Sunday, November 23, 2008

Credit Card Finance Charge Tidbit

Okay, as some following this blog (if anyone is) may know, I'm not just doing internal server operations at Tacit Knowledge any more, I'm also the CFO, so naturally I do a lot of finance.

In order to want to take on a role like that, and to pursue excellence in it, you've got to have more than a little bit of interest in even the most mundane parts of finance. You have to want to truly understand the full workings of the little things or you've got no chance when the big things confront you.

With that as motivation, I'll mention that for my entire adult life I have engaged in a campaign against credit card finance charges. This may seem pointless, and I'll admit it is - on the "dollar value" side, it is not really worth a lot to achieve a state of "no finance charges ever" because even getting close to that state means there's not enough dollar value left in charges to justify getting to zero. But where's the fun in that? Let's get to zero.

The first thing I learned in this campaign was that the credit card companies use several strategies to make it nearly impossible. The first of these strategies is the non-fixed statement date. In other words, they do not align their statement dates with any fixed calendar day so you can never assume that if you make a full payment by the 1st of the month every month, you won't get a finance charge.

They move the date around every month, so every once in a while, a full statement period will be between and not inclusive of the two 1st dates, and they'll get you. How sneaky! That honestly took me a couple finance charges to figure out, but is easily defeated with a "semi-monthly payment plan" though - just send them two payments a month, on the 1st and 15th. Please note that if you don't have some automated way to make this extremely easy you're wasting your time and it is not worth it. I use Quicken with bill pay, personally.

Okay, so having done that, I thought I'd essentially won the game and needed to move on to other venues to exorcise the daemons of my financial obsessive compulsiveness.

Most of their other strategies revolve around keeping you in debt once you've gotten there, and since that's a problem solved with fiscal discipline (a much larger subject than tactical credit card payment plans) I'm not going to go into it here. You need Suze Orman or a Rich Dad, Poor Dad book, Quicken, and some soul-searching if you're in that situation (highly recommended if you are, though).

Then I just got hit with two finance charges in two consecutive months, and the game was back on. I simply couldn't understand what happened since I sent them more then the previous balance was.

I'm sure this is no surprise to some of you but for those that did not know it, I'll mention another subtle trick they play on you. If you *ever* take advantage of the ability to defer payment, as I did two months ago, you will obviously incur a finance charge. I'm not against that, I will pay to rent cash sometimes, and that month I did so.

But what you've done is you have established a new class of balance in your account - a "revolving balance". It's important to realize that this class of balance is treated very differently from "new charges" because now when you send payments in - even two a month! even more than all new charges! - all of the payments will be applied to "new charges" *first*, and only the excess will apply to the revolving balance.

Sneaky again! In this way, you may find yourself making multiple payments a month, for *more* than the sum of your new charges every month, and still owe a finance charge every month as they charge you to float whatever is left of the revolving bit from the past. Seems unfair to me, but hey, they're in the cartel of payment processing networks and I'm not, so I don't get a vote. I do have a new compensating strategy though, and will restate my "never get a finance charge" rules like so:

- make two payments a month, on the 1st and 15th, for whatever the balance is on those days
- if you ever establish a "revolving balance", make sure to establish a credit balance with the account with the next payment - compensating for any charges you may incur between your sending the semi-monthly payment that would otherwise make you run a balance

Now I think I've "got" them. We'll see.

Some will argue I should quit fussing and use the "AutoPay" option, but then if you actually wanted to rent cash for a month, you'd have to pick up the phone to do it or they'd pull the full balance from your checking account anyway. So that option gives you a low score on the "ability to control" things scale. My phone calls to Citibank to get the finance charges waived while I learn these lessons :-) average around 15 minutes, so as a solution design with AutoPay I'd be losing money on the opportunity cost of my hourly billable time.

This concludes your obsessively compulsive finance lesson for the day.