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Wise Use of Paid off Credit Cards? You Decide.

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Paid off credit cards – shred ’em, close ’em, and forget ’em – OR – shred ’em but leave open and risk fees in hope of increased FICO score – OR – risk fees, leverage rewards, and laugh all the way to the bank!

On Wednesday I featured an article titled “More Reasons to Pay Off Credit Card Debt” where I mention a few of the ways our recent reduction in spending and use of credit has affected our relationships with our credit card banks.  In summary, the recent changes we’ve made in spending make them mad – and the ways in which they’re responding make me puke!

So… should I tie them to the bumper of my car and drag ’em through the city streets?  Or risk navigating the shark infested waters by trying to increase my FICO score and/or exploit their rewards programs while avoiding the 47895 possible fees?

What is the most wise use of paid off credit cards?

To help me decide whether I should close the 3 credit card accounts and forgo the benefits of increased credit score and possible future rewards – or keeping them open, risk the fees, and hope my FICO score will rise… I will turn to the über-wise DFA debt slaying community.

In today’s post I will detail the three choices I am kicking around including the approach I am currently using, along with two opposing responses I received from two DFA commentators… and put them up for all of you to examine – vote on – and comment on.

Three possible approaches:

My current approach:

As of right now I have paid off all three credit cards, shredded all but one, but have not closed any.  I haven’t closed them because the word on the streets is… a paid off credit card will increase your FICO score – but a closed card will not.

“Steve in W MA” uses his cards with this system and reaps the benefits…

After getting used to using the Cash Envelope system for all my ongoing weekly and day to day spending (Food, Gas/Tolls, and Fun), I have discovered that it has trained me to stay on budget like a hawk. So now what I do is shop with the envelope in hand as well as my credit card.  I clear all purchases with my budget by first looking to see that enough greenbacks are in the cash envelope, then I use the credit card to run the purchase.  I take the greenbacks from the cash envelope and put them in a fourth envelope I carry marked “VISA repayment”.

The cash envelopes get adjusted, the Visa bill gets paid, I don’t go over budget or into debt, and I get the 1% (soon increasing to 5%).

I am astonished at how much the cash envelope system is doing for me – even though, by including use of a credit card,  I am acting  in a way staunch Dave Ramsey followers might consider perverse and twisted.

The fact that I clear all spending by checking my cash envelopes first means that I cannot fall prey to the usual temptations of the credit card including… losing track of your money, spending more when you use it, and going over budget (and risk falling into debt over time.)

I still spend at my predetermined budget limit, but I am getting the 1% back (soon to be 5%.) And for someone who watches their dollars like a hawk and spends less than $50 a week on food, that one percent, or $2-$4 a month,  is appreciated and will go to good use. Once I am getting 5%, it will be $10 a month.  $10-$20 is decent money to be had – if and only if you are sure you aren’t losing $200 out the other end by overspending. However, the cash envelope system as I describe here prevents that overspending.

I would only recommend doing this to people who:

  • are familiar with and  use a cash envelope system as well as a master budget system
  • have been successful at using the strict normal cash envelope system for several months and therefore have begun to associate normal spending behavior with  checking the envelopes and pulling out cash, rather with reaching for your credit or debit card
  • in general are no longer as tempted by the lure of spending.

My long term experiences have shown me that using a credit card without a similar system of proven success, or while still experiencing spending temptations, will most definitely cause you to overspend.

Whereas Mr. Not the Jet Set holds a completely different point of view…

Matt – love the post.

First – “Can’t you just see the execs of Capital One, Citibank, etc. sitting around in a board room coming up with new ways to screw us out of our money?”  Yeah, I nearly fall off the couch laughing at these new credit card commercials & how they wanna be your buddy again. “Yeah, yeah, we hate debt too, so we’re giving you 17 new BS features to help you, ya know, pay off your debt or something… oh and we’ve got this sweet rewards program too…” As if.

Second – I’ll join the chorus here and challenge both you and Peter to shred those cards. Burn’em. BBQ’em. Whatever! Ditch the credit cards and their never-ending schemes. Then come back in a month, 3 months, 6 months – tell me if you really miss it. It’s not like you can’t go out and get another card if it’s really that awful.

It’s a much simpler life.

What do you think?

Kill credit cards & bury ’em in the back yard – Leave them open but shred ’em – or use & abuse them and beat credit card banks at their own game?  That is the question!

Here is a poll.  Weigh in with your opinion… I’m really intrigued to find out what the majority of DFA readers think.

[poll id=”4″]

Where is Mr. Credit Card when you need him?

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DFA is passionately dedicated to helping people break the bondage of debt and work toward financial freedom using biblical principles.

A Journey of a Thousand Miles begins with A Single Step

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In our Wealth Pilgrim Radio interview yesterday evening Neal Frankle & I talked a lot about passion.  What my passions are, how I discovered them, etc.  In an email to Friends of The Simple Dollar Trent Hamm recently asked for “a key piece of advice that really changed the way you saw the world and helped bring about real change in your life.”

The combination of these two events inspired me to write this post.

How I lacked the ability to set goals…

Historically I had always been a man of no specifically set goals.  I was never sure exactly why or how I developed & maintained this aversion to process oriented accomplishment.  Whatever the problem was — whether I just couldn’t find the time, didn’t place enough value in achievement, or maybe just didn’t want to be bothered — I had the problem.

Setting goals was not something I regularly purposed to avoid, but rather I had always been a “fly-by-the-seat-of-my-pants” type of guy who just didn’t find it commonly necessary to assimilate goals into my life.

I may have grown tired of this character flaw at different times, but never had the proper set of circumstances materialize to spur me into actually implementing change.  I suppose I always found goal setting to be overwhelming, rendering me frustrated and unable to formulate a personal achievement plan.  Looking back now, I can see how the truth of that last statement may have embodied my goal paralysis.

What finally woke me up…

In January of 2009 the stars finally aligned so to speak when I found a desperately simple piece of advice that would finally remove the scales from my eyes allowing me to understand the incredible value process oriented achievement could bring, and just how I could implement a goal setting strategy that worked for me into my life.  This lucid quote brought it all together for me:

“A journey of a thousand miles begins with a single step”  – Lao Tzu

Glancing over the quote after typing it I suppose the key could lie in the way the quote combines the wonder and excitement of travel & discovery with accomplishing established tasks in life.  Whatever brought me clarity — whether it was the element of adventure, the lack of desired achievement, or the hope of future accomplishment — I have that clarity.

How setting goals has helped me achieve…

Since first reading that quote early this year, I have established life achievement goals and worked to break those down into smaller, more achievable and tangible short-term goals.  I have also been able to successfully implement goals into every aspect of my life, including my personal finance.  The understanding gained also goes beyond goal setting and helps me better work toward achieving anything I set my mind to because I am no longer overwhelmed with the entire process.  I have been able to set up a working, living, family budget.  I have been able to increase my ability to read and finish books.  I have been able to lose nearly 40 pounds.  I have been able to grow more and more self-reliant.  I have been able to change my eating habits to include predominately healthy, local, organic foods.  I am closer with my wife and I am closer with my God.

There are other examples of implementation but I think you understand the power this simple quote has allowed me to find within myself.

What about you?

Are you naturally a goal-oriented person or did you need a similar eye opening piece of information to help you finally adopt a goal centered, and purpose driven life?

Identify & Overcome Money Anxiety & Stress in Relationships

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My wife & I had a very important personal finance breakthrough recently, one I am excited to share in order to prevent others from having to reinvent the wheel…

Thanks to the folks who like to label things… there is a new “diagnoses” of sorts that has come onto the scene and is growing fast thanks to the recent housing crash.  The acronym is all too fitting… M.A.D. or Money Anxiety Disorder is basically a fancy way of saying that people are more stressed out than ever about all the debt they have gotten themselves into.

“Whether you experience great peace of mind or constant anxiety will depend on getting your finances under control.”  – Robert G. Allen

Today I’ll touch on how this “disorder” has effected our lives, how we stumbled upon it by accident, and the plan we have to overcome it.

A Little History…

  • My wife hates math.  She’s not necessarily bad at it, she just doesn’t like it.
  • She is a “right-brained” thinker… almost without exception.
  • She does not enjoy the topic of personal finance.
  • She does not fully understand the topic of personal finance.

Though it was never much of an issue prior to our “financial awakening” in January of 2009 – now that we’re actually tracking our finances Mrs. Jabs has to deal with our money matters far too often for her liking.

  • I, on the other hand, love math!
  • I am one of those analytical “left-brained” types who thought high school Algebra class was actually fun.
  • I am very passionate about personal finance.
  • I love learning more & more about personal finance.

Armed with this knowledge of our disparate — albeit balancing — attitudes toward all things math & finance, we unanimously decided to elect me as the Family CFO.

As a product of these realities, no matter how brief, simple, or painless the financial matter at hand may seem – like Dr. Jekyll quickly becomes Mr. Hyde – when engaged in a discussion about finance, my wife instantly transforms from a happy camper into one frustrated & dissatisfied customer! Which, both of us ALWAYS mistakenly interpreted as anger…

The Breakthrough…

Therein lies the problem… we always misinterpreted her anxiety for anger! The other night, after about an hour of solid communication, in passing my wife said, “I just get instant anxiety as soon as we start talking about anything to do with money.” As soon as she uttered those words I stood up & triumphantly replied, “Wait a minute!  That’s it.  You’re not angry… you’re anxious!”

It is important to define the often undiagnosed or misdiagnosed role anxiety & stress usually play in personal finance.  When unaware of their presence… you may experience:

  • The appearance of anger – Although anger may be what you see… it is not the root emotion.  This is what baffled my wife & I both.  She appeared angry, and felt angry, but was not able to successfully illiterate what was causing the feelings of anger… it was anxiety.
  • Eroded communication – No sooner than we began a discussion about our finances, this apparent angry attitude appeared which immediately broke down our ability to communicate effectively.
  • Quickly enacted defense mechanisms – Human nature dictates that negative emotion in one person, will elicit a negative response in another.  This builds upon itself and leads to a defensive point-of-view from both involved parties, which breaks down your ability to solve problems effectively.

After discovering the existence of money anxiety in my wife, we naturally began to search for the root cause of the anxiety itself.

What is Causing the Anxiety?

The good news is… there is hope!  In the presence of anxiety there is always a root cause.  Once we discovered the anxiety, it did not take long for this math/computer/analytical geek to break down the equation into manageable components.  Here is a list of common sources of anxiety as pertaining to personal finance:

  • Dislike for math – Okay, we had already established this, so I will continue to handle the detailed number crunching & just ask her to focus on helping me make decisions based on the end resulting numbers.
  • Fear of the unknown – If you are not the one in control of the finances, you can have a feeling of being uninformed that may lead to anxiety. This wasn’t really the case with us since I always strive to give her any info she needs to make a decision.
  • Feelings of insecurity based on ignorance – Not understanding the topic at hand is a point of contention for a lot of people, especially for men.  My wife & I decided this was not the main source of her anxiety, but may be a small contributor.
  • Lack of security – If your Emergency Fund is inadequately funded, you are only one job loss away from hard financial times with no adequate buffer to hold you over in the interim of finding new work.
  • Inadequate buffer in checking account – If you cannot pay all your monthly bills on the first of each month because you simply don’t have enough money, you are going to have to deal with a whole new set of problems.  You have to wait until you get your second monthly check to pay some of your bills.  This could cause you to be late on some bills, and will cause you constant worry about whether or not you are going to overdraw your account!
  • Lack of dependence on the Lord – Peter instructs us regarding faith in Jesus, “Casting all your care upon him; for he careth for you.”  I Peter 5:7.  Believers need to revisit the scriptures for wisdom & prayerfully consider whether or not they are actively trusting in the promises of God.

So What’s The Answer?

First of all, communication is paramount.  Although Mrs. Jabs & I talk about money quite often, we never sat down to consider points of contention or anxiety each of us may have in relation to our financial health.  Heck, we didn’t even realize that anxiety was the problem… we had wrongfully attributed our contention to the emotion of anger and were just “dealing with it” until I finally snapped and informed my wife that I couldn’t handle the poor attitude any longer.

Secondly, go over the above list to decipher the source of the anxiety.  For us the largest sources of anxiety were last few points:

  1. Lack of security – BINGO!  After realizing her need for security in other areas of our lives, I mentioned this and Mrs. J agreed that she was definitely nervous that we were not adequately prepared for an emergency.  In response to this problem, we have adjusted our goals to reapportion the funding of our emergency fund and the amount we put toward debt repayment.
  2. Inadequate buffer in checking account –  BINGO!  Although I have an adequate buffer, and have been advising my wife to increase her checking account buffer for a few months now, she had not heeded the advice and therefore was always anxious about having enough money in her account.  To combat this we committed to supplying her checking account with a one month buffer, so she can pay all monthly bills on the 1st of the month, and no longer has to worry about whether she has enough to pay any of her bills.
  3. Lack of dependence on the Lord – BINGO!  We can all use a renewed & heightened faith in the Lord and His Word.  We plan to turn over more of the emotional burden to Christ since He promises in His Word that He is ready & willing to take it!  Ahhh, what a blessed hope!

Some may ask, “If you love personal finance & math so much, and your wife is the exact opposite… why don’t you just handle all the finances & stop consulting her altogether?”  Great question.

I feel I must explain something…

The Importance of Teamwork

“Just because one of you earns the paycheck doesn’t mean that person should lord over how the money is handled.”  – Suze Orman

Although I am The Family CFO, it is very important to me that my wife be at least somewhat involved in the family finances.  Here are just a few great reasons why you need both spouses involved in the money decisions of the house:

  • I need her input – Both man and woman bring important & necessary input to the table.  We think differently, but when you combine the differences in those thought patterns you wind up with a more complete and well-rounded perspective.  I can make decisions without my wife and she can make decisions without me, but I believe the best decisions are those that are made together… with both of our input.
  • Realization of situation – Both spouses need to have at least a basic understanding of where they are financially.  It is crucial that both individuals carry this information with them so they can make informed purchasing decisions day in & day out.  Imagine how frustrating it would be for me if my wife kept making poor decisions because she simply was not properly informed.  To keep her in the dark just does not make good financial sense; even if it may seem like a good or easy solution for a season.
  • Repel the “money grows on trees” mentality – Again, if one person in the relationship handles all things financial, human nature dictates that the other person may very well take this fact for granted.  If you continually do something for someone, they begin to lose touch with the reality of what is being done.  It is important to revisit & review the process on a regular basis to maintain a properly grounded view of how much money is available & for what.

I find the practice of communication worth repeating… successful communication and teamwork are essential to the health and sanctity of any relationship; the topic of finances are no exception.

In Summary…

  • Always maintain open lines of communication, this is crucial to overcoming financial anxiety and stress in relationships.
  • Define each others strengths & weaknesses regarding personal finance, and delegate jobs accordingly.
  • Identify the root cause(s) of the anxiety and/or stress.
  • Work to decipher the changes that need to be made to alleviate these sources of contention and implement your changes.
  • Remember to work together as a team!  My wife’s mantra is “Teamwork makes the dream work”!
  • Lastly & most importantly, remember to trust in the God who created us.  He is able!

Identifying & overcoming money anxiety & stress may seem overwhelming at times, but if you follow these simple steps and concepts you will be amazed at how fast you can increase the health & happiness of your financial relationship.

DFA is passionately dedicated to helping others break the bondage of debt using biblical principles.