Financial Blog

Whether your credit’s good or bad, avoid these common blunders

Whether you’re in a financial crunch or just lack a second Ferrari, credit card offers landing in your mailbox might look like an answer to prayer.

Don’t succumb to temptation, says Cate Williams, vice president of financial literacy for Money Management International in Chicago.

“The first thing consumers need to do is walk from their mailbox to their shredder,” says Williams. “A new credit card might give you that sparkling feeling for about 24 hours, but as a way to clean up your finances, borrowing money to pay back other money is not a solution.”

Experts’ advice can steer you away from the top 10 credit card mistakes.

1. Getting too many

Bypass the shredder and you could make one of the most common credit card blunders by collecting too many credit cards.

“Ask yourself,” says Williams, “ ‘Do I need another credit card?’ Probably 95 percent of us don’t need another one to keep in the sock drawer or in the little metal box in the kitchen.”

Howard S. Dvorkin, founder and president of Consolidated Credit Counseling Services, a nonprofit debt management company in Fort Lauderdale, Fla., agrees. “The worst mistake is that people don’t know when to stop. Too many credit cards is not a good thing.”

Even if the cards have zero balances, multiple open accounts could cause a lender to question what could happen if the account holder gives in to temptation and maxes out on all that plastic.

2. Misunderstanding introductory rates

But, you argue, that new card will help you manage your money better because you can transfer other balances to a no-interest account. Welcome to credit card mistake No. 2: being misled by introductory rates.

“People don’t look at what the rate’s going to be once the teaser is over,” says Daniel Wishnatsky, certified financial planner and owner of Special Kids Financial in Phoenix “The assumption is that it’s going to be a reasonable rate. But with these particular loans, it’s not unusual for it to go up to 18 to 20 percent. They’re surprised six months later when it expires. But if they’d done their homework, they wouldn’t be.”

3. Not reading the fine print

That homework is reading the offer’s fine print. Not doing so is credit card blunder No. 3.

That tiny text insert is where you’ll discover when the zero-percent or very low interest rate expires. It’s also how you can find out about any balance transfer fees, as well as any offer limitations. In most cases, the introductory rate applies only to balance transfer amounts or new purchases for a certain period of time, says June A. Schroeder, a CFP with Liberty Financial Group, Inc. in Elm Grove, Wisc., a private financial planning and advisory firm.

4. Choosing a card for the wrong reasons

You might be tempted to ignore the fine print because the card has other attractions, such as a rebate or rewards program. Don’t, or you’ll make credit card mistake No. 4: choosing a card for the wrong reasons.

“Credit card granters are not a consumer’s’ friend. It is a business,” says Dvorkin. “They don’t know what’s right for you. Their job is to extract as much money from you as they can. Your job is to not let that happen. People need to go through and find a card that’s right for them. There’s every sort of card out there — points, cash back, donations to your college.”

5. Not rate shopping

Look for the best possible interest rate. Not shopping around is credit card mistake No. 5.

It’s especially important to note the rate on unsolicited offers. If you’re struggling financially, you’re not likely to get the most favorable rates or terms. You’ll be paying higher interest rates.” So comparison shop for a credit card.

6. Making minimum payments

OK. You do need another card. You read the fine print, you completely understand the terms and you got a competitive rate. But even after choosing the perfect credit card, people still make mistakes, such as No. 6 on our list, making minimum-only payments.

“Credit cards are not a form of supplemental income,” says Dvorkin. “They’re for convenience, and should be paid off at the end of every month. Paying the minimum is not going to get you anywhere. It’s going to get you in trouble, that’s where it’s going to get you.”

And it’s going to get you into trouble for a long, long time. “People don’t realize how difficult it is to pay off loans at a high rate,” says Wishnatsky. “You’re going to be paying it for your next three lifetimes.”

7. Paying your bill late

Making late payments, blunder No. 7, is better than not paying at all, but not by much.Not only will you face a late-payment charge, which could be higher than your minimum payment, your tardiness will show up on your credit report, making it harder to get better terms for future loans and accounts.

Check your account statement for the due date and make sure you send your check in plenty of time. But the date alone isn’t enough, says Liberty Financial’s Schroeder. Some companies have cutoff times. If your check arrives on the 22nd as required, but in the afternoon mail, your payment is counted as late because your account terms called for payment by 9 a.m. that day.

If you’ve set up an automatic payment via your bank, make sure the time and date are taken into account, says Schroeder. And find out your bank’s payment policy when the due date falls on a weekend or holiday.

8. Ignoring your monthly statement

You can avoid late payments by checking your credit card statement. Not doing so is mistake number 8. Checking your statement will help you pay your bill promptly, as well as allow you to make sure that the charges on it are correct. “In these days of ID theft, you need to check your bills religiously,” says Schroeder. And you need to do so as soon as the statement arrives. If you wait too long to dispute a charge, says Schroeder, “you’re essentially accepting it.”

9. Exceeding your credit limit

Checking your statements also can keep you from exceeding your credit limit, mistake No. 9. “If you’re near the top of your credit limit, try really hard to pay in cash for subsequent purchases or get an increased credit line,” says Schroeder. “If you don’t, you’ll get over-the-limit charges, which are costly and look bad on your credit report.”

10. Buying things you don’t need

Careful statement examination also could prevent the 10th credit card blunder, using plastic to purchase things you don’t need.”Go over your credit card bills every month and you’ll be amazed at the number of items that, upon reflection, you could have done without,” says Wishnatsky. “It’s surprising how many purchases we make that we think are needs, but are impulse buys.”

The Phoenix financial planner tells his clients who are considering a significant purchase to wait 48 hours, if at all possible. “If you still want it, wait another 48 hours,” Wishnatsky says. “Then if you have to get it, then get it.”

Also use your statements to help you create a budget. Wishnatsky realizes many people cringe at the “B” word, but he says control of your spending and your credit card usage doesn’t have to be a way to deprive yourself. Instead, it can be a way to make things happen in financially positive ways.

“Once you get control, even to a degree, it frees you from this constant money worry,” says Wishnatsky. “You might find there are things that you can actually end up having if you just have a plan, if you get your financial desires in tune with your financial resources.”

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Retirees relying more on credit cards.

The rocky years of the Depression shaped frugal and debt-shy consumers, but towering credit card balances now compel many seniors to seek help.

Their growing mortgage debt and credit card balances are of real concern, says George Gaberlavage, a director of policy research and development at AARP.

Some credit card holders older than 55 –already coping with fixed incomes and escalating medical expenses — court trouble with credit cards because they’re being “sandwiched.” A new survey by Ameriprise Financial Inc. shows seniors often assist parents and adult children with loans, health insurance, rent, utilities and other expenses.

“My experience is that credit card debt is one of the top reasons seniors seek bankruptcy protection,” says Barbara Whipple, a bankruptcy attorney in Latham, N.Y.

“Older consumers who turn to me for help are embarrassed, ashamed and often do not talk to their children about their financial problems. The biggest complaint I hear is,’I pay and pay every month, and my debt doesn’t go down, even when I don’t make purchases,’ ” Whipple says.

The availability of credit “has gone through the roof” over the past two decades, aided by the advent of credit scores and Wall Street’s buying and selling of credit card debt, says Liz Pulliam Weston, a personal finance author and columnist. Twenty years ago, older Americans were less susceptible to credit crises because lending standards were much more stringent, she says.

Cate Williams, vice president of finance at Money Management International, a nonprofit organization that offers financial guidance and debt management services, says she expects the percentage of older Americans seeking pre-bankruptcy counseling to climb.

They’re supposed to be in the best of their financial years, Williams says, but they’ve got “serious, serious debt” to get rid of.

Katie Porter, associate professor at the University of Iowa College of Law and project director of the 2001 Consumer Bankruptcy Project, says older Americans are especially vulnerable to the dangers of credit cards, because, among other things, they’re less likely to use debit cards as an alternative.

A report this year from the Institute for Financial Literacy indicated 14 percent of Americans seeking pre-bankruptcy counseling in 2006 were 55 to 64, yet that age group made up 10 percent of the U.S. population. Credit card bills often account for most of the debt.

The Administrative Office of U.S. Courts shows that seniors file for bankruptcy more often than young people.

Porter quotes a review of thousands of credit card accounts by the Massachusetts Institute of Technology Department of Economics which suggests that older Americans borrow at higher interest rates and cough up more late-payment, over-limit and cash-advance fees.

They try to pay their bills, only to be trapped by high interest rates and fees, Whipple says.

Facing rising costs for basic necessities, older consumers often are forced to make a choice to go without or borrow to pay,” says Bob O’Connell, a member of the AARP Executive Council. “Of course, many older people go without, often at serious expense to their own well-being. But for those who have chosen to rely on the plastic safety net, borrowing increasingly means sky-high costs and the very real prospect of endless … debt.”

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As technology advances in the banking and credit communities, you’d think something as simple as a credit rating should be readily available to banks, credit institutions and lenders outside of the United States.

When Jason Hinkley, 30, an American national and information technology specialist living in Germany, started shopping for a local mortgage lender outside the city of Wiesbaden, he found that it was not the case.

“Not many Americans have bought a home here,” says Hinkley. “The rules are really different.”

Lending agencies asked Hinkley for income verification and about any outstanding debts he might be carrying during the loan application process, but had no way to confirm his previous credit history from the United States.

Differing identifiers and consumer protection laws
James Jones, Consumer Education Manager at Experian in the United Kingdom, says the need to establish credit in a foreign country using your standing credit history is an issue for many people. But as it stands now, it simply cannot be done.

“Your credit record can’t actually be transferred between the United States and the United Kingdom, or vice versa,” Jones says. “Nor can it be done between the United Kingdom and Europe or the United States and Europe. There is just no facility to do so at the moment.”

That lack of communication goes both ways. Linda Sherry, director of national priorities at Consumer Action, a nonprofit consumer advocacy and education group based in San Francisco, says that foreigners coming to the United States will also have difficulty using their past history to apply for credit. “Even if a country has a viable credit reporting system — and many countries don’t — those systems won’t talk to the ones here in the United States.”

Each country has its own format for credit-related data as well as stringent laws to protect consumer data, Jones says. Those formats include the unique identifiers that allow agencies to track your credit use. “In the United States, your credit history is built around your Social Security number,” says Jones. “That’s not the case in the United Kingdom; we have a different system with different identifiers.”

As more legislation is passed to protect consumer data and reduce identity theft, varying national and international laws might make it illegal for one country to share an individual’s credit history with a foreign lender. “From a United Kingdom perspective, we have very strict consumer protection legislation that stops any credit information from being transferred out of the country,” says Jones.

As such, people who move abroad will not be able to provide foreign lenders with instant access to their hard-won credit histories. “They are, in effect, starting from scratch,” says Jones. “They have to earn and build the lender’s confidence.”

Using current credit products abroad
It’s possible to bypass applying for credit with international lenders by using existing bank accounts, credit cards or lines of credit. “If you have American cards already, they will still exist wherever you go. You can change the cards to an overseas address and they will still be viable,” says Sherry.

By doing so, consumers might be subject to extra costs and fees. “We know that credit bureaus don’t transfer credit history across countries,” says Rosa Alfonso, spokeswoman for American Express. “American Express card members can, of course, use their cards all over the world. But it is beneficial to have a card in the currency of the place in which you reside.”

Without that, says Alfonso, consumers might be subject to currency conversion fees when purchases are converted from the local currency to United States dollars. There could also be other fees, depending on purchase type and country.

Alfonso suggests that before an international move, you contact credit card companies to switch to the most appropriate product for your new residence. With the American Express card, you might have to apply for a different card. Alfonso reassures existing card members that American Express would do everything in its power to make the transition seamless. A new application doesn’t negate a previous relationship, she says.

You can take it with you
Alfonso says that at American Express, every application is evaluated case by case, even when an American credit report is not available. “We definitely want to be able to establish income verification from a reliable source,” she says. “But every application is evaluated on its own merits. It is not one size fits all.”

Sherry says that other credit card companies might also be willing to look beyond your credit report. “A thin credit history does preclude you from getting most types of credit in the United States. But credit reports are not the only criteria that creditors rely on.”

Though your credit report cannot be automatically transferred to lenders, Jones and Sherry suggest you provide it in the form of a hard copy or old-fashioned letter of credit from your bank back home.

“You can always print out a copy a copy of your credit report and provide that to lenders,” says Jones. “In the U.K., we also send out an explanatory guide with the report, so that would be useful to keep as well. It’s possible that with a paper copy to work from, a lender might try to verify the information.” In Hinkley’s case, an income verification statement from his employer satisfied the German banker who guaranteed the home loan.

Jones firmly recommends that any time you apply for credit with unusual circumstances, you speak with the lender about your situation before applying. This could prevent a large number of credit searches from creating a red flag on your budding local credit record.

If your history doesn’t transfer, Sherry and Jones suggest gradually building up your credit history in your new homeland. Sherry suggests looking into a secured credit card product where you can deposit money as the security for the credit line. Jones says it may be as simple as opening a bank account.

“Overdraft protection is a credit product,” Jones says. “If you open a bank account and they see your regular income and outgoings, the bank may be eventually inclined to offer overdraft. That can later help you apply for other credit products.”

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Net Worth: $8.1 million

Where he got it:

Fred Thompson may be history’s best-paid public servant.

He’s been a senator, lawyer and lobbyist, but his stint as Arthur Branch, the DA on “Law and Order,” and other acting bits playing past and present U.S. Presidents and FBI and CIA directors are what made him wealthy.

In 2006 he took in about $3.6 million for his acting roles, another $3.6 million as a commentator for ABC Radio, plus $1.6 million for making speeches. He collected an additional $200,000 or so from his investments.

Thompson had an early star turn in politics as minority counsel in the Watergate hearings. He got his start in show business playing himself - a plaintiff’s lawyer who helped to expose a bribe-for-clemency scandal at the Tennessee parole board. The story became a book (”Marie” by Peter Maas) and then a movie in 1985.

When he wasn’t holding office, Thompson was a lobbyist - from 1975 to 1993, and then again after leaving the Senate in 2003. He collected $760,000 over the years from Equitas, a British reinsurance company that wanted Congress to limit its contributions to a fund to pay people sickened by asbestos.

To run for President, Thompson had to give up his TV roles, radio gig and lobbying. No wonder he waited until the last minute to declare his candidacy.

Where it goes:

Thompson didn’t make really big money until he went Hollywood in 2003, so he has only $4 million in assets outside of his homes.

About $825,000 is in retirement plans, the rest in bank accounts. His only liability is a mortgage on his condo.

How he could do better:

Thompson is 65, but he should invest “like a 41-year-old,” says Cordaro of RegentAtlantic Capital. That’s because his wife, ex-political consultant Jeri Kehn, is that age, and the couple have two children.

Cordaro recommends a portfolio of 15 percent bonds, 65 percent stocks and 20 percent in alternative investments.

Another concern: career longevity.

“If this President thing doesn’t work out, his acting career may have only a few years left,” says Cordaro. “He should be saving most of his income.”

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Net Worth: $202 million

Where he got it:

Romney won a combo M.B.A. and law degree from Harvard and promptly took himself to Wall Street, or at least the Boston version.

He started with the Boston Consulting Group and moved on to Bain & Co., another consulting firm, where he became vice president in 1978.

Six years later he founded Bain Capital, a private equity spin-off that at one time or another had stakes in Bright Horizons, Domino’s Pizza, Staples and The Sports Authority, among others. Romney still receives income from Bain as a retired partner but no longer has any say in operations.

Since 1999, when Romney entered public life, taking over the troubled operations of the 2002 Salt Lake City Olympics, and later as Governor of Massachusetts, he has donated his public service salaries to charity.

He has said he would do the same with his presidential earnings. He doesn’t need the small change.

Where it goes:

Romney and his wife Ann hold about 100 stocks, including Dell, Disney and Target, as well as foreign issues including the Bank of Yokohama and China Mobile, in two blind trusts.

About 43 percent of the Romney portfolio is tied up in private equity investments through Bain Capital Management. About $38 million is in Federal Home Loan Bank bonds that have maturities stretching out to 2016.

Last year Romney’s adviser sold dozens of stocks, some of which he believed would be politically sensitive.

Among them: gaming companies such as Bally and Harrah’s, and companies that do business with Iran, including European oil producers Eni SpA and Total. The sales explain Romney’s ultrahigh 2006 income.

How he could do better:

Romney is the candidate with the most riding on the estate-tax debate. Hugh Smith and Stewart Welch of the Welch Group say that unless Congress changes laws, Romney’s estate could owe at least $90 million as of 2011.

They suggest various ways to cut that bill, including giving all the money to the family foundation after Mitt and Ann both die.

A smaller bite out of the problem: They could give $24,000 tax-free to each of their grandchildren, soon to number 12, every year.

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Net Worth: $1.3 million

Where he got it:

After Harvard Law, Obama didn’t exactly rake in the big bucks. He led a voter-registration drive and then worked for a Chicago law firm that specializes in civil rights and employment discrimination.

He earned $60,000 as an Illinois state senator, plus another $32,000 as a lecturer in constitutional law at the University of Chicago.

Michelle Obama, however, worked for a while as a big-firm lawyer, leaving to take jobs in the nonprofit sector. She wound up as vice president for community affairs at the University of Chicago Hospitals, a position that paid nearly $317,000 a year.

She resigned in May and also left her post as lead independent director of Tree House Foods, a private-label food business.

According to the Obamas’ tax return (Obama and Sen. Christopher Dodd of Connecticut are the only candidates to release one), their income hit $1.7 million in 2005 and $991,000 in 2006.

The big boost came from his writing, following the stirring speech at the 2004 Democratic Convention that made him famous.

First came a memoir, “Dreams of My Father,” and later “The Audacity of Hope,” which was on the New York Times bestseller list for 30 weeks.

Where it goes:

Excluding Michelle Obama’s retirement plan, whose value needn’t be reported, the couple has about $715,000 in investments. All the money except for two very large checking accounts is in mutual funds.

About $350,000 is divided between Vanguard FTSE Social Index Fund, a socially responsible fund, and Vanguard Wellesley Income, which has a mix of 60 percent bonds and 40 percent stocks.

How he could do better:

The Obamas have about 40 percent of their money in cash - about right for now, says Jason Mirsky of RiskMetrics: “They may need that much cash to tide the family over without Michelle’s income.”

Later, however, the Obamas should ramp up their stock allocation to about 70 percent. With their earning power, they can take more risk, adding small-cap and international funds.

They could also venture into real estate investment trusts or commodities. They should start 529 college savings plans for their two girls.

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Net Worth: $40.4 million

Where he got it:

McCain wouldn’t exactly be poor were he on his own. As a senator he earns $165,200 a year, and he has a $54,000 Navy pension. And then there’s publishing.

“Faith of My Fathers,” his autobiography, was on bestseller lists for 24 weeks in 1999.

Since then he has produced about a book a year, recently “Hard Call,” about good decisions and how historic figures made them.

In 2006 he took in about $225,000 in royalties, but over the years, income from books has totaled about $1.7 million, all of which he has donated to charity.

He can afford to be generous. His wife Cindy is the chairman of Hensley & Co., the Anheuser-Busch beer distribution business she inherited from her father. As an only child, Cindy is in charge of the family trusts.

Although she only has to report that she has a salary of $1,000 or more, her income from investments in 2006 came to about $3.7 million.

Where it goes:

Except for checking accounts, all the McCain assets are in Cindy’s name or those of their dependent children. Nearly $5 million sits in two generation-skipping trusts.

She receives the income, but the principal passes to her heirs. One holds mostly J.P. Morgan mutual funds and Anheuser-Busch stock, while a second trust has only Arizona municipal bonds.

Other trusts that benefit Cindy contain a variety of stocks, bonds and mutual funds. She also owns shares in two large medical buildings in Phoenix, a guesthouse near the couple’s home in Sedona and an investment property in Coronado Beach, Calif.

Another $6 million in J.P. Morgan funds is held in the name of their four children.

How he could do better:

In the Navy, McCain no doubt learned to keep things tidy, and the couple’s finances are shipshape. They - and Cindy’s father - “have clearly given a great deal of thought to their estate,” says Christopher Cordaro, wealth manager at RegentAtlantic Capital.

Cordaro has just one worry: “Everything except $50,000 is in her name or in trust for her and the children,” he says. “I’d advise the senator to keep Cindy very happy - or have a good prenuptial agreement.”

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Net Worth: $52.2 million

Where he got it:

Absent 9/11, Rudy Giuliani would have very likely followed the path of other retired mayors, joining a local law firm and reeling in politically connected clients. Instead he’s become a publishing, consulting and speech-making juggernaut.

He received a $3 million advance for “Leadership,” a tome on management that appeared in 2003. He founded Giuliani Partners, a lobbying and security consulting company that paid him an income of $4.1 million in 2006.

He became a named partner at Bracewell & Giuliani, a Houston-based law firm with close ties to the energy industry. That job pays the ex-mayor another $1 million.

But Giuliani’s greatest financial triumph has been his speech-making. In 2006 he took in $11.4 million by delivering 124 talks for up to $200,000 each, one speech every three days.

Where it goes:

Giuliani’s finances partly reflect his somewhat messy personal life. Nearly $100,000 in assets are half owned by Donna Hanover, his second wife, whom he divorced in 2002. (She got a $6.8 million settlement, according to news reports.)

He has since married Judith Nathan, a former pharmaceutical sales rep. With her he shares about $11.6 million in assets, and she has assets of $2.4 million in her own name.

Giuliani’s most significant holding is his 30 percent stake in Giuliani Partners, which has some controversial clients, including the manufacturer of Oxycontin, a powerful painkiller that the government is trying to restrict. (A Giuliani spokesman said the company never discusses engagements.)

Of the couple’s nearly $28 million in investable assets, about 46 percent is in cash and 25 percent in bonds.

How he could do better:

Advisers Hugh Smith and Stewart Welch note that Old Westbury funds, in which Giuliani has invested much of his money, receive only one- to three-star ratings from fund watcher Morningstar, a mediocre record. (Top-ranked funds earn five stars. Not all Westbury funds are ranked.)

They think Giuliani would be better off if he had a manager invest in individual stocks. At his asset level, that would be a cheaper alternative to actively managed mutual funds.

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