Banking is a competitive, but they try to stay out of each other’s way. Why I like credit cards and hate annual fees. What is FICO and VantageScore?
I’ve been talking recently about Capital One’s nightmarish dispute process that is stacked against their customers, their higher-than-average interest rates if you carry a balance, and the fact that they’re a “subprime” bank that typically goes trawling to sign up the working class for their cards, even if they have a bankruptcy.
The first question I hear from some people is “Why do I need a credit score if I don’t intend to take on a big loan?”.
Dave Ramsey says you don’t need a credit score. He calls FICO and VantageScore, the two main credit scoring systems in the United States, the “I love debt.” score. But it’s possible to have a high credit score, no debt, and to make money using the cards, and actually save thousands of dollars someplace else because you have an okay or fantastic score instead of no score or a bad one.
The first place that not having a credit score is going to hurt you badly is that it will usually limit the type of apartments you can rent.
While it is true that management companies and landlords can make whatever decisions they want, they almost always pull a credit score.
The most common model they tend to use is called TransUnion SmartMove.
In fact, they’ll probably even make you pay for it so that you’re wasting your own money if they decide to turn you down for a place to live.
So it’s important to know what’s on your credit score, and to keep the score as high as possible. This is why renters really need to bring the hammer down and find reasons to dispute any and all negative information on their TransUnion credit score.
You’d be amazed the number of times that it turns out that the collection agency or other entity that put the debt there actually doesn’t respond in time, doesn’t follow “the process”, or just doesn’t bother to reply at all, or doesn’t actually have everything in order to substantiate that you owe them the debt.
It’s a crapshoot, but I’d say between 40-60% of the time, when you dispute a delinquent bill, it just falls off, sometimes the same day!
Obviously, your strategy should be to make sure you don’t overlook bills long enough to have them go to collections, and a barrage of disputes should be your last resort, when the damage has been done and you need to undo as much of it as you can.
I have no idea what exactly goes on “in the kitchen”, to make this happen, but my guess is that most collection agencies are only going to sue you if it’s going to be over a certain amount.
If it’s been a while, they figure the debt is uncollectable, and if they pay someone to sit there and gather up a response, they just spend money to no avail, and so they let things go sometimes. It’s certainly no guarantee, but a law of averages seems to be that 40-60% of the time, the item in dispute disappears.
Obviously, the more negative information you can remove, the less harm there will be to your credit scores, and the more likely you’ll be able to get it to a level where you can start applying for some apartments or credit cards, or car loan terms, that wouldn’t have been accessible to you before.
Obviously, you shouldn’t go into debt if there is any other choice, but I know people with car loans that they signed to get to work, and then the interest rates were so high that they spent most of their money from work on the stupid car loan. So there’s a big difference between getting a car loan at 15% and getting one at 6-8%. 6-8% is subprime and 15% is predatory.
So, if it has to be a shit sandwich, at least make it a smaller shit sandwich I suppose, and paying interest is always a shit sandwich because it just bleeds you and disappears into the bank’s pockets.
People also don’t seem to be aware that they might be able to get a personal loan from the bank at 5.5% and that a car loan may cost them 9%, and in addition to saving a couple thousand on bank interest, if disaster strikes later, a personal loan is not directly attached to their car, so nobody is coming to haul the car off and leave them stranded.
And finally, insurance companies in all but 4 American states where the practice is illegal, use credit scores to justify giving you much higher car insurance premiums.
There are actually no good studies that show that people with lower credit scores are more likely to file a big claim with an insurance company, but people who have bad credit scores tend to work lower income jobs, have medical bills they can’t pay, and so on. Many of these people are also minorities.
While civil rights laws say that insurance companies would be in hot water for openly charging people more for their skin color, they can jack up insurance rates on black people and “make it legal” by saying anyone with a credit rating under 700 starts paying a lot more for car insurance.
If I file bankruptcy, won’t that hurt my credit score?
Well, the answer is technically yes, but factually, almost always no.
Of course, THEY don’t want you to know that the reality is almost always “no”. Once a person files bankruptcy, it’s because their fiscal outlook is totally hopeless and their credit score is already ruined by having so much debt which is probably also all delinquent.
The longer you go without filing for bankruptcy, the worse it gets when you do file for bankruptcy.
About the only three things you will accomplish once you’re pretty sure the debt is as bad as it will get are (1) you give your creditors more months to post on your credit reports that you’ve been delinquent for another month, which they have to stop doing the moment you file and the automatic stay is granted by the courts, and this may even mean your car gets repossessed and the repossession outside of bankruptcy stays on your credit and causes great harm after you’ve filed and lose the car anyway, and (2) by putting it off, you’re delaying by an equal amount of time into the future until you can file again, and (3) you successfully delay the amount of time before the debt is forgiven by the court and your credit rating starts to mend and you can start over and build your credit up again.
How do I get a credit card if I’m young and have no credit history or have had some credit problems or a bankruptcy?
This can make things considerably difficult, but by no means impossible.
For example, there are some things to just flat out avoid.
There are “bottom feeder banks” that make Capital One look respectable. One example is the similarly named “Credit One” bank, which has nothing to do with Capital One.
While you could start out with “subprime” banks like Capital One that aren’t complete bottom feeders, you could also go to a more mainstream bank like Chase, Citi, or Discover, and apply for a Secured Credit Card.
Essentially, when you get a Secured Credit Card, you can file a deposit, which becomes your credit limit.
The danger with a Secured Card is that if you default, the bank can take your deposit, report the entire balance to the credit bureaus anyway, and then sue you for the entire amount on top of keeping your deposit, so the risk is yours, and it’s guaranteed money for the bank. This is why most Secured Cards approve everyone except those with a filed but not discharged (“active”) bankruptcy.
But it still looks like a tradeline, just as any other credit card would.
For example, I put down a $200 deposit on a Secured Discover Card and $200 became my spending limit.
For 8 months I made small purchases and paid them back, then after 8 months, the bank does an account review each month by computer and decides when to return your $200 deposit and convert you to a non-secured card. In my case, they raised my limit to $3,000 to start off with. And it’s very unusual for a Secured Credit Card to have a rewards program, but Discover’s does, and it survives into the Unsecured card.
Then you can change your rewards program to the Discover It card and activate rotating bonus categories. For example, in this quarter I even get 5% back on gas.
Another trick is if you have a trusted spouse, you can each get credit cards and make the other one an Authorized User, and then it shows up that you each have more revolving accounts than you really do, and it helps both of you (as long as you manage your credit lines responsibly).
Should I pay annual fees for a credit card?
As a rule of thumb? 95% or more of people out there shouldn’t.
Unless you can get some INSANE rewards on a category you will use ALL THE TIME, it’s not worth it. Like, if you can get an American Express Blue that has 6% back at grocery stores permanently and a $95 annual fee, and you have four people in the house eating groceries, obviously this card will benefit you more than the small nuisance of paying the annual fee.
And when you throw multiple cards with annual fees together, eventually you won’t even have a good idea how much you really net in rewards points.
But if you have two people in the house eating groceries, and you shop at Walmart, and you do it online, you could use the Capital One Walmart Rewards card and get 5% back on your groceries (and anything else from Walmart’s website) and no annual fee.
Since Walmart doesn’t ever code as a grocery store, that would also make the AmEx essentially useless there as far as a decent rewards rate on your grocery shopping.
You can also find credit cards that have 3-4% back at coded Grocery stores with no annual fee, so in many cases it’s just not worth getting the AmEx card with the 6% on groceries.
There’s also cards with annual fees that have eyepopping rates on gasoline, but once you subtract the annual fee, you might as well have gotten a PNC Cash Rewards that is 4% on gas all the time (and 3% on restaurants).
Once you have a substantial number of cards, you’ll probably figure out which is the best to use for a given category of merchant. I always like to have a card with 2% for non-category spending as a fallback because there’s guaranteed to be hundreds of dollars in non-bonus spending that would otherwise have a wimpy rewards rate of like 1% on other cards, as well as the occasional BOAT (Bust Out Another Thousand) payment to a mechanic to keep your car running, so the Citi Double Cash or the Wells Fargo Active Cash cards can both fill in when you can’t earn bonus points paying your cell phone or electric bill.
And then Discover’s 5% category for rotating quarters (which you can activate ahead of time on their site) kicks in, and you switch to that for a while (5% beats 4% on gasoline but then 4% on gasoline the other 9 months beats 2%).
As long as credit card points are there and you are spending responsibly, on bills that you absolutely must pay, which would earn no rewards otherwise, then credit cards can be an asset.
The average family in America could be leaving as much as $1,000 or more on the table each year by using cash or debit cards. There’s just not much incentive to use these forms of payment because nobody is paying you for gas and groceries, and if you’ve looked around lately during Bidenflation, they’re not exactly giving those away!
What’s more, the IRS considers credit card rewards to be tax-free income, because it treats them as rebates on money you’ve already spent, so odds are you probably don’t have to declare them on your state returns either.
Credit card companies aren’t a charity, however. They offer the rewards to loosen you up to spend more, and hoping that you’ll misuse the card and end up badly in debt.
There is some debate about credit card points and whether they actually benefit consumers or not. It benefits the ones that are using them.
The Federal Reserve studies the effects of rewards credit cards and found that the average person who pays cash loses out.
As of 2010, which granted was 12 years ago, “After accounting for rewards paid by banks, households who earn more than $150,000 annually receive a subsidy of $756 on average every year, while the households earning $20,000 or less pay $23.”.
I figure when you adjust for inflation it’s more, because we tend to make nearly $800 on credit card points every year and our household income is not $150,000.
Even if you consider that retailers may charge you a little less than half of your own rewards to make up for the expected amount of interchange, we’d still easily clear over $400, but as a counter-point, sometimes the retailers help fund the schemes with the big bonus points.
I doubt Capital One is paying the entire 5% you get back on the Walmart card for buying your groceries and stuff online.
Regardless, the fact that the wealthy tend to make off with the money could be why the IRS is loathe to charge income tax on the rewards points. Every time rich people scream about something, like paying taxes, it tends to disappear, doesn’t it?
There’s a bill in Congress to cap credit card fees, but they always lose because the Card Industry is a more powerful lobby than Retail in the end.
Besides, there’s a distinct possibility that retailers could promise to lower prices, and then keep the money after the credit card rewards are gone, just as banks played down the magnitude of repealing Glass-Steagall as “wanting to provide complimentary magazines to credit card holders”, and then used the repeal to cause the housing crisis of 2008.
So in the end, there’s reasons to have credit cards in your wallet, and reasons not to.
If you are responsible, you will:
Earn rewards points worth a lot of money.
Have a better credit rating.
Get access to more favorable loan terms, if you have to take on a loan for something. (But you should avoid this if you can.)
Save money on insurance premiums.
Show landlords that you are managing credit responsibly. If you pay them, you’ll probably pay the landlord.
On the other hand, if you have no credit rating at all or, worse, the only thing on your report is some drive by shootings from collection agency scum, the landlord could determine you’re too much of a risk and that other people are more likely to pay him, statistically, so you’ll end up renting from a bottom feeder and paying him too much money because he knows you have nowhere else to go, and then your neighbors will most likely be criminals who are making loud noises, dealing drugs, and spilling bedbugs over into your unit.
If you are irresponsible:
Well, eventually the banks will sue and you’ll be a serf with oppressive garnishments.
When my Aunt was alive, she was a very nice person. I loved my Aunt and I miss her terribly. She was a fantastic person, and they even named an entire hospital after her because she always fought for her patients there and saved many people’s lives.
But she simply couldn’t handle money. She had overwhelming depression, and as I do as well many times, I understand how painful it can be. To struggle and hurt and feel hopeless every day but to fight through the pain and to take on other people’s burdens anyway.
To escape from the depression, (she made good money but could never afford to pay cash for everything she WANTED to do, so took on loans), they retreated into fantasy vacations at Disney World. Sometimes twice a year.
She never drove there either, they always bought expensive plane tickets. Then when they were there, they spent yet more eating at places like “Cinderella’s Castle”, which is terrific if you’re made out of money and can just pay it and not worry about it, but she wasn’t.
One year, she sold the family car to finance a vacation to Disney, then came back and had no car, nobody would loan her money for a car, and she ended up having to keep an Enterprise van for a while to get back and forth to work, which she rented for the vacation.
(Don’t ask me why, but she drove that year, and instead of taking the Lumina that was only a few years old, she sold it and rented a van for hundreds of dollars a week.)
One way some people deal with depression is to finance and escape, which causes a rebound effect and a feedback loop which makes the depression worse.
For some people, they understand this concept when it comes to why people abuse drugs or alcohol, but not when it’s the root of money problems. And I’m not saying I’m perfect and that my methods of coping have always been healthy, but I’ve at least steered clear of substance abuse and reckless financial decisions.
Banks can absolutely be your worst enemy. They often are.
In the end they create nothing, they assist in ruining lives. The credit scoring system that we have shouldn’t even be legal. The “rewards” points literally rob Peter to pay Paul.
But Dave Ramsey is a millionaire and probably truly doesn’t need a credit score. Many of us are not as lucky.
Some of his advice is right, like not buying extended warranties because over time they’ll cost you more money than just replacing things sometimes, and they may not even honor the warranty when something does happen.
An extended warranty is nice in theory. You buy one, you don’t have to worry about a thing, because if it breaks, you go to the warranty people and tell them all about how the stupid thing broke and you want a replacement or repair.
That’s how it works in theory, but in fact, they find ways to screw you.
In theory, federal law requires Capital One to take my side in my dispute against Batteries Plus Bulbs in Gurnee, Illinois, which is in the business of selling fake aftermarket car keys that don’t work. I even got a letter from a dealership saying there’s nothing wrong with my car and the person who sold me the keys ripped me off because it wouldn’t program.
Capital One still ruled against me and I’m still yelling at them over something that happened like 6 weeks ago.
Extended warranties are worse. Dave Ramsey says to avoid paying for an extended warranty or “service plan” at all costs.
Often, you pay for the plan, and then 90% of the time, you find out it wasn’t what you thought it was and they won’t give you the money for the warranty back, so now you have broken shit and a warranty that cost you 100% more than it was worth.
Walmart is pushing these things HARD, and it’s often for some crazy amount of money too, like I bought a microwave for $67, and it’s been a good microwave, and that was two years ago. They wanted to sell me a 2 year service plan that would have expired already for an additional $17.
When I bought this laptop, Lenovo wanted me to pay them $150 for an additional year of warranty. The additional year is almost up. I had one repair (a malfunctioning USB-C port) in the original warranty, and they had to replace the whole motherboard to fix it. And their service plans go out to five years. But I didn’t buy the “service plan”, so I have some money to buy a new laptop if mine craps out and isn’t worth fixing.
Who pays hundreds of a 5 year plan on a laptop that probably won’t break in the 5 years, and even if it does, it would cost less to go down to uBreakiFix and tell them to tear it down and put a new battery or something in it?
Most consumer products either outlive any kind of warranty you can buy or wouldn’t be worth the money you spend even if you bought one and they honored it for whatever reason.
Sometimes you get an extended warranty for free, from your credit card!
Obviously, if it doesn’t cost extra, you may want to put a big ticket purchase on a credit card with such a benefit. If they don’t honor it, at least you didn’t pay anything for it, so it’s worth filing a claim.
When I lived in Chicago, my ex and I went to The Roomplace for furniture. It looked like good furniture, then they delivered it and it started falling apart immediately.
Since I paid with my Chase card, which had Purchase Protection and Extended Warranty for free, I not only submitted a price adjustment and got over $100 back when the same set went on sale two months later, but after the first year was up and the furniture still kept breaking, I just called a furniture repair company and paid them with my Chase card, and then submitted a repair bill invoice and a statement about what the guy was fixing on his company letterhead, and Chase gave me a matching credit for the next 5 times I had to have them out repairing the furniture. Eventually, the guy had to fix it so much with improved parts, that the furniture stopped breaking every time someone sat down.
So there’s companies that honor what they say they’ll do in the Cardholder Agreement, like Chase, and there’s ones that obviously only pretend to follow Federal Law, like Capital One.
And thanks to Capital One screwing me, the only way to win now would be to make some day the “take this asshole to court over $70 day” and he’d probably just stiff me even if I got the ruling.
So there’s a list of how credit cards work, what you shouldn’t do, a run down on why credit ratings matter, and a little more free financial advice.
You know, it’s funny that Dave Ramsey has people paying him millions to get worse advice than what I can give you here on my blog, isn’t it?
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