A fool and his money, something something

March 5, 2010

refund anticipation loan, tax refund, IRS

Apparently, keno players are not as dumb as it gets.

This week, Refund Anticipation Loans. This is almost the invention of the wheel in reverse. Human ingenuity has now developed an inefficient, costly, inelegant, labor-increasing device that if left unchecked will send the species back millennia.

The “refund” in an RAL refers to a tax refund. You file your taxes with a professional preparer such as H&R Block. (Because addition is hard, subtraction is extra hard, and multiplication and division should be left only to the professionals, or at least to people who know how to press buttons on a calculator.) Then, because you overpaid your taxes throughout the year by having as much as possible withheld from your paychecks, the IRS returns to you the interest-free loan you gave it. Which can take weeks beyond the time you’ve already granted the IRS.

But this is America. We don’t do delayed gratification.

It bears repeating to the next social engineer who decries the amorphous “gap between rich and poor” that plagues our society: the poor are poor largely because they choose to be.

For those who can’t wait (and wouldn’t have had to wait, had they had the minimum deducted from each paycheck throughout the year), some enterprising souls created the RAL. Say you go down to the Jackson Hewitt office with your W-2s in tow. The preparer calculates that the money you’ve been lending to the federal government, without interest, totals $1000. Are you going to wait until April, maybe May, for that money when there are PlayStations to buy and child support to pay? Hell no!

So the preparer asks “Will you take $970 now?” And apparently, every year 12 million people say yes. If it’s any encouragement, a goodly ratio of them are probably too dumb to fill out a voter registration form.

If someone’s holding your daughter for $970 ransom with a 12-hour deadline before he mails you her scalp, only then is an RAL an outstanding investment.

That’s a 3% commission, for saving the taxpayer the trouble of waiting maybe a month for his refund. Which is an annualized rate of 43%, not that anyone ever waits an entire year. Still, that annualized number looks so enormous that it got the attention of some elected officials. Who decided that when two parties sign an agreement that showcases the stupidity of one party, the other party must be to blame. California’s attorney general sued H&R Block for offering RALs, an Illinois judge decided a $360 million settlement wasn’t enough, and the FDIC, America’s bank regulator, asked Republic Bank of Louisville to “consider ending (the) line of business” that represents most of its profit.

65% of people who receive Refund Anticipation Loans are already receiving the federal Earned Income Tax Credit. They’re so poor that they’re not making enough to be net taxpayers in the first place.

Someone found a racial component to this, too. In 2006, 7% of Illinoisans used RALs, but 23% of black Illinoisans did. If you’re black and use an RAL, then no, you’re not being exploited. But you are a moron. You’re equally stupid if you’re white, Oriental, or Melanesian and use an RAL.

Let’s hear from a loquacious consumer advocate on the issue:

“Almost one in four taxpayers living in African-American communities pays hundreds of dollars to receive his own money a few days early,” said Katie Buitrago, Policy and Communications Associate at Woodstock Institute. “Millions of dollars that could be used to pay down debt or provide a safety net for emergency expenses are being lost.”

No, that’s millions of dollars that could be used to buy crack, drink malt liquor, and spend on custom LeBron Air Max VIIs. Does Ms. Buitrago really think that RAL users are going to buy corporate bonds and index fund shares with their refunds? If they’re the kind of people who are farsighted enough to invest their money, they would have done it by now. Does she think refund anticipation lenders should just let taxpayers enjoy early money interest-free? Why should a tax preparation service that sells RALs be held to a higher standard than the IRS, which these taxpayers are giving their money to in the first place? (Then again, from the perspective of a taxpayer who’s let the IRS enjoy his money interest-free, it does make sense.)

Despite the extraneity of the second half of the quote, Ms. Buitrago is technically right. And practically disingenuous. Or just dense – it’s hard to tell with academics sometimes.

Again this has nothing to do with money, but assume that anyone who’s using the passive voice is hiding something. The quote should read “(People who are getting these RALs) choose to forgo millions of dollars that could…etc.”

Exploitation is an easy thing to prove. If you’re being taken advantage of without understanding the circumstances, you’re being exploited. When someone picks your pocket, literally picks it, that’s exploitation. When you sign an agreement granting someone the exclusive right to remove your wallet from your pants and take whatever they deem fair, you’re not being exploited.

Paying extra to get what was yours in the first place is called extortion, but even that isn’t accurate because most extortionists don’t operate with the explicit permission of the people they’re extorting money from. Furthermore, this subject matter is so outrageous that it’s reduced the author to overuse of italics.

Do we have to do this again? Here it is, in handy list form:

  1. Get as little as possible withheld from your paychecks. This will involve redoing your W-4, with the help of whoever handles this at your workplace. It should take less than a minute.
  2. You’ll now have more take-home pay in each check. Take the difference and invest it somewhere (NB: exacta boxes at the dog track are not an investment. Toyota stock is.)
  3. Write the United States Treasury a check at 11:59 p.m. on April 15.

It’s your money until the last possible second. You don’t pay upfront for most other things, why do so with your taxes?

If you’ve ever received a RAL, get the person who’s reading this to you to stop and smack you, but hard. The Marlboro reds, lottery tickets and 24-packs of Pabst Blue Ribbon will still be there when your refund check comes. So will the UFC clothing and Shadows Fall albums.

Filed Under: Consumer Debt, Taxes Tagged With: , , , , , ,

Someone should do something about how much money I spend

October 25, 2009

 

A vehicle to encourage responsible spending.

This is the fusion of two of our bugbears, each indirectly related to personal finance: media idiocy and public panic. The photo is of an application for a credit card issued by First Premier Bank of South Dakota. The interest rate on purchases and cash advances is:

79.9%

A reporter from San Diego’s NBC affiliate* with some air minutes to kill manufactured a story out of the application. Here’s his impassioned defense of an innocent viewer who was just blindly applying for credit cards one day when he ended up getting impoverished. Actually he didn’t, all he did was open an envelope, but news wouldn’t be news without a little embellishment:

Hageman acknowleged that his credit isn’t perfect, but he said it’s about average. He said the pre-approved offer didn’t mention the actual interest rate on the card — for that, he had to read the enclosed fine-print disclosure. (Editor’s note: the disclosure is the pre-approved offer. The offer is the disclosure. This is a distinction without a difference. “Your honor, I didn’t hit her, my fist did.”)

“I think you’re beginning to border on deception there,” San Diego State marketing professor Michael Belch said.

No, Professor Belch. Deception would be charging 109.9% or 139.9% while listing a rate of 79.9%. What you’re commenting on is candor, the opposite of deception. Which is apparently beyond the grasp of the overeducated.

So, serious question: is a credit card with a 79.9% interest rate an atrocious deal? There are two possible answers:

  1. Not really.
  2. No.

Let’s examine them in numerical order. [For you people who would pay interest on a 79.9% credit card, that means we’ll do 1) (ONE), and then we’ll do 2) (TWO).]

1) NOT REALLY

The next credit card issuer to force someone to use its cards will be the first. Card issuers don’t tell you to buy things you can’t afford, live beyond your means, and then owe them money for the privilege of letting you buy what you couldn’t afford in the first place.

If anything, card users should be happy that banks like First Premier provide a means by which such people can spend recklessly in the first place. If credit cards didn’t exist, or if this were the 1960s and cards were only available to rich people, then anyone who would today use a 79.9% card would have to save money before spending that money. The horror.

Hageman claims his credit is “about average”, but doesn’t quantify it with, say, a credit score.** Hageman’s (and the journalist’s) complaint is essentially the following:
“You can’t trust me not to spend what I haven’t yet earned. First Premier is offering nickel beers, and here’s me, fresh out of my AA meeting.”

You don’t have to apply for the card. If you do, you don’t have to accept it. Nothing is usurious, deceitful or dishonest about First Premier’s offer. In fact, they’re being pretty clear: if you use their card, you have a month to pay off your purchase. That they give you 30 days makes First Premier far more accommodating than merchants you pay with cash, who often expect their money within 30 seconds. First Premier will cover you for the first month.

If you don’t pay off your purchase within a month – which is an eminently reasonable task you ought to be able to complete, assuming you know how to read price tags – then in exchange for their generosity, First Premier will charge you 79.9% interest.

That is perfectly fair. You signed an agreement, with mutual rights and responsibilities. First Premier honored the responsibility part of its side of the agreement, and now they’re entitled to their right: 79.9% interest on your money.

This story came to the attention of Control Your Cash after appearing on Consumerist. That site’s commenters show what happens when personal responsibility goes from being a fundamental precept of life to a vestige from our grandparents’ era. Here’s an example:

The guy who owns First Premier has donated billions to one of the local hospitals for a children’s hospitals (sic) and a research facility. It is going to take much more than that to undo the bad karma he has going on.

Engaging people in bilateral, voluntary commerce now fosters “bad karma”, as defined by the kind of person who a) believes in karma, b) thinks it has a place in an economic discussion, and c) thinks spending “billions” of dollars on “a children’s hospitals” is barely a step in the right direction.

Not that people who comment on web stories are necessarily examples of intellectual titanhood (think about that before you comment on the post you’re reading right now), but here’s another:

Which is why we need a NATIONAL usury law. Problem is these crooks have great lobbies in state governments.

Words mean what they mean, and “crook” has a fairly unambiguous definition. Crooks steal. They take what isn’t theirs. What they don’t do is enter into a voluntary contract, then honor it. Calling an honest business entity a “crook” is like saying “literally” when you mean “figuratively”. Or “black” in lieu of “white”.

Here’s one last commenter, blessed with a gift for both pithiness and renewing our faith in humanity:

Don’t like the terms? DON’T USE THE CARD!!! It’s pretty damn simple people. Where did this entitlement mentality for cheap credit card interest rates with free stuff back come from?

2) NO.

Let’s answer a question (if you forgot, it’s “Is a credit card with a 79.9% interest rate an atrocious deal?”) with a question. What’s the difference between a card with a 7.99% interest rate and a card with a 79.9% interest rate?

If you Control Your Cash, nothing. If you ring up $500 worth of charges, then transfer $500 from your bank account to First Premier within 30 days, it doesn’t matter what they charge. There is no difference between a card that charges 1% interest and one that charges 500,000% interest.

 

So should you accept First Premier’s offer, and happily charge purchases to your 79.9% card? After all that, no. But for completely different reasons.

The least important criterion for what credit card you should get is the interest rate. The most important is the benefits it’ll provide, for the price.

More than most cards, an American Express card can make it easy for you to reverse purchases that go awry (e.g. a brake relining that doesn’t work.) But depending on which particular American Express card you get, you might have to pay an annual fee. The standard Discover card doesn’t have an annual fee, and gives you 1% cash back on everything you buy. But it’s also useless outside the United States.

Most credit cards are free to use. If you can’t find a free one, you probably shouldn’t be using credit. And that’s what makes the First Premier card a bad deal:

The $75 annual fee.

You saw that, right? Of course you did. You read the agreement.

——————-

*Our primary passion at Control Your Cash is the responsible use of money. A close second is our hatred of journalists. In particular, television journalists. In particular, local television journalists who have neither the chops nor the ambition to progress beyond their home market(s). That’s why we don’t mention journalists by name. You can still verify the story by clicking the link, but we won’t do the journalist the courtesy of a mention.

**Why should he? Math is hard! Numbers are intimidating! Words are better than numbers, especially because you can’t prove something with the former as convincingly as you can with the latter.

**This post is featured at the 28th Carnival of Money Stories.**

Filed Under: Credit Cards Tagged With: , , , , ,

Paper or plastic?

October 11, 2009

Would you be interested in an investment that pays 14.29%? You can get in for as little as a dollar, but the average investor puts in $6775.

You’ve had a fraction of a second to decide, but you can’t possibly still be thinking about it. 14.29%. This investment pays 7.8 times the highest available rate on money market accounts (from Flagstar Direct in Troy, Michigan), 8.4 times the highest rate on 1-year CDs (Ally Bank in Midvale, Utah) and 19 times the highest rate on checking accounts in a city chosen at random (Charles Schwab in Ocean View, Delaware.)

This investment came close to beating the Dow as a whole over the last year (which has gained 14.98%.) Unlike the Dow, this investment isn’t a gamble. It comes with a guaranteed return.

The investment is credit card debt. The numbers in the first paragraph are the average rate and balance among American cardholders.

Yeah, but he had a GREAT introductory rate.

Very funny, you soulless jerk. You’re poking fun at me while Visa and MasterCard are busy giving it to me repeatedly and hard.

Then here’s the same advice recommended to any woman who whines about being in an abusive relationship: stop being a victim.

If you have a spare dollar, there’s no excuse for having credit card debt. This post is mostly for the benefit of the people who haven’t incurred credit card debt, but if you’ve already let it get away from you, you need to wage the equivalent of total war on your debt.

Wear a sweater instead of turning the heat on. Learn to cook, and never eat out. Sell that car. You own it outright? We don’t believe you, but if you do that’s even better and will take a significant chunk out of any credit card debt you owe. Buy a bike or take the bus. Live the life of a Kosovar refugee until you eliminate that balance. A few months or even years as an ascetic beats the hell out of a lifetime as a credit card company’s sharecropper.

If you haven’t yet incurred credit card debt, the austere lifestyle above is what awaits you if you do. The only question is whether you want to compress it into as little time as possible, or spread the pain out over a lifetime.

The mantra will never get old nor obsolete: Buy assets, sell liabilities. The two aren’t purely symmetrical, however. Assets, those wonderful constructs that enrich you, are somewhat optional. Liabilities, in all their impoverishing glory, are not. You have to pay them, one way or another.

The fewer liabilities you have – e.g. a credit card balance that’s enriching the issuer while rendering you worse than broke – the less capacity you have for buying assets that will ultimately keep you out of poverty.

There appears to be no consensus on which culture the following proverb supposedly originates from – Chinese, Songhai, perhaps Aztec – but it applies here in spades:

“The best time to plant a tree is 20 years ago. The second-best time is now.”

————————–

Lung cancer is an effective means for killing 1.3 million people every year. Fun symptoms include shortness of breath, abdominal pain, and fatigue. Many lucky patients also enjoy profound weight loss, and even deformed fingernails. Pain in the bones, metastasis to the kidneys and lymph nodes, skin that turns grey…lung cancer is something you’re probably going to want to shun, unless you’re a masochist of historic order.

Control Your Cash isn’t above dispensing occasional unsolicited amateur medical advice. You want to know the best way to avoid lung cancer? A way that’ll reduce your chances by at least 90%, assuming you want to avoid spending your declining years bedridden and praying for the sweet release of death?

Never start smoking.

Hopefully you’re not looking for a more intricate answer, because that’s as complex as this one gets.

You can figure out where we’re going with this. If you want to avoid being indebted to credit card companies for the rest of your life, don’t take that first drag. Don’t buy that first pack. (Or if you do, at least pay for it with cash.)

Here’s a radical concept: buy what you can afford. Credit card companies aren’t responsible for your dismal financial situation, any more than the guy behind the 7-Eleven counter will be responsible for you coughing up blood 20 years from now.

How many possible excuses can there be for incurring credit card debt? “I didn’t know how much the stuff cost”? “It just kind of crept up on me”? “It’s the retailers’ fault for making me want it so much”? Read the freaking price tag. You can’t be so easily swayed as to look at the minimum payment listed on your monthly statement and find it palatable, if you’re carrying a $6775 balance. Or even if you’re carrying a $200 balance.

We’d reprint the relevant passages of a typical credit card agreement here, but if you didn’t read your agreement when you received your card and started incurring debt, you’re not going to read it now. Just understand that the moment you fail to pay your balance in full, you’re on the road to cheating yourself, your posterity, and your planet. Incurring debt that you can’t pay is the act of a child, not an adult; a parasite, not a worker.

Credit is a privilege, a word that’s been largely equated with “right” in recent years. Not only does nobody owe you anything, nobody even owes you the means for owing other people. (Which is a good thing. One of the best ways to avoid credit troubles is to be ineligible for them in the first place.)

When credit cards were invented in the 1960s, they were status symbols. We’re not referring to the American Express black card. We mean the now-lowly green one. And for years, the issuers enjoyed a modest business charging interest to the kind of profligate people who found it gauche to pay for restaurant meals with cash. The credit card companies didn’t bother selling to middle- and low-class people, the argument being that those people didn’t have enough money to be customers.

It took a while, but the credit card companies eventually figured out that you don’t need to be rich for them to profit off you. All you needed was the capacity for earning something, somewhere down the road, and the law of large numbers would take care of the rest. Which it has, and beautifully.

In recent months, Americans who bought too much on credit engaged en masse in our national pastime – whining about their situation. Which resulted in a compliant political establishment requiring credit card companies to lower their rates. This was a classic example of Washington bipartisanship, a noun which when applied to domestic policy means “responsible people are about to get punished.”

Like almost all laws, the one capping credit card interest rates led to unintended consequences worse than the trouble that prompted the law. With their potential profit reduced, credit card companies simply stopped offering cards to high-risk customers. Many of those high-risk customers will still find their credit, even if it’s being offered by people who understand physical violence better than they do legal procedure.

But regardless, the credit card companies still have to make up the shortfall somehow. Which can mean universal user fees, penalties for prompt payment, even cancellation for people who committed the sin of paying their accounts in full every month. To the responsible credit card carrier, this means a reduced opportunity to ride free on the backs of people who refuse to Control Their Cash. But it’s also a chance to strip away preconceptions. Imagine if credit cards didn’t exist. You’d save up to pay for stuff with cash, or at least with collateral.

And how is that worse than paying a creditor every month?

Filed Under: Credit Cards Tagged With: , , , , , ,
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