Projecting

I’m working on some tips to share with friends/family on the best way to use credit cards.  I know that sounds beyond boring, but having worked at a credit card company for two years (TWO YEARS!  HOMG!), I have encountered many people who do NOT use credit cards correctly and therefore lose tons of money.

Anyways, I’m just keeping a log of the tips I’d like to use (see below).  That’s all.

Consumer blogs (like fatwallet.com, consumerist.com, etc) are a good way to measure the opinions of a certain segment of customers.  The segment self-selects into reading and posting on these blogs, so many are concerned about their finances, being ripped off, and advocating for consumer rights.  I read these blogs from time to time when I’m trying to develop products and strategies at work.  Unfortunately, all companies everywhere are trying to turn a profit (except for, um, non-profits…) and sadly credit card companies can’t loan money to their borrowers for free.  Or even close to free.  And there are plenty of ways to earn money honestly in the credit card business and even more ways to take the easy short term route and “surprise” the customer.  Many people have been burned in the past by lending institutions, even (or especially?) by Cap1.  These are the people most likely to spread information about various credit card companies (for good reason), but their opinions, or often-incorrect perceptions of how the industry works, are extremely biased and probably make ANYone who reads their insights a bit nervous.  The same is true for those nightly news segments about Mysterious Monolithic Credit Card Companies Seeking Your Financial Ruin.  The shows need to cause a stir to get anyone to watch, and DO offer some accurate tips, but unfortunately they’re often delivered with a tinge of hysteria in the newscaster’s voice, often causing a more panicked and less informed perception of credit.

So, in an effort to make the world a slightly more-informed-but-not-necessarily-better place, I want to clear up some misconceptions so you can make good decisions about your credit/borrowing.  These are practices I’ve seen at my own work, but I’m sure that ANY credit card company would have to use similar practices in order to be successful, so any generalizations I make are likely industry-wide, and I’ll call out any exceptions to those generalizations where I’m aware of them.  I will also be careful not to point out any SECRETS of my own company so I don’t accidentally get sued.  (Note:  None of those secrets are actually exciting, in case you were wondering.  This is financial analysis I do.  Zzzzzzz.)

Perception:  “Fixed for life” means Fixed for life.
False:  While many companies claim that a certain interest rate/APR is fixed for life, companies ARE STILL ALLOWED to change the APR on your credit card.  My company has stopped claiming this since it’s just a lie, but if you see it on any advertisements, it’s not true.  Common reasons for a change to your interest rate include changes in the economy (so…. NOW), or to make some quick cash for the company (like if liquid assets are needed on the balance sheet asap, to show to investors etc).

Perception:  Your entire balance will have the same APR applied to it.
False:  This used to be a “trick” that worked very well for some companies, mine included.  However, so many people have been burned by this one that it has become pretty common knowledge that different aspects of your balance will have different APRs applied.  There are three main types of balances:  Purchase Balances (the most common - this is anything you buy at a store, online, etc), Cash Balances (this is used if you get a cash advance by putting your credit card into an ATM and getting cash out), and Balance Transfer Balances (this is if you transfer a balance from say a Chase credit card to an American Express card in order to take advantage of a lower APR offer).  So, on your purchases, you may have a 9.9% rate, on Cash a 19.9% rate, and probably a short term promotional rate on the Balance Transfer like 0% which will turn into 14.9% after 6 months or so.

Here’s what sucks for the consumer.  Your payments are applied in order of lowest-to-highest APR.  Here’s an example to illustrate why this is often a bad move for consumers:

John receives an offer in the mail from XYZ Credit Card company.  The offer is:  0% APR on all transferred balances until July 2009!  John accepts the offer, transfers $1000 of balances to XYZ and spends along on his merry little way.  John will have a 9.9% APR on any new purchases he makes.

Fast forward to August 2009 (yes, I can accurately predict the future with 90% confidence).  Here’s what John’s situation looks like now (this is in a scenario where he’s not very committed to paying his balance in the first year of holding the card):

• John has the $1000 balance remaining that he transferred originally.  He was not accruing any interest on in the first year, but since that agreement ended in July 2009, he now has a 19.9% interest on that balance.
• Like before, John has a 9.9% on the additional purchases he made, which was $3000.
• Now, he has to pay it all back.  The $1000 balance is the most expensive to him, since that APR is 19.9%.  Therefore, the company will apply any payments he makes to that $3000 balance, on which he is only accruing 9.9% interest.  The most expensive part of his loan is essentially buried beneath the cheapest, and he can’t dig himself out of that expensive rate until he’s already paid that $3000 balance!!!!

While this practice is extremely profitable for credit card companies, it will probably be discontinued soon.  Due to new federal regulations, this practice will likely be illegal, but no one knows WHEN yet.

My recommendation is to YES, take advantage of those low Balance Transfer offers you receive, but do not compound a balance on top of the transfer.  I.e. whichever card you use for a balance transfer, try to use it exclusively for the transfer, and reserve a different card for purchases.

Myth:  Credit card companies don’t make money off of responsible users - like if you pay your balance in full each month.
False:  They make plenty!  Here’s how it works:

For the sake of simplicity, there are two main types of credit card users (obviously we can parse this down into hundreds of types, and sometimes we do when doing analysis, but these two describe 90% of the important stuff).

1. Some people will use their credit card to make purchases and then pay their bill in full at the end of every month.  We’ll call them Payers.  Since Payers have the financial ability to pay their bill in full each month, they may tend to be more financially stable, more careful with their finances, older, and be attracted to Rewards products on their cards.  (These are generalizations for simplicity!)
2. Other people will accumulate a balance on their card over time - in other words, they make purchases each month but don’t pay the entire bill.  They might just make the minimum payment or pay a certain portion of their bill.  These people will be called Balance Carriers.

Let’s start with Balance Carriers, since that’s how people think credit card companies make all their money (and believe me, they ARE profitable, but almost all customers are profitable, or else they… wouldn’t be customers!).

Another job I’d want

“Receiver of delivered coffee.”

I wonder how to dress for that, so someone will bring me coffee whenever I would like.  Nekkid might work for that one too but the risk metric would be significantly increased.

Dress for the job you want

I started thinking about the job I want.  I would love for Capital One to fire me.  So the best outfit to get me fired would probably be no outfit.  Nekkid!

I wish an antiexclamation point existed.  Exclamation points feel too cheerful to express an angry yet surprised thought.

Possibilities:

“I look ugly today <!>”

“I hate you !=”

“This has carrots in it ? *!* “

Waherds

Words that make me recoil whilst job searching (a dynamic list):

• Process (this is code for rules).
• Cash flow (this is code for your job will suck).
• Financial (is not code for anything).
• PhD (this is code for I’m too stupid).
• Analyst (this is what I already am and in the process of fleeing).
• Attention to Detail (code for boring).

Over(t)ly caffienated.