Monday, March 1, 2010

Credit Cards, Regulations, and You

Last Monday, new regulations went into effect that targeted the consumers of revolving credit accounts, a.k.a. credit cards. The idea went like this: make it harder for credit card companies to change their policies on a dime and you, Mr. / Mrs. Consumer, won't be so easily taken to the cleaners with fees, interest rates, etc.

As you probably know consumers still are getting taken to the cleaners because not only are their other ways for the credit card companies to maintain their well established revenue streams (read: us) but other things that they were lackadaisical in are no longer being treated with such apathy by the credit card companies.

So while it is mostly common sense, Sandra Block's article in USA Today listing the ways by which you can use the new regulations to maximize your benefit is quite timely. In her article, she writes as the number one thing you can do as paying off your balance...in its entirety.

My parents, as well as numerous other Americans, maintain a healthy credit card balance. For my parents, the balance lives in the 5-digit range, and this occasionally gets "paid off" via a HELOC (which only transfers the balance to a lower interest rate loan) before getting run up again. I was once like this, albeit with a smaller balance, until I was forced to learn how to live within my means by my ex-wife who is an accountant. It was painful to be sure, but 17 years later I swear by this mantra.

Has it been painful at times? Yes. When I married again, I had credit card bills that were in the 5 digit range, but I paid them off.

Has it been tempting to not pay them off completely? Yes. When I was unemployed last year for 7 months and still maintained a decent standard of living (read: I carried the same balance of $3,500 monthly) I was tempted at times to pay less.

Would I have done things differently now that I look back? No. And my FICO II score of nearly 800 - my Beacon 4.0 score is well over 800 - is the reason why. "What's the connection?" you ask. My claim is that it all boils down to one's mental approach, i.e. once you've accepted it as normal behavior to fall behind on what essentially is a financial obligation to pay back a monthly loan every month then you are just as likely to fall behind on other payments that you have to make. For me, those other payments were a mortgage, homeowner's association fees (not insubstantial), car payments and associated insurance, etc.

And then there is the apartment lease for our current residence as well as a vehicle lease since my wife's previous lease expired. "Why," you ask again, "are you getting a lease for your wife?"

A few years ago, before we were married, she became terribly ill and spent several days in the hospital. As an entrepreneur, she had no medical insurance and quickly amassed medical bills nearing $200,000. She had no choice, as you can imagine, but to declare personal bankruptcy, which absolutely destroyed any vestiges of a credit score. Now she cannot get a loan of any type because of this.

In other words, we know what financial pain is like even though no one has ever adequately expressed the frustration one feels when they can't get a loan for an automobile, a necessity in today's world unless you happen to live in Manhattan or a metropolitan area with a similar mass transit system.

The moral of this story is that it's less about the paying off of your credit card to avoid seemingly random interest rate hikes (prior to the new regulations taking effect) or other unusual fees that can crop up and more about establishing a mental attitude toward fiscal responsibility. It is taking this approach to one's life that can really be a game changer, since there are innumerable repercussions of which you and I will never be totally aware like being able to maintain an insanely high credit score when you need it most.

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