In days gone by, taking a holiday overseas meant changing dollars for another currency or ordering a stack of travelers’ checks to cash in while on vacation.
However, consumers are increasingly opting to use credit cards while abroad to save the hassle of having to preorder currency, as well as to avoid the greater risks involved with loss or theft.
For those who opt to use a credit card while on vacation, it is advisable to take a couple of precautionary steps before leaving the US.
First, contact your credit card provider and let them know you will be going to a different country and plan on using your card. There have been instances of accounts being frozen after they were flagged up as possibly fraudulent due to transactions outside the US.
Second, ensure that you have your lender’s contact details, including the hotline for lost or stolen cards, and that you have written your card number and expiration date down. While this isn’t essential, it may help save time when you are in the midst of a crisis.
Credit cards are undoubtedly a very convenient way to pay for items when traveling overseas, but there are some downsides that need to be taken into consideration before using your plastic.
At home in the US, cardholders may be used to paying for purchases on plastic without any additional charges unless the retailer specifies otherwise, but while overseas, there are a number of different charges that can make any transaction more expensive than its cash equivalent.
Interest rates are often hiked up for any overseas credit card use and some firms can charge as much as 2% more in interest, just for the privilege of using the card abroad. This may not seem that much, but this is in addition to the other charges that firms may levy.
Two of the biggest names in credit cards, Visa and MasterCard, both add an additional handling charge onto any international purchases. This is usually in the region of 1% and is on top of the interest rate applicable to the account.
Withdrawing cash from a credit card is seldom a good idea and a policy best reserved for absolute emergencies, as it tends to attract a higher rate of interest or charges from the credit card firm.
However, using your flexible friend to get money from a foreign ATM is even more expensive than back home.
Cardholders can be hit with two sets of ATM fees - one lot from the ATM provider, which is usually in the region of $1 to $3 per withdrawal - and the other from the credit card firm who tend to charge around $2 to $7 for a cash advance from an overseas ATM.
It is not unusual to find the total charges from a foreign ATM amounting to between $5-10 per withdrawal - a hefty sum that soon adds up.
If all of the above weren’t weighty enough, cardholders are often penalized with poor exchange rates.
When an item in a foreign currency is purchased with a credit card, the currency must be converted back into dollars. The exchange rates applied to credit card transactions are notoriously low and usually among the worst conversion rates on the market.
Although credit cards are a convenient choice when going abroad and worth considering for not only their ease of use, but security, it is essential that the additional charges and interest are added onto the holiday budget to prevent a nasty shock when the bill arrives as the suntan is fading.
No matter who you are, if you live in the US you have been exposed to payday loan companies. Either you have used one to get a loan, you know someone who has used one, you have seen one of their offices in your neighborhood, or you have heard about them online, on TV, or on the radio. It isn’t just poor neighborhoods anymore. You can find them in the most exclusive Zip Codes in the country. If you don’t want to walk into one, you don’t have to. Online payday loans make it easy to use one in private if you don’t want your boss (or worse, your employee) walk into one.
Most personal financial advisers would suggest that you don’t use these services, and if you are using them now stop doing so. Why would financial experts recommend this, especially if you don’t have access to traditional loan sources like a credit card, bank, or credit union? If you know more about them, maybe their advice would make more sense.
What Is a PayDay Loan?
A classic payday loan nothing more than a short-term term loan where the company issuing the loan requires that you have a job with a steady paycheck before you get the loan. A payday loan may have other names, like a cash advance loan, check advance loan, post-dated check loan, or a deferred deposit loans.
The names may be different, but they all work in a similar way. The borrower writes a personal check payable to the lender for the loan amount plus any fees. The payday loan company the gives the borrower the loan amount (some may deposit the amount electronically into the borrower’s bank account), and agrees to hold the check until the loan is due, usually the next time the borrower gets paid. The loan (plus the fee) gets paid off after the next payday.
Payday Loans Are Very Expensive
If the loan is extended, or “rolled over,” you may be charged new fees or penalties, making it harder for the borrower to pay it off. How expensive can it get? For example, say you need to borrow $100 for two weeks. You write a personal check for $110, with the $10 being the fee for the loan. The payday lender agrees to hold your check until your next payday. When that day comes around, you either pay it off or rollover the loan until next payday. You may have to pay even more than $10 for this rollover fee. If you roll-over the loan several times, the finance charge might be half or more of your original loan amount.
Payday loans are much more popular with people who can’t get short term credit from their bank or credit union. Not surprisingly, payday loan businesses are much more common than banks or credit unions in poor neighborhoods.
Options to Payday Loan Companies
If you have not choice and have to use a payday loan company, borrow only what you can afford to pay with your next paycheck — and make it a goal to survive to the next payday without borrowing any more money.
You can have the greatest system in the world for analyzing and solving your personal or business money problems, but you would be wasting your time if you were solving the wrong problem. This usually happens if you do not think through a problem before you start to solve it. To understand how to approach a particular problem you should understand at least these things about the problem:
A Mutual Fund Example
One example of solving the wrong problem is to pursue a high rate of return from a mutual fund investments without first deciding what kind of comparison or benchmark you should use to determine if the return is high enough. For example, index mutual funds that are designed to mirror the results of the Standard and Poor’s 500 index consistently outperform rough 80% of all mutual funds. The original problem may have been how to choose mutual funds with high returns. A better problem to solve would be how choose mutual funds which consistently perform better than the S&P 500.
Remember that most problems involving money usually involve something else besides money or mathematics. If you focus on the parts of the problem that are objective and that can be measured or solved with common with equations and spreadsheets, you may miss the most important part of the problem.
Next Lesson: Not Looking at All Sides of a Problem
Money Decision Problem 1: Not Taking the Time to Think About the Problem and the Decisions that Must Be Made
Before you make a financial decision, you have to know something about your needs, the effect your decision may have, and how you go about making a decision. Some common money decisions that often happens too quickly is what credit card you should have, whether to buy or sell a stock, or whether to go into debt to replace your boring old (and paid off) car for a shiny new one. Taking the time to make a proper decision can save you a lot of frustration and regret, especially if you do it consistently.
A Credit Card Example
Let’s look at the credit card situation more closely. There could be dozens of reasons why you suddenly decide that you need a new credit card. You might not have one at all, but one day you decide to rent a car and find out that you need a credit card. You might have a card already, but you find a way to transfer balances and reduce your interest rate for the first six months. Even if you think you need to take action right now, it always makes sense to think it through to see if it is the right decision for you. The following are just some of the questions you should ask yourself before you sign on the dotted line:
Once the background questions are settled and you have a good understanding of your overall situation, you have to start dealing with the decision making process. You should finish gathering any information that you need to make a decision. For credit cards, this would be things like late fees or other penalties, how much interest you will be charged, and what kind of no-interest grace period you have. These kinds of details should be spelled out in the agreement. If you don’t understand it, don’t sign it. If you don’t see it in the agreement, then it’s not part of the deal.
The next big steps are making the decision and carrying it out. If you decide to do something, then follow through. If you decide to do nothing, then take no action, no matter how tempting it may be. If you decide to change your mind, go through the same decision process. Don’t make the mistake of being logical and systematic the first time through and then being very informal the second time you wrestle with the same decision. Every decision is a combination of your analysis and your judgment. If you have a consistent process, you’ll likely improve the quality of both your analysis and your judgment.
Keep in mind that a credit card can turn out to be a long-term relationship. If you pay your bills in full every month, it can be a very happy and harmonious relationship. If you fall behind, it can turn real ugly real quick.
Next Lesson: Solving the Wrong Problem
If you don’t currently own your the place you live in you may be missing out on one of the greatest opportunities in your life. Most of us are well aware that it is a buyers market and that homes are being sold dirt cheap. The other opportunity is the incredibly low prices on 30 year fixed mortgages. The last time they were even close was March of 2004 at 5.45%. If you look at the charts since 1971 this has rarely happenned and could truly be a once in a lifetime opportunity to have a low monthly payment on a loan. Even if you already have a home loan your payback period to refinance could be less than 2 years. The reason for that is you typically have to pay some fees to refinance your home. Let’s say you save $100 a month in mortgage payments by refinancing, but the fee is $2,400. Even with the lower payment it will take you 2 years to make up for the difference. If you plan on staying in your current home for more than 2 years it should certainly be considered. Over the next 30 years you would save $36,000.
I’ll never forget the first spam I received involving an African prince who would send me oodles of money. Unfortunately, these types of loans continue to proliferate the Internet and take advantage of people. The trend has only gotten worse as people are more desperate in these hard economic times. They prey on people desperate to get student loans and other types of financing. The most common type of fraud is called an advance fee loan scams. In this situation the person is told that they have been guaranteed a unsecured loan for a large sum of money. They simply need to pay the processing fee.
Here are a few of the signs that the company may not be legitimate.
Do business with licensed companies. Ask your state banking or finance department about the licensing requirements for lenders and loan brokers, and find out if the company has complied.
If you are the victim of a fraudulant crime you can visit https://www.ftccomplaintassistant.gov/. This site helps people who have been victimized by credit card theft. It helps the government to aggregate data and ultimately apprehend those responsible for the fraudulant crimes.
Every day I hear ads for debt consolidation. I was always curious how these loans are able to take existing interest debt and turn it into a lower payment. The primary way debt consolidation programs work is by transferring unsecured debt into secured debt. Which brings up the next question, what are the difference between the two? An unsecured debt does not have an underlying asset associated with it. A good example is a credit card. Usually, there isn’t a specific asset that you own tied to the credit card. An example of a secured debt is a home mortgage. If you don’t pay back the mortgage the bank can take possession of the home (secured asset).
Lenders are usually able to offer a lower rates since the debt is now secured with an asset. There is less risk to the lender.
Additionally, programs can do things like extend the term of your loans to increase the payback period and decrease the monthly payment. This makes it easier to meet your monthly payment. Many debt consolidation experts have the ability to work with multiple lenders. This can save a great deal of time and frustration as these agents are experts and can navigate the maze of creditors while minimizing payment.
One of my favorite financial sites is bankrate.com. When I was looking for a mortgage I scoured that site on a daily basis watching rates change and thinking about who I would place my mortgage with. Interestingly for me it wasn’t all about the best rate. I also wanted someone who wouldn’t sell my mortgage and who had an office close by. I was able to find it and get a decent rate easily. I am amazed at the difference between the advertised rate and the rate you end up with though.
Even though bankrate is the 800 lb gorilla in the market there are a growing list of sites specializing in financial niches as well.
Anyway, there is a new site that seeks to help Australians with their rates as well. The site is called GoodWithMoney. They compare traditional items like credit cards
and cheap loans, but what I also found interesting is that you can compare rates on items like insurance and broadband services. They have most of the major items that you need for your financial being on their site specifically geared to those living in Australia. They also have a section dedicated to financial Australian news.
If you have any other interesting sites that help to compare rates for a given niche let us know in a comment.
The payday loan industry is enormous at over 85 billion dollars. In 2008 the state of Ohio passed legislation limiting the interest rate to 28% for businesses offering payday advance loans. This puts the interest rate at close to the same rate as a credit card. The state supported this bill by 64%. Proponents of the bill noted that payday loans cause the poor to get caught in a vicious cycle of debt that they cannot escape.
The interest rates on these types of loans ranges from 300% -600%. It is also important to understand the amount of risk involved with this type of transaction for the person lending the money. Given the size of the industry it would seem that there is plenty of profit motive to enter the market and that someone would lend at a lower percentage to pick up more business. However, the only thing to factor in must be the size of risk involved. More innovative online pay day lenders such as those that offer no fax payday loan have actually decided to stop lending in Ohio due to the new legislation.
This limits choice for Ohioans and others in States that limit pay day interest rates. Some have suggested that state level assistance programs may be necessary in the absence of this form of credit.
I’m interested to hear your thoughts on the subject. Leave a comment and let me know what you think. Does the new legislation protect those who would otherwise be taken advantage of or is this a necessary service that people depend on that will no longer be an option?
I came across this fun credit quiz that will tell you your credit age. It takes about 2 minutes to take the quiz. At the end you will get your credit age and a description of your credit self.
I’m interested to hear how many of you are credit newbies versus connoisseurs. You can leave a comment and let everyone know how you did. I would be interested to hear if any of you seemed to struggle on a particular section of the quiz or were troubled. I know personally, I pay off my credit card every month but the amount of credit on the card I use is high relative to my credit limit. I didn’t realize, but this can actually be viewed as a negative.
Oh, and by the way my credit age was also 47. In this case I am assuming that older is better, but I’m not really sure. I had my cousin take the quiz and she failed miserably. I think that explains a lot. This is the same woman who collects tons of longaberger baskets and complains about not having any money. Hmm, I don’t know what could be the problem.
Anyway, here is the link to the quiz Credit Quiz. Don’t forget to tell everyone how you did.