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MEDIA CENTER

The Money Minute - August 2014

In this Issue


 

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Is it Too Early to Plan for the Holidays?

Holiday spending in the United States grows every year and has reached the point where everyone’s budget is impacted. We are all under a lot of pressure to buy more and bigger presents, to throw bigger parties, to travel more, and to give more to charity. It’s no wonder that stress and financial worry prevent many Americans from enjoying their holiday season. How can you minimize or avoid holiday financial stress completely?

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 card holder experience

Credit Cards 101: Where Does All of the Money Go?

During 2013, Americans made more than $2 trillion in credit card charges and carried over more than $850 billion in credit card debt. The payments on the debt alone were more than $100 billion. That is a lot of money and it's a fair question to ask where it all went.

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Financial Essentials Checklist for the College Bound

Many young adults are leaving home for the first time, yet remain ill-prepared to independently manage their personal finances. This is predictable considering that less than one-half of the States mandate a course in personal finance as a requirement for high school graduation.

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 Credit scoring

The Method FICO Uses to Calculate Your Credit Score is Changing. Will Your Credit Score be Affected?

FICO has just announced that a change in their FICO credit scoring algorithm. The changes come as the company works to improve its ability to predict whether or not you might be a good credit risk. The new formula de-emphasizes medical debt that has been taken into collections and completely ignores any debt that has gone to collections, but has later been paid off.

Read the entire article

   
   
   

Is it Too Early to Plan for the Holidays?

This is August and the holiday season is still a few months away. So, why are we already talking about the holidays? After all, holiday decorations won’t show up in stores for a couple of months.

Holiday spending in the United States grows every year and has reached the point where everyone’s budget is impacted. We are all under a lot of pressure to buy more and bigger presents, throw bigger parties, travel more, and give more to charity. It’s no wonder that stress and financial worry prevent many Americans from enjoying their holiday season. How can you minimize or avoid holiday financial stress completely? The answer is to have a plan in place that will allow you to focus on what is important to you over the holidays while putting financial stress behind you.

The earlier you begin your holiday spending plan, the better off you will be. August is the perfect time to create a spending plan for the holidays and start saving for gifts and celebrations.

  • Create a holiday spending plan. Simply list the areas in which you will need to spend money. From special holiday meals, to gifts for friends and family, write down how much you plan to spend. Apprisen has a Holiday Spending Plan eBook with an easy-to-use worksheet inside. You can download the eBook for free here. The eBook will walk you through the process and help you make decisions on what is important to you and where you want to spend your money. Be realistic. Don’t plan on spending money that you can’t possibly save between now and the holidays.
  • Start saving money now if you haven’t done so already. Look at your holiday spending plan and determine how you will save the money you will need. Your goal is to not resort to loans or credit cards to finance your holiday plans. Break the total down by paydays and set the appropriate amount aside as you are paid. Apprisen has a Holiday Savings Worksheet perfect for this job. You might even consider opening a savings account just for your holiday fund. You can use the same account each year.
  • Revisit your plan. If, after step two, you can’t possibly save enough to achieve your spending plan, then you only have two choices. Reduce the amount in your spending plan or find additional money that you can add to your plan. Do not turn to credit cards.

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    Credit Cards 101: Where Does All of the Money Go?

    During 2013, American’s made more than $2 trillion in credit card charges and carried over more than $850 billion in credit card debt. The payments on the debt alone were more than $100 billion. That is a lot of money and it’s a fair question to ask where it all went.

    In order to answer the question, we need to know a bit about the credit card industry as a whole.

    The American credit card industry is very complex and we have a lot to learn. We’ll start by looking at everyone involved. 

    • Credit Card Network - The credit card networks (Visa, MasterCard, Discover,  American Express, etc.) provide an electronic network that is used to approve and process transactions, move money between banks, and much more. Credit card networks are also known as credit card associations.
    • Credit Card Issuers - Credit card issuers (the bank that issues the credit card to you) process credit card applications, make payments to the merchant’s bank, issue bills to the card holders, and manage the card holders’ accounts. In the case of American Express and Discover, the companies are both network and issuer.
    • Card Holders – A consumer with a credit card is known as a card holder. Card holders can use their credit card at participating merchants to buy goods and services. Card holders receive bills from and make payments to the issuing bank.
    • Merchants - The business (brick and mortar, over the phone or internet) that accepts your credit card as a form of payment in exchange for goods and services. Merchants transmit the purchase transaction to their merchant bank.
    • Merchant’s Bank – The merchant’s bank processes the purchase information and forwards the data to the issuing bank and receives payment in return. Once the merchant bank receives payment, it transfers the money to the merchant’s account, less any appropriate fees. The merchant’s bank is also known as the acquiring bank.

    Now that we have a good understanding of the roles, let’s take a look at where the money goes within the credit card industry. We will start with you, the card holder.

    Costs to the card holder

    There are many costs in the form of interest and fees that are paid by the card holder.

    • Cost of the purchase – This one is pretty straight forward. If you bought something using your credit card, you must pay the card issuing bank for the full cost of your purchase.
    • Interest – If you carry over a balance from one month to the next, you must pay interest on the amount carried over.
    • Late fees – Card holders must pay late fees when they fail to make their minimum payments by the due date.
    • Over limit fees – When credit cardholders exceed the limit placed on their credit card, they must pay an over limit fee to the credit card issuer.
    • Returned Check fees – If your check bounces, the card issuer will charge you a fee.
    • Cash advance and convenience check fees – Each time you make a cash advance or make a purchase with a convenience check you will be charged a fee. These fees typically amount to 3%.
    • Foreign Transaction fees – When you travel abroad and make purchases with your credit card, you may be charged a fee. Typical foreign currency transaction fees are approximately 1% to 3% of the transaction.
    • Loading fees – The cost of exchanging foreign currencies may be covered by a loading fee of 2% to 3%.
    • Membership fees – Many credit card companies charge a monthly or yearly membership fee for the privilege of becoming a cardholder.

    Interest payments are the largest source of credit card profit for the card issuing bank. To be clear, once you start making interest payments, you are paying above and beyond the cost of your purchase.

    Here is an example. You use your credit card to purchase a new flat screen TV for $1000. Congratulations, I am sure you will get many thousands of hours of enjoyment from your new TV.

    If you pay off the TV before your credit card’s grace period has expired, you won’t pay one penny in interest. You might even get some cash back rewards or frequent flyer points for your purchase. The credit card network and banks make a few dollars off of the fees they charge each other, but that is all paid by the merchant who sold you the TV.

    However, if you plan on making only minimum payments on that $1000 and your interest rate is 13%, you will end up spending much more than the $1000 purchase price on your new TV. After 8.4 years of minimum payments (101 months at $20.83 per month) you will have paid $1,605.10 for your TV. When you were standing in the aisle looking at that TV, would you have thought the full cost of $1,605.10 was a good price to pay for that $1,000 TV? That’s a 60% increase in the cost of the TV and all of it went to the card issuing bank.

    card holder experience

    Costs to the merchant

    After the cardholder makes a purchase using a credit card, the merchant sends the transaction’s details to the issuing bank via his own bank (merchant’s bank aka the acquiring bank). The credit card issuer processes the transaction and, transmits the money charged by the cardholder back to the merchant’s bank once a day, less any interchange fees charged by the credit card issuer and processing fees charged by the merchant’s bank.

    • Interchange fees – Interchange fees are typically 2% of the transaction amount. Interchange fees are split between the credit card network and the issuing bank.
    • Processing fees – The merchant typically pays the acquiring bank (the merchant’s bank) a small fee (approximately $0.50) to process the payment made to the merchant.

    For example, let’s say that you make a purchase of $100.00 from a local auto parts store. By the time the transaction makes the loop from the merchant, to the issuing bank, to the merchant’s bank, and back to the merchant, the merchant will receive only $97.50 ($100.00 less 2% and less $0.50.)  That 2% - 3% that he did not get back is the merchant’s cost for letting you pay with a credit card.

    Why would a merchant be willing to lose 2% to 3% on every credit card purchase you make? The simple answer is that he is not. The merchant simply builds that cost into the price he charges you for the TV. He also knows that if you can pay with a credit card, you won’t’ feel as much pain as you would if you had to pay with cash from your pocket. Less pain means that you will probably be willing to buy more from him or pay a higher price.

     interchange fees

    Costs to the credit card issuer

    The card issuing bank has costs of its own.

    • The cost of lending – Lending you money (remember a credit card charge is a loan) costs the issuing bank money because the bank borrows that money at a low interest rate so that it can lend it to you. If the issuing bank borrows at a 5% APR and then loans the money to you at a 13% APR, the difference is the bank’s gross profit on the loan.
    • Association fees – The issuing bank must pay the credit card network multiple fees to cover such expenses as data integrity, brand usage, card validation, and network usage.

    Costs to the credit card network

    The credit card network does not pay any fees for any of the transactions that occur during the entire credit card purchase process. Instead, the network’s expenses represent the enormous cost of buying equipment, software and hiring people to operate, administer, and maintain the credit card network and oversee the process. These costs as well as the credit card networks profits come from the pennies per transaction fees and association fees that it collects from the card issuing bank. Millions of credit card transactions add up to a lot of pennies.

    The bottom line

    After learning more than you expected about the credit card industry, we can sum it all up as follows:

    1. The merchant gets about 98% - 97% of the money you pay for his product or service.
    2. The merchant’s bank (acquiring bank) makes less than $1 off of each credit card transaction.
    3. The card issuing bank and the credit card network split about 2% - 3% for the money you charge on your card with each purchase.
    4. If you carry a balance from month to month, all of the interest you pay goes to the card issuing bank in the form of extra profit, costing you above and beyond the initial price you charged on your credit card.
     

    Financial Essentials Checklist for the College-Bound

The basics of personal finance every young adult should know before leaving home


    Many young adults are leaving home for the first time, yet remain ill-prepared to independently manage their personal finances. This is predictable considering that less than one-half of the States mandate a course in personal finance as a requirement for high school graduation.

    Further, the 2014 National Foundation for Credit Counseling® (NFCC) Financial Literacy Survey revealed that the majority of adults say they learned the most about personal finance from their parents, which is true whether mom and dad possess good or bad financial habits. Proving that parents may not be the best teachers of personal finance, more than four in 10 survey respondents, 41 percent, gave themselves a C, D or F on their grasp of personal finance. Therefore it should be no surprise that many young adults smart enough to get into college remain ignorant of even the most basic financial skills.

    Whether it’s off to work or off to college, parents put a lot of time and money into preparing their child to leave home, but often neglect the basic life skills associated with personal finance. With just a few weeks until the young adult children will head out the door, the time is now for a crash course in personal finance.

    The following is a Personal Finance 101 checklist of basic knowledge everyone living on their own for the first time needs to possess in order to start off on the right financial foot. 

    • Start with budgeting - Learned early, the discipline to live within a budget is a skill that will pay benefits for a lifetime. Parents should be transparent with their child about how much money is available for expenses and jointly create a workable monthly budget. Once on their own, students should track their spending to know where their money goes and stay in control of spending. This can be accomplished by tracking on paper, using a budgeting computer program or a smartphone app. The method isn’t important, but knowing how the money is being spent is.
    • Understand basic banking - Even those who do not write many checks each month need to understand the importance of recording transactions in their check register and promptly balancing the bank statement. Along with checks, ATM withdrawals and debit card purchases should be recorded in the checkbook after each use, with a running balance tallied daily. Attempts to withdraw funds beyond the account balance could result in being declined at the point of sale unless other arrangements such as overdraft protection have been put in place. Since overdraft fees can quickly add up, it is best to keep track of the account balance and not exceed it.
    • Respect credit - Credit matters now and it matters later. Young adults under the age of 21 cannot obtain a credit card unless they can prove ability to pay or have a co-signer. Nonetheless, many will have plastic in their wallets when they leave home. Studies show that a disturbing number of college graduates have both student loan debt and credit card debt which can prevent them from moving forward with their professional lives. However, young adults also have the opportunity to graduate with a positive credit file which could help them buy a car, rent an apartment, obtain insurance or land the job of their dreams. To have an unblemished credit report and a solid credit score, commit to paying each credit card bill in full and on time each month.
    • Be financially organized - Keep all financial records, bills, and bank statements in one location. A file or accordion folder in a locked file cabinet is ideal. Since spare time may be hard to come by, this system allows quick access to what is needed when it’s needed. Being financially organized ensures that bills are paid on time, late fees are avoided and the credit report and score are not damaged.
    • Recognize the dangers of Identity Theft - Identity theft is common on college campuses. The identity thief may not be a stranger, but someone in the room next door. Computers and phones contain a wealth of personal and financial information, and should be password protected. Social Security numbers are like gold to a criminal, and should be stored in a safe and locked location. Memorize the number and do not carry the card unless it is needed for one-time verification purposes, then promptly store it again. Be cautious when posting information on social media, as sites are frequented by thieves trolling for seemingly innocent postings that can be pieced together to equal enough data to steal a person’s identity.

    Everyone makes money mistakes, particularly those who are still learning how to responsibly manage their finances. Knowing that blunders are likely, parents should decide if they’re going to bail their child out or put tough financial love in place. This is a family decision that is best made in advance, not in the midst of the emergency. However, it is critical that parents not allow the child’s financial mistakes to ruin their own personal finances.

     

    The Method FICO Uses to Calculate Your Credit Score is Changing. Will Your Credit Score be Affected?

    FICO has just announced a change to their FICO credit scoring algorithm. The changes come as the company works to improve its ability to predict whether or not you might be a good credit risk. The new formula de-emphasizes medical debt that has been taken into collections and completely ignores any debt that has gone to collections, but has later been paid off.

    The new calculations will benefit people that have struggled with their debt in the past, but have worked hard to make their payments current again. The new FICO score gives recognition to people that do the right thing and pay their debt.

    The new credit scoring method has been named FICO 9 and takes into account research that shows that medical debt has a smaller impact on a consumer’s repayment behavior than other debt, like credit cards. FICO reports that a person with a credit score of 711, has medical debt in collections, and an otherwise good credit history could see their score rise as much as 25 points.

    What does the FICO 9 mean to you? A 25 point rise in your credit score might not make the difference between being approved for a loan and not being approved, but the higher score will help to get you better interest rates and save you a lot of money in the long run. For those people who have paid off all of the debt that had been taken to collections, seeing that blemish removed from their credit history will have a much larger impact. 

    When could you expect to see changes in your credit score? Maybe not as soon as you would like. The new FICO 9 is just the latest credit scoring system to be released and has a lot of competition in the market, including the previous FICO 8. Creditors can choose any credit scoring method they prefer, and the adoption of the FICO 9 system could take some time. The news from FICO will be welcomed by many consumers. However, you might not see changes in the credit score your creditor uses in the near future. 

     

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