After reading the recent NYT Magazine Article What does your credit card company know about you? and listening to the Planet Money interview with the author, Adam and I were discussing our personal credit experiences a bit. We begun an exchange over email, but I’m going to move it to the blog. Here is the initial email I sent to him, after he asked what the interest rate on my credit cards is.
I have three credit cards, all from Chase Bank (now JP Morgan, originally Chase Manattan).
Limit APR Cash APR
$10,500 9.24% 19.24%
$11,000 7.24% 19.24%
$4,200 13.24% 19.24%
(APR is Annual Percentage Rate, basically just interest rate. Cash APR is the rate they charge when you take a cash advance by using your credit card as an ATM card.)
All 2 cards are from Chase, I had only applied for one originally, which started with an introductory $500 limit back in like 1999 or so, which has been gradually raised over the years and with them, sending me two extra cards, unsolicited, at some point. The original card was MasterCard, the others include a second Mastercard and a Visa. Of course, I also have an ATM debit card, but I only use that to withdraw cash since I got the credit card, which presumably is how I built enough of a record with Chase for them to give me so much unsolicited credit at apparently reasonably rates. BTW, I’m not entirely sure which card is the original one at this point, but I think it may be the one with the highest APR, with the lowest interest rate card being the most recent, granted to me as an apparently responsible customer.
Obviously I should make sure to only use that one in the middle from now on. In fact, that is the one I’ve been using, which currently has a couple of hundred bucks I haven’t payed off yet, but I will as soon as I get paid next into my Chase account. BTW, I hadn’t even noticed my credit limit had been raised again sometime in the past year. Last time I looked my total credit limit was around $20,000 but now it’s up to $25,700.
I say don’t use them at all unless absolutely necessary (i.e. if you know you’ll have the cash next month but don’t have it at the moment), and then always pay back the full balance (if I understand correctly, it’s like in Japan where no interest occurs unless you fail to pay that month’s full balance).
You can think of any interest accrued as money added onto the price of whatever you bought. The convenience of credit cards is what makes it easy to pay extra fees, even though you might not have decided to make the original purchase if the sticker price was 10 or 20% higher (4000 yen full set of Tezuka manga vs 5000 yen).
One thing that should be in the credit card bill of rights is to force credit card companies to give you the option of automatically paying your full balance every month, which is what they do for us on our Ito Yokado cards.
“Cash APR” refers to the interest they’d charge if you used the credit card to get cash out of an ATM, right? That is pretty outrageous but I guess not quite as bad as payday loans. Speaking of payday, I used to cash my check from Pizza Hut at the local supermarket for aa 25 cent fee. America is full of these sorts of dubious financial “services.”
As you might know the APR number itself is a little misleading because they charge you 1/365.25 of that rate every day, so it will compound if you don’t pay it off.
Why don’t you just cancel the other two cards? Will there ever be a situation where you will want to go $20,000 in the hole at such a high interest rate? It had better be a life and death scenario because that would doom you to debt hell for years (it’s almost double the rate I paid on my student debt, so youd be responsible for the same super high minimum payments). $11,000 seems like plenty for a credit limit.
I had this weird experience when I paid off my credit card debt about a year after college. I called Citi to try and cancel my card and the guy on the phone wouldn’t let me, insisting that I should keep it and use it to roll over my other credit card debt. I never did it and just paid off the remaining balance on my other card, but to this day I still have the two card accts open with no balance. The Citi one I cut in half and one I still have “just in case.”
Actually, using cards frequently and paying them off immediately is one of the best and cheapest ways to build credit. Obviously it’s worked well if they started sending me newer cards with better rates. I almost never carry more than a very small balance (i.e. <$100) so the worst I’ve ever been hit with in charges is like $5 or so before I pay it all off.
That’s exactly what it is. It can be useful in emergencies I suppose, but really things have to be pretty bad if you have zero cash left in any of your accounts. Still, I guess it’s possible you could be stuck somewhere and not have brought your regular ATM card for some reason, but you desperately need cash. In those situations it’s not too bad, as long as you pay it right back.
Well, obviously it’s important to have both a Mastercard and a Visa, since a fair number of places will still take only one or the other. I also have had problems from time to time where a card gets cut off automatically due to suspicious looking overseas use or something, and in situations like that’s it’s also good as a frequent traveler to have multiple backups you can use before you have time to call them for an hour and sort it out. As for actually using the full amount of credit, it’s very unlikely but I could see it happening in a case such as a family emergency where I had to say pay bills for one of my parents’ houses for a couple of months before I could sort things out properly.
I should also add that I’ve never had a car loan, student loan, home mortgage, or any other form of credit besides these three cards from chase, unless having a cell phone counts. I’m actually a bit confused about that, because when I first got a cell phone in the US I did not yet have a credit card, and because I had zero credit history they asked me for a $150 deposit, which was refunded after a year. However, after that year was over and I went to apply for that first credit card, I was initially refused because I still had no credit history, which implies that while having a cell phone contract requires a credit score, it does not actually contribute to it (at least in a positive way.)
Dude, at least you didn’t use this opportunity to air EVERY awkward detail about your life, like this guy from the NYT did:
http://www.nytimes.com/2009/05/17/magazine/17foreclosure-t.html
One thing we can say as younger people without experience owning homes or whatever is we can be damn glad that others are experiencing the disasters of super-easy credit and not us.
And I see your points about “building credit” and having different cards for different occasions. That tends to slip my mind because logically simply using a credit card and paying off the balance immediately after shouldn’t make you a better credit risk because you aren’t even really using credit as much as a more convenient cash equivalent. But maybe the awarding of creditworthiness is the card companies’ way of rewarding you for letting them charge fees to retailers.
I have about $25,000 in credit across six US cards, most of which charge 13% to 15% APR, plus a 300,000 yen revolving limit on my JAL card which charges 13.2%. I make more than Roy (being a full-time working stiff and all), but my huge student loan debt probably makes me a bigger credit risk from a US perspective, and my riskiness in Japanese eyes should be pretty apparent.
The JAL card is weird because it is basically the opposite of Roy’s experience. From what I understand, they do not pull credit history when issuing a card, but still report credit events to the major Japanese bureaus. I may test this in a few months by applying for another card here and seeing what happens.
As for the “Ito Yokado system” cited above, I’m not sure which system is really better. With my card, payments are automatically treated as “ikkatsu” and get paid from my bank account the following month unless I manually switch them to “revolving,” in which case they are carried over with interest until I pay them off. The problem is that you can only make this selection before your monthly bill is locked in, so if you don’t pay attention you can end up defaulting even though you have an unused revolving limit. US cards are much easier if you are responsible about it, because you can basically pay as much as you want to whenever you want to (as long as it is above the minimum payment, which is usually really low relative to the total balance).
The Planet Money spot and the Duhigg article were informative. (As an aside, I find the stories with just Adam Davidson, Alex Blumberg, and David Kestenbaum far more easy to listen to than the days with lots of Chana Joffe-Walt and Caitlin Kenney. Perhaps there’s a misogynist streak in me.)
Although conversing with friends about unsecured credit and the evil math behind APRs, etc., I find that talking with my parents about credit cards is quite interesting. They grew up when credit cards were being introduced and would much rather purchase something on layaway than buy it with a credit card. This was many many years ago, but I remember thinking, “layaway…what’s that?”
http://www.nytimes.com/2009/05/19/business/19credit.html?ref=us
This article airs the CC industry’s scare tactics – essentially they are saying that if they can’t gouge people then rewards programs and interest grace periods aren’t worth the trouble. That means that all the positive aspects of credit cards that Roy takes for granted – the miles, the easy credit-building, etc might all go away. It won’t even be a temporary cash replacement if they start charging instant interest (though I kind of doubt they have the balls to go through with it since it will mean NO ONE will use a credit card except in exceptional circumstances. I am sure most people rely on at least the fiction that they will pay the balance the following month)
Charging interest on purchase would suck. Functionally, my credit card is a debit card, and if it becomes a portable unsecured loan, then I would just as soon dump a chunk of cash out of the ATM once a month (free) and pay for everything with yukichi’s just like Japan is famous for…
If it does happen in the US, I wonder how long it would take for the trend to catch on in Japan.
“That means that all the positive aspects of credit cards that Roy takes for granted – the miles, the easy credit-building, etc might all go away. It won’t even be a temporary cash replacement if they start charging instant interest”
The reward aspect of it has always been pretty worthless to me actually, as I don’t spend enough money total to build up a significant amount of points. The important thing for building credit is to just make a lot of purchases and pay them off promptly, so even if they start charging interest immediately that doesn’t change. However, take a look at this NYT article claiming that these threats are heavily overblown.
http://www.nytimes.com/2009/05/20/your-money/20money.html?_r=1&hp
I was following a discussion on FlyerTalk about the topic of immediate interest, and many people there seem to agree that it is an empty threat from the credit card companies in an attempt to scare off the regulators. (Link)
The points aren’t really useful for casual spenders. The folks who really clean up are people who travel a lot on business; their flights, hotels and meals are often paid on their own card and then billed back to their employer later, so they get to keep the points on top of the miles they earn from flying. With that sort of setup it isn’t hard to get a free first-class ticket around the world every year.
The other way to clean up is to simply move all your spending onto a point-earning card. Pay your bills with it, buy groceries with it, go out to eat with it. This doesn’t really make sense if your cards are issued overseas, though, because the exchange rate spread will eat up any added value you get from the points.
Those guys on FlyerTalk are into the practice of “churning” — get a point-earning cards, use it enough to get the huge initial bonus, and then switch to a new point-earning card. I did this with a Northwest card the summer after law school; just applying for the card and buying my bar review course with it got me enough Northwest miles to fly from Tokyo to Saipan and Beijing for free (in business class, no less).
I don’t really know the situation about american credit cards, but as Joe Jones above states, in most cases the points are really worth all that much. It’s not uncommon for special offers to be given – that if you buy this – you get double points etc to get you to buy something you wouldn’t have normally got. The point system most benefits those who use them for business.
One useful thing though – is it’s a good idea to call your provider and let them know when and where you will be travelling ahead of time. There’s now software that automatically flags when your spending habits change which can then cause your card to be suspended automatically. If you’re like me and travel frequently overseas this can cause a bit of havoc.
Citydweller is correct, this has happened to me multiple times and it’s annoying as hell. When I flew to the Philippines earlier this year I booked my ticket online from my PC in Kyoto, using my US credit card, at the Cebu Pacific website located in The Philippines. Every single card I have rejected the transaction, I had to call the service center in the US and even that didn’t work at first! Apparently the transaction was hitting so many red flags they had to send me up to a high level supervisor to put a special security override on my account. Needless to say I had them make a note in my file of the exact dates I would be there.
“The other way to clean up is to simply move all your spending onto a point-earning card. Pay your bills with it, buy groceries with it, go out to eat with it. This doesn’t really make sense if your cards are issued overseas, though, because the exchange rate spread will eat up any added value you get from the points.
Not to mention that there are hardly any bills you CAN pay with a credit card in Japan. I’ve never seen anyplace where you can put rent on it, most ordinary grocery stores don’t take credit cards. Cell phone and internet does, but I don’t think you can put power, water, gas on a card.
Some credit card companies will even put a permanent note on your record that you are a globe-trotter who might use your card in a random country on short notice, if you ask them to do so. I know American Express will do this. With some other issuers, you can only put such a note on your file for a short term, so you have to keep calling them back every few months to renew your card’s travel clearance.
On the topic of foreign travel, the cash advance feature of credit cards can come in handy when you are overseas and can’t get your cash card to work. Visa and MasterCard have broader ATM acceptance than most bank networks, so you can often use a foreign credit card to get cash out of a machine that doesn’t take foreign bank cards. This can get expensive when you compound the exchange spread, ATM fee and interest rate, so I would only recommend it on an as-absolutely-needed basis.
BTW, in Tokyo you can use a credit card for most anything. My power, water, gas, phone and internet all go to my JAL card. Most supermarkets here take cards, but convenience stores generally don’t (although the AM/PM by my office takes Suica, and my JAL card has a built-in Suica which autocharges). Kyoto might be more behind the times.
Finally sick of only being able to charge things in USD I finally went and filled out an application for a Visa card at the University Co-op office today. I should get it next month.