What to do with a 0 balance card

Well, the two new credit cards that I wrote about earlier are up and running. I put 100% of the available credit from the first one (Citi, $1,600, 0% on balance transfer for 7 months) and 65% of the second one (Discover, $3,600, 0% on balance transfer for 12 months) toward the balance on the previous card (Bank of America, 19.9% interest). I put $300 from my tax refund immediately to the Citi card, and $178 to the BA card, bringing the balance to zero. (Don't congratulate me, it's not an accomplishment, it's a machination at this point.)

The question now is, what to do with the BA card. There's part of me that just wants to cancel the account and be done with it, especially since I'm kind of mad at BA that they kept lowering my limit in the aftermath of my house disaster and because I couldn't get them to lower the interest rate on the card. (In case you're wondering, we were never late or delinquent on the card. The only mark against my credit is the short sale of the house.)

However, a quick perusal of some of the PF sites suggests that canceling this card might be counterproductive, since it's my longest-standing credit line and it's in reasonably good shape - and, now that it's at 0, it helps my credit utilization percentage, which is one of the elements of the FICO score (and which is pretty high on the balance transfer cards). Here's a couple of representative examples: Frugal Dad, "Closing Credit Card Account Affects Credit Score," and Rich Credit Debt Loan, "Why is it Bad to Cancel a Credit Card?" Money quote:

When you end up closing out open accounts, then those credit lines will no longer be factored into your good credit ratio, and so you are going to be upping your debt ratio in a bad way. This is a silly thing to do and is going to end up costing you in the end.

Well, I don't want to be silly. On the other hand, there's this, "10 Reasons for Canceling Credit Cards," from Dollar Stretcher. I am not in the market for a house, and it will probably be some years before I am (due to both the black credit mark and our inability to save a down payment while we're paying down debt). I hate feeling like I'm jumping through hoops for the FICO score, but on the other hand, I don't feel the need to damage my standing unnecessarily either.

The other major consideration in this is if I feel that I won't be able to resist credit temptation. Right now I'm feeling pretty good on that front, the cards are all in the underwear drawer and I'm pretty motivated to get out of debt, I'm happy to have this card at zero, and anyway I have other credit cards available to me now, so getting rid of this one isn't going to save me if I am not to be saved.

So the conclusion is: this card will get cut up, but I'll leave the account open. As (b'ezrat Hashem, ptui ptui ptui) the newer two cards get paid off, I'll cancel those accounts - those are shorter term and so canceling them won't have the impact on our credit that canceling this one would. When, somewhere down the road, we get to the point that we want to have the use of a credit card, we can decide then which one to use.

But whether the account is open or closed, it's important at this stage for us to treat the credit as though it's not available.

I'm dreaming of a 0% balance transfer

After opening the Citi card that allowed me to transfer $1600 of my $5300 cc debt at 0% (from 19.9), I figured that if I could transfer part of it, maybe I could transfer all of it.

First I went to Prosper.com, which is a peer-to-peer lending site similar to Lending Club, which you may remember I couldn't use b/c they don't lend in Kansas. Well, after filling out the whole Prosper process (you fill out your info as if you're applying for loan, which you are - ss #, employer's phone number, the whole 9 yards - and they run a credit check on you and then bid out your loan) I was told that the best they could offer me was $7500 at upwards of 28% interest. Usury! I don't want to tell you what my response was to that, except that it rhymes with "truck poo."

So I went back to the suggestions on the various frugality sites and what I came up with is a Discover card that will let me transfer the remaining $3600 from card #1 at 0% for a full year. These two transactions will save me upwards of $700 in interest payments over the next year+, and even if I make no additional snowball payments this particular debt will be paid off one year from now.

I'm not sure what warrants giving a guy with a house default on his credit record $5200 in new credit in a little under a week, but it works for my purposes so I'll take it! I have to assume that they think I won't be able to get out from under during the grace period and they'll have me on the hook for a rotating 20% a year from now. Needless to say, this whole thing depends on a) getting out from under during the grace period, and b) no additional debting. DW and I have been talking a lot about this, and I think we're finally there.

I'm sick of debt

I'm writing today from a place of frustration. I have been pursuing what I think of as a fairly simple and frugal lifestyle for quite a number of years now. I can remember discovering the Tightwad Gazette while I still lived in New York, which is over 15 years ago. I don't buy expensive clothes or a lot of video games or fancy electronic equipment. We have two cars: a 12 year old beater and a 6 year old slightly-less-beater. We very rarely eat out. We don't go to movies very much or other entertainment unless someone gives us tickets. I don't really even give that much to charity, in the great scheme of things. I have thought and written about frugality and sustainability extensively and have tried to apply most of the low-hanging fruit principles of the frugal lifestyle to my own life.

Yet we continue to have a hard time staying within our monthly budget, and we continue to struggle to pay down a substantial amount of credit card debt. I don't understand it, and I'm feeling really frustrated about it.

The thing is, while DW's paychecks have been a little inconsistent lately, she's earning a good deal more now than she was last year at this time, meaning things should be getting easier. I put a few numbers into a simple budget spreadsheet last night, and it looks to me like, counting just our fixed expenses and including debt service, we should be running a surplus of a couple hundred dollars every month. But we're not - we consistently have to take money from our emergency fund to make the monthly nut. The conclusion I reach is there are substantial random (unbudgeted) expenses that are hurting us. And I'm not even really sure what they are.

The reason I stopped working on this blog was because I felt that I didn't have anything to teach anyone because I wasn't getting anywhere. I picked it up again because just letting things go on this way is not going to solve my problem. DW and I have to raise the level of seriousness with which we think about and address this problem.

The first step has to be figuring out where the money's going, and getting to the point where we're living within our monthly means. This means squeezing our monthly expenses, such as canceling cable and changing auto insurers, but is also means figuring out where we're spending this mysterious money that isn't in the monthly plan.

The second thing (well, a related thing) would be to build our emergency fund back up to about $2,000, so that extraordinary expenses - such as auto repairs - don't have to go on the plastic.

And the third thing is paying down this damned credit card debt. I went back and looked a previous posting I made about the debt snowflake, which is where you pay the minimums on all your debts except one, and you put all extra available funds into the highest priority debt. At that time (October 2008) our two cards had about $7,000 each on them, and I predicted that if I followed the snowflake program the debt on the highest interest rate card (mine) would be retired by ... June 2010. Well, I'm here to tell ya, it ain't gonna be. As of March 1, my card at about $5,700, and DW's is up to almost 9. So we've essentially gotten nowhere in a year and a half. And it's because we keep putting non-fixed but reasonably expectable expenses - kids' clothing and shoes, car repairs - on the card. And I of course debted the equipment for the TV transition.

I redid the snowflake the other day, and it's basically the same story as it was the last time: if we do it as prescribed, and maybe throw in another month's payment with our tax refund, my card will be retired in a year, and DW's a year after that. That of course depends on not using them anymore.

To recap, here are the steps:
1 - get our monthly expenses under DW's and my combined income, including debt service and the snowflake payments, and including reasonably expectable ongoing expenses that we've been putting on the cards. This will have to be a combination of squeezing fixed expenses and figuring out and eliminating all the pissy little expenses that don't present themselves so easily.

2 - build the emergency fund back up to $2,000 so there's a some leeway for larger extraordinary expenses such as car repairs.

3 - Discontinuing use of the credit cards and paying them down with the debt snowflake method.

The thing is, when I look at what's supposed to happen after the two cards and DW's car are paid off, there's actually quite a bit of money there, even with ongoing payments on my student loan debt stretching off to the horizon. We make a decent, middle-class salary, certainly enough that we should be able to save a little money and even buy stuff with cash once in a while. Right now, that has to be the goal - and we need to get serious about meeting it.

Some interesting links

A NY Times article today on the growing problems with credit cards, which calls it the next crisis - unemployment and recession leading to defaults leading to raised interest rates and lowered credit limits for everybody else. People can no longer use their home equity loans to juggle their credit card debt, is what it comes down to.

Working off that article, here's a good post from Zen Habits on how to deal with the credit card crisis: it's is worth reading in its entirety, but it's basically to move away from debt, pay down debt (perhaps by using the debt snowflake model I talk about here), and stop spending money. Good advice, like I say.

Consumer Reports has a new Money Blog written by Tightwad Todd which is pretty consistently worthwhile. A couple of days ago I had the oil in the '98 Voyager changed (110,000 miles - I decided to put off the larger service call until it gets to 120K ptui ptui ptui which is what the manual recommends) and at about the same time, Get Rich Slowly happened to have a post saying that he thought the 3,000K recommendation for oil changes was a con cooked up by the likes of Jiffy Lube. He doesn't exactly say not to do it, instead saying to rely on the owners manual rather than a general guideline. Which I guess is okay, but my owner's manual says to do it every 3,000 miles and anyway, Tightwad Todd says that one is foolish to ignore this simple and routine procedure, that any American car should be able to get to 200,000 miles if it's treated well and part of being treated well is regular oil changes.

Mike Quincy, one of our long-time auto writers, says the most important trick to keeping a car performing properly is to follow the manufacturer's recommended maintenance schedule and make any repairs promptly. If you think you’re saving money by skipping an oil change, you’re wrong, Quincy says. Missing even one oil change can accelerate premature engine wear and cause engine damage, reducing long term reliability.

And if you can't believe Consumer Reports (no advertising) who can you believe? I sometimes push it to almost 4,000 miles, but I need this car to last for a while so I want to be nice to it.

Third, I've been noticing a bunch of hits on this site from a blog called "justice desserts." It's part of what it calls the "urban homesteader" movement, pretty hardcore DIY and back to the land. I've been sort of looking at it for the last month, there's s a bit of a survivalist vibe that I find myself reacting to negatively but that may be more about me - there's a lot of good information on there and it's definitely worth a looksee. And they put my link under a heading, "Blogs of those who eat and love Justice," which I am proud to say is true.

Article in this week's Newsweek on frugality - the title says it all: Thrift is the New Fashion:

Thrift, like the repossession business, is one of those classic countercyclical industries. When the gross domestic product shrinks and bulls grow mute, Americans are called to rouse themselves from a consumption-induced daze and start saving and investing rather than borrowing and splurging. At about this time in the economic cycle, we hear a lot more from Warren Buffett and a lot less from Donald Trump.

Well, that's one good thing, anyway. (Maybe the Apprentice will be shown clipping coupons this season, and Team A will point a finger at Team B and say, they bought the toilet tissue that wasn't on sale!) The article poses the hope that the current economy crisis will somewhat swing the pendulum back to savings from the spendthrifty ways of the past ...how many years? Since the last recession, I suppose. But he also makes time to drop the hoary "wisdom" that thrift is bad for the economy:

Clearly, we need to save more. But as John Maynard Keynes taught us, thrift can be counterproductive in times of weak demand. Consumer activity accounts for about 70 percent of economic activity. Spending money heedlessly—traveling, redecorating, eating out—keeps our friends and neighbors employed.

Well, not anymore, I guess. Speaking as one who was trying to be frugal when frugal wasn't cool, basing the entire world's economy on the spending habits of lavish Americans is foolish - it is unsustainable, it is unenvironmental, and it is unfair to others who will certainly be tempted to replicate it and then will be told, no you can't, it causes global warming. The economy of the future will have to be based on green technology and the development of renewables, and not on reigniting consumables. Thomas Friedman is quite right about that, and I think Obama thinks that way too, as far as I can tell.

And finally, here is the most foolish sentence I have read in a while, from that bastion of inconceivable overconsumption, the Times Sunday Style section:

In an economic climate in which buying a handbag with a four- or five-digit price tag is starting to seem gauche, the free-spending style hounds formerly known as “fashionistas” are rebranding themselves.

"Starting to seem gauche" - you like that? Note to the Times: It was always gauche. Just ask Sarah Palin and her Neiman Marcus charge card.

Debt snowflake

There's a concept in the on-line frugality community of the "debt snowflake." I think it was developed by Dave Ramsey, but I found out about it through Get Rich Slowly, which is about my favorite of the many frugality sites on the net these days. As explained here, the idea is that you set a certain amount to apply to your debts every month above the minimum payments , and all of that extra money gets put into one priority debt: it could be highest interest debt, or the one with the lowest balance, which seems counterintuitive but the idea is that success at eliminating "low-hanging fruit" will be a positive reinforcement toward continuing to pursue future goals.

Then, whenever you come into some money - whether it be a repaid $5 loan from a person at work or a tax rebate check, a high holiday pulpit, whatever - you apply it to the priority debt. That's the snowflake, which builds, presumably, into a snowball. This gets the priority debt down faster, and then once you have paid off that debt you take all the money you've been paying toward that debt and apply it to the next priority debt, and so on.

It sounds pretty smart to me, so I've been trying to adopt it for the past several months. I also found, probably through GRS though I don't really remember now, software for an Excel spread sheet that helps make this a visible, workable plan. You load in all your debt numbers, interest rates, and the amount you pay each month, and prioritize which debt to attack first, and it figures out how long it will take you, and how much money you will be able to apply to other debts once the priority debts are resolved. There's a place for you to enter in any additional money that you can snowflake, and it automatically readusts the calculations to take that additional money into account.

So I have 4 major, priority debts: two credit cards of about $7,000 balance each, one at 19.9% interest and one at 13%; a car payment of $340 over 72 months, which we're a little more than 24 months into; and about $7K to one of my brothers-in-law, which was mostly to buy our way out of the house in IL. (I also have my student loan debt, which is $400 / month but which I'm leaving off here for right now because the interest rates are low and the other debts are higher priority.) Given that there isn't any one particular debt that has a significantly lower balance than the others, I'm prioritizing the 19.9% credit card. So I pay $400 monthly to that, $200 to the other card, the $340 for the car, and $100 to the brother in law.

According to the calculations, if I don't incur any additional debt, the first card will be paid off in June of 2010, and the second one, taking into account the additional $400 per month that I will then be able to add to the payments, will be paid off in January of 2011. Then we apply the two additional amounts to the car payment, etc. etc. If nothing else changes, these 4 debts (again, leaving aside the student loan) will be resolved in November of 2011.

Which doesn't really seem that far away, when you think about it. The problem, of course, is that many things will happen between now and then to complicate these calculations. We have the looming orthodonture issue that I wrote about earlier; we want to send DK1 to Jewish summer camp next year; and we have a bat mitzvah on the horizon for August of 2011, right in the middle of all of this. (Stay tuned for a large expansion of the "frugal bar mitzvah" tag starting in about a year or so!) We also haven't been saving for retirement or for college for over a year now, since we got to Wichita.

I suppose the unexpected could happen in a positive way as well, such as DW getting gainful employment which would allow us to raise the numbers, or at least not add to them because of tight circumstances. Right now we have about $2500 in our savings account, which means we wouldn't have to go to the credit cards if we had an unbudgeted expense, such as needing to do a repair on the car, for instance.

So it is what it is, it seems like a good tool, and I think in this case it's useful to have things written down. It makes the thing less liable to vagaries of my mood or the balance in the checkbook. I'll let you know down the road how it's working out.

Oh, and one other thing: every once in a while I find myself moaning because things are tight at the end of the month and it seems that we're not being frugal enough. But one thing I've realized through paying closer attention is that I am paying about 25% of my monthly net income in debt service, so it's no surprise that things can get tight. That's no reason to let up, and I still think there are more economies to be found, but I also think relief will have to come on the income side, if you get my meaning.

Budget woes

A continuing sore subject is DW's and my inability to stick to the budget. I've written before about our challenges in feeding our family of 5 for anything resembling (at least to my mind) a reasonable amount. (I set $450 as a goal but we have a hard time getting through a month spending less than $900, which to me seems crazy.) DW also has a tendency to say, well, we need this and this and that, and run to the store and get it, despite where we are in the month or the budget or whatever. (Although she won't do it if I jump up and down and say we really don't have any money.) The latest one was we got her Visa bill today, we're supposedly trying not to use them but every month on her card there's a $100 or $150 charge from Target for school supplies or clothes for the kids or whatever. We've really been making an effort to pay the cards down but of course we can't do it if I make a $200 payment and she spends $150 on school clothes! Her answer is, well, the kids needed clothes, what was I supposed to do? Well, that's fine, but the money you're using is not real money, and it's interfering with our ability to dig ourselves out of our hole.

Much as I would love to rake her over the coals on this, I really can't because a) she reads the blog and b) I have my own things I spend money on, like the farmer's market and the free range meat guy and building up the liquor cabinet. I have virtually given up spending money in bookstores, not completely but mostly, and I pay cash when I do go. But I am far from a saint on this. Jako got $120 out of me yesterday, it'll last 2 months but still.

I think what we may have to try is to stop using, not only the credit cards, but even the debit cards. I read somewhere on one of the frugal sites that if you carry around the cash with you you're more likely to stick to the budget. So maybe we'll have to try that.