Exchange Rate Surcharges and ATM Fees for the International Traveler

The summer travel season is coming and for folks who are traveling abroad and planning to use their credit cards or ATM cards, Lowcards.com has an excellent article, Credit Card Tips for the International Traveler, which explains how the credit exchange rate surcharges work, and the rates currently charged by the various financial institutions, as well as ATM-fees for cash withdrawal from foreign ATMs.

Link to article: Credit Card Tips for the International Traveler

See also my other postings on credit cards:

• More on Credit Cards
  
• Dealing with Credit Cards
• Careful Use of Credit Cards
• Credit Cards and Frugal Living
  

More on Credit Cards

Credit cards have been in the news for the past two weeks. CNN Money has a recent article that credit card satisfaction has hit a new low. I have blogged about my recent frustrations with credit card companies closing my inactive card without notice and lowering my credit on an underused card.

Because of the risks associated with debit cards, I see myself continuing to use credit cards for the foreseeable. For tips and strategies on how I use my credit cards, see: Credit Cards & Frugal Living and Careful Use of Credit Cards (My Frugal Living Tip #2).

On the one hand, if you want to swear off credit cards, you might find Walletpop's 6 ways to destroy a credit card securely very handy.

But if on the other hand, you want to continue using your credit cards, American Public Media's Marketplace (which I listen to daily on my commute home) has its list of 10 purchases not to put on credit cards.

See my other blog postings on credit cards.

Dealing with Credit Cards

Did you receive letters in the mail from credit card issuers canceling your dormant credit cards, reducing the credit limit or increasing the interest rate? If you did, you're not alone. Many folks received such letters. In my case, Bank of America summarily canceled my dormant AAA credit card, which I haven't used since they took over the MBNA, without informing me. I only found out when I did my routine login of the account (I do this to ensure no charges are posted) and discovered that I couldn't log in. Upon enquiring, I found out that the account was closed for inactivity. American Express sent me a letter raising my APR from a fixed rate to a higher floating rate and Citibank cut my credit limit by 20% on the basis that I only utilize a small percentage of my credit limit.

So what should you do? The New York Times columnist, Ron Lieber discusses the various options that you have in his recent article, Maybe It's Time To Change Credit Cards. You might find useful advice and tips that you could use. As for me, I will continue doing what I've always been doing, paying my balance in full every month and keeping an emergency fund fully funded (it is presently funded at 9-months salary replacement, my target is 12 months) and not using credit cards as an emergency fund.

I have discussed my views on credit card in two earlier blog postings: Credit Cards & Frugal Living and Careful Use of Credit Cards (My Frugal Living Tip #2). At the end of the day, credit cards cannot replace personal savings that you accummulate through disciplined monthly saving. For me, credit cards function best as a float, allowing you to earn interest on money you have to pay your credit card bills in full in a high-yield online savings account. That's the only way for credit cards to work to your advantage. Carrying a balance at high interest rates will turn into a burden that would take years to overcome.

For further reading: More New York Times' articles on credit and debit cards.

Dilemmas of Debt: Suze Orman, Edmund Andrews & Credit Card Issuers

This weekend's New York Times Magazine (May 17, 2009), with Suze Orman on its cover, focuses on a theme that is at the forefront of the American national financial psyche: "Dilemmas of Debt."

As the magazine cover indicates, Suze Orman and her approach to debt anchors the various discussions in this issue. The lead article Suze Orman is Having a Moment, focuses on Orman and her financial philosophy: "Track your spending. Stay out of debt. Take care of your car. Look (sic) into a Roth I.R.A." Notwithstanding the quibbles I have about her endorsement of certain companies and products, her fundamental message about frugality resonates very well with my own too, viz., living a frugal yet balanced and healthy life.

The piece about Orman is juxtaposed with the New York Times economics reporter, Edmund L. Andrews' reflections on his own subprime mortgage mess: My Personal Credit Crisis. This article is a summary of his forthcoming book, Busted: Life Inside the Great Mortgage Meltdown (W.W. Norton), which is scheduled for publication in June 2009.

Reading the article about Orman's financial philosophy and Andrews' ruminations of his own financial missteps reminded me about a news article that appeared earlier last week: Thriving Norway Provides an Economic Lesson. The underlying theme of this article is how Norway's frugal and contrarian spirit places it in a position to thrive while others, like Britain and the U.S., are strugling to stay afloat in an ocean of debt:

The global financial crisis has brought low the economies of just about every country on earth. But not Norway.

With a quirky contrariness as deeply etched in the national character as the fjords carved into its rugged landscape, Norway has thrived by going its own way. When others splurged, it saved. When others sought to limit the role of government, Norway strengthened its cradle-to-grave welfare state.

By far, the most fascinating article in this issue is What Does Your Credit Card Company Know About You? This article describes how credit card companies are looking to human psychology to not only understand the motivations behind spending and paying, but also using those insights to squeeze as much as possible from their debtors.

See also other articles in this blog on:

• Suze Orman
• frugal living
• credit cards
  

My Frugal Living Tip #2: Careful Use of Credit Cards

I have blogged about credit card use here (Credit Cards & Frugal Living) and here (Damage Control for Your Credit Score).

Credit Cards are like wine: both are meant to be used in moderation.

Let me explain: medical experts say that 1 glass of wine is good for one's health. But when one binges on wine, one becomes an alcoholic and needs to stay away from wine as far as possible. This is because the ill effects of alcoholism far outweigh the healthy benefits of wine.

Ditto for credit card use. As I explained in my earlier blog post, Credit Cards & Frugal Living, one should use credit cards judiciously, spending only what one is able to afford and paying off the balance in full at the end of each monthly billing cycle.

In other words, don't binge on credit card and end up addicted to easy credit. If you can't control your credit card use, then take a pair of scissors and cut up all your credit cards and close your accounts, just as a recovering alcoholic has to stay away from wine, no matter how healthy a single glass can be.

But if you are able to use credit cards judiciously, then you can reap the benefits of leveraging your monthly float between spending and paying, as well as earning rewards (cash back, rebates, statement credit, etc.) for using your credit cards.

Read the other entries in my Frugal Living Tips Series.

Damage Control for your credit score

Last Thursday (April 30, 2009), the Washington Post's personal finance columnist Michelle Singletary discussed the issue of involuntary credit card cancellation by the card issuer and its impact on one's credit score in her Color of Money column. She discusses two possible scenarios: (1) where a card hasn't been used in ages and the cardholder pays off the credit bill in full every month, (2) where a card holder carries a balance. Singletary rightly concludes that in the first scenario, there is no need for any damage control. But that is not the case for the second scenario, since the closure of a credit card will reduce the card holder's total utilization rate.

As I explained in an earlier blog posting, Credit Cards & Frugal Living, I was not happy when Bank of America unilaterally closed my AAA Visa Card (formerly a gas rebate card issued by MBNA) which has been dormant for ages. Since I pay off all my credit cards in full every month, my credit utilization rate is not affected by the closure and my FICO score remains in the excellent range.

Indeed, I totally agree with Singletary's ending sentence: "It would be great if the long-term impact of this credit crunch is people relying less on credit and more on cash." I treat my credit cards as "cash" and use them as my monthly float and to get rebates for statement credit (thereby bringing down my actual credit card bill every couple of months). As far as I am concerned, there is nothing wrong in using credit cards if you are able to withhold an equivalent amount in cash in your bank account to pay off all your credit cards in full at the end of each billing cycle. Otherwise, credit cards become a trap that ensnares a person in a vicious debt cycle.

Suze Orman's Recession Rescue Plan

If you are one of those who follow Oprah's daily TV show, you might have caught Oprah's favorite financial guru, Suze Orman expounding on her Five-Step Recession Rescue Plan. Her five-step plan is simple but requires a fair measure of discipline:

1. Learn to live on half what you're used to and save the other half.


2. Stash your cash, especially since credit card companies are becoming less generous.


3. Make the Federal Stimulus Package work for you.


4. Make your home affordable.


5. Look at what you have and not what you had.

In other words, Suze is saying the things I have practiced all my life: be frugal. Save. Plan for unforeseen circumstances, e.g., losing one's job or getting a pay cut.

Suze advocates a 8-month emergency fund. I am planning for 12 months. She says, "no credit card usage, everybody, Pay for things in cash." As I explained in an earlier blog, I use credit card to leverage a monthly interest float and get rewards points. But Suze has a point: if you aren't disciplined enough to budget with a credit card and keep track of your daily credit card expenses, you are better off using cold, hard cash.

Credit Cards & Frugal Living

Credit cards issuers have gotten a very bad rap for their aggressive tactics. Even President Obama has gotten into the act, pressuring credit card issuers on rates. As far as I am concerned, credit cards are like guns, i.e., you can either use them to your benefit or abuse them at your peril. In the industry parlance, I am what the credit card issuers call a "deadbeat," i.e., someone who pays the entire monthly credit card bill on time, i.e., I do not carry a monthly balance. In my opinion, carrying a credit card balance is like entering Hotel California, you can enter but you can't leave :-)

Having said that, let me share my ground rules on my credit card usage:

1. I draw up a monthly budget for my expenses, allocating funds for recurring expenses (e.g., utility bills, groceries, etc.) and giving myself a reasonable allowance for unexpected expenses.


2. I divide up my monthly income to cover my expenses. If I don't have enough funds for a specific expense, I either postpone that expense until I have saved enough funds, or I cut my discretionary spending to cover that.


3. I keep my funds in my ING online high yield savings and use my credit cards to pay those bills.


4. In other words, my credit cards function like a monthly float, allowing me to earn some interest, albeit a pittance as a result of the Fed's generous bailouts to banks.


5. I keep track of all my daily credit card expenses in my Excel spreadsheet. If I made any unexpected credit card expense on a specific day, I immediately readjust my monthly budget in my Excel spreadsheet accordingly. This way, I never spend more than what I allocate. In other words, I have trained myself to treat my credit cards as if they were like cash. It requires discipline and over the years I have gotten better at it.
   


6. When the time comes to pay my monthly credit bills, I transfer the funds from my ING online high yield savings to my ING Electric Orange checking account and arrange for payment of my credit cards.


7. This way, I not only avoid carrying cash but also earn a monthly interest float and also the purchase protection that credit cards issuers offer.


8. In addition, I use only fee-free premium credit cards, aka rewards cards. I avoid all credit cards that require me to pay an annual fee or credit cards with no rewards. In addition, I have no use for credit cards with low interest rates, since I pay off my monthly credit card bill in full.
   


9. Currently, I am using Citibank's Diamond Preferred Mastercard with Thank You Rewards and American Express' Blue Card with Membership Rewards. My Citibank Diamond Preferred Mastercard is my principal credit card. I normally redeem the Thank You points for statement credit. For a long time, I used this card regularly because it offered me 5 Thank You points for gas, drugstores and supermarkets. This would mean that I not only earn interest on my monthly float, I also get regular and bonus points that I redeem for statement credit, thereby lowering my monthly credit bill even further.
   


10. A few years ago, Citibank reduced that to double Thank You points for those categories. Early this year, Citibank eliminated those bonus points. If I get a better credit card deal, I would definitely consider switching to a different credit card.


11. I used to have a AAA Visa with Gas Rebate (then issued by MBNA). After Bank of America took over and got rid of the gas rebates, I stopped using my card and last year Bank of America unilaterally closed that card without notifying me. I only found out when I did a routine quarterly check on all my various dormant account and discovered that Bank of America closed my AAA credit card.


12. My Amex Blue card is my oldest credit card, dating all the way from my college days. This card started out as an Amex Blue credit card for students that Amex upgraded to a standard card once I graduated from college. I keep it alive to maintain my FICO credit score, since a portion of a person's FICO score is determined by length of credit history. After my bad experience with Bank of America closing my AAA credit card unilaterally without prior notice, I use my Amex Blue card once or twice a month to keep it alive.

If you have any good credit card tips, please let me know.