; on January 31, 2006 it was increased to 4.50%.  This increases the rate that credit card issuers charge you.

The increase in interest rates has caused credit card issuers to switch from fixed to variable rates because they can pass that increase on to the consumer much more quickly.  According to The Wall Street Journal, today 66% of all credit cards carry a variable rate, whereas only one year ago only 55% had variable rates.  In February, 2006 the average interest rate on variable-rate cards jumped to 15.75% from 12.84% a year earlier.  On the other hand, the average increase in fixed-rate cards over the same period was only to 14.11% from 13.25%.

Indeed, issuers can increase the rate on a fixed-rate card at any time, or change the fixed rate to a variable rate, with only 15 days notice.  The rate change on a variable-rate card is more "automatic" and is based on a formula that is often tied to the issuing bank's prime rate.  The prime rate typically increases when the Federal Reserve raises the Federal Funds Rate mentioned above.  Issuers don't generally send out notices when the rate increases on variable-rate cards.  Make sure you pay close attention to your statement when it arrives for those rate changes.

Debt and Savings

During a workshop I was conducting yesterday, a bright woman who was asking great questions, asked me something I had never considered:  if you are supposed to save six months of expenses for the unfortunate event that you might lose your job, does that six months worth of expenses include paying off your debt?

I told her that I believe the six months of expenses saved in case of a job loss should include the servicing of the debt.  In other words, the amount you put back should not only cover your day-to-day living expenses, but should also include the minimum payments on your unsecured debt.  The worst thing that can happen is that your credit card debt increases while you have no income.  It makes it very difficult to pay off your debt if you don't at least cover your minimum payments each month.

Credit card companies are usually fairly lenient when it comes to hardships.  If you call them, and in a firm, non threatening tone, explain your unfortunate situation of temporary income loss, they will be glad to make alternative arrangements.  They would rather be paid something than nothing at all.  Remember to stay cool and calm; they will react more favorably to you.

That's One For Savings

Hooray for Danielle DiMartino, columnist for The Dallas Morning News!!!  In the paper on Monday, March 20th she wrote that she receives lots of emails from folks who wish to increase their investment returns by a percentage point or two.  But, she said, they're missing the point.  She says, "it isn't the percentage return of your investment that matters; it's the percentage of your income that you save and invest." 

Last year, in 2005, for the first time since the Great Depression, the savings rate in America was negative.  What does that mean?  That means we spent more than our disposable income, disposable income being that which is left over after taxes.  One of two things happen (or both happen) when we spend more than we make:  either we cash in our investments in order to pay for our purchases, or we go into debt.  Neither one are a good thing.

I must agree with what Dick Cheney said on March 2nd at the National Summit on Retirement Savings:  "The American dream begins with saving money, and that should begin on the very first day of work."

More and more we must rely on ourselves for our retirement.  Our employers and our government are not going to fund our retirement, so we must save for ourselves.  Otherwise, we better get used to eating Little Friskies and sleeping under a bridge.