The paradox of credit cards

        I don't recall all the prohibitions of being a little kid placed on me by the adult world, but I'm quite sure that I heard from time to time that I shouldn't play with matches, run with scissors, or play with knives. Those are all now common sense principles, but to an inexperienced kid it wasn't quite clear the reasoning behind the prohibitions. As I became a young adult and moved far away from my family, the every day decisions I faced were less likely to inflict physical harm to me. Nonetheless, there were still some poor life management skills that could have a major negative impact on my future. One of those undeveloped skills was learning how to handle credit cards.
       There was something about being perpetually broke that made the first mailing I received from a credit card company stating that I was "pre-approved" very enticing. I'll be the first to admit I knew nothing about credit history, credit scores, or how compound interest was calculated when I received my first credit card. The only thing I knew was they were going to give me access to $500 that I could spend now even with no realistic plan on how to pay it back later. You give a broke college student access to immediate cash at a 25% APR, it's the equivalent of giving a little kid matches, sharp objects, or anything that the consequences are easily foreseeable.

       Since I was completely ignorant on how credit worked, I made the minimum payments when it was convenient. I'd take a couple months off when I was too broke to make the payment in a particular month with the plan to make 3 minimum payments all at once later. I didn't really notice that I was getting a $25 late penalty tacked on each month mainly because I moved away and forgot to tell the credit card company my new address. Eventually, the company called my number and explained to me that I needed to make a payment every month. That was news to me, but I promised them I would. Since then, I don't think I've ever missed a payment when I had a balance.
        Living within my means and avoiding debt should have been intuitive, considering my parents avoided credit card debt growing up. As legend has it, one year we took a road trip from Minnesota to Florida with the intention of going to Disney World.  If you can imagine 6 kids piled into a full-size van and arriving at the parking lot of the park only to find out that the entrance fees were way higher than expected. My parents did a quick back of the napkin calculation and realized that if we went into the park that we'd likely run out of money prior to making it back home to Minnesota. Therefore, we left the parking lot and found an alternate and much cheaper water park to visit. The Disney World entrance was not the happiest celebration on Earth at least for our family that day a long time ago.

The Paradox

         It's nearly impossible to not have at least one credit card as an adult in today's world. There are some companies that don't accept anything but credit cards as a form of payment. Try paying for a rental car with cash sometime to test my theory. Almost everybody I know has at least one credit card to their name.

         The paradox is that credit card companies' business models are ethically objectionable. They prey on the weak and the struggling. Their best case scenario is that you carry high balances at staggeringly high interest rates where you make the minimum payment month after month. If you had favorable terms in the beginning to entice you to sign up, they are waiting for signs of struggle to kick you while you are down. They do this by consistently monitoring your credit score to decrease your favorable terms at a moment's notice. I have first hand experience with this while clawing my way through several years of graduate school.

 

         Here's a scenario that could easily play out for someone with 2 credit cards with a $2K limit each. I made up this scenario, but it is based on a real life situation I had to deal with: 

          You start doing well by using each card and paying them off each month without paying interest. Then one month, you have unexpected car repairs and run up a $1,500 bill on one of the cards that will take you 5-6 months to pay off. The other credit card company (hereinafter credit card company #2) notices that your debt utilization ratio is up and your credit score has declined.
          Credit card company #2 sends you a notice that you'll be charged an annual fee of $99 and will increase your interest rate from 12.99% to 24.99% and lower your credit limit to $1K. Keep in mind that you haven't touched this credit card, but they are just sitting back and monitoring your credit to see that you are possibly in over your head. Of course, you get upset at the changes and close the account prior to the changes taking effect. (that is if you happen to notice the term changes that come to you in the mail and read through them). All of a sudden, your credit utilization goes from 37% to 75% and your credit score drops even further. You scramble to apply for another credit card, but find that you get declined based on a too high of utilization score. Your current card company smelling blood sends similar change of terms notices to make you pay an annual fee and an increased interest rate. The end result is that you pay back your $1,500 at very unfavorable terms unless you want to be without a credit card.

         The moral of the story is that dealing with credit card companies is like a chess game. They are bound by the terms of the agreement, which is unfortunately heavily skewed in their favor. Even when you think you might be taking advantage of a great offer, there are always loopholes for them to kick you while you are down. Even though they will never be able to take your first born child, they will find a way to make you pay in their best case scenario (minimum payments, high balance, high interest) if you are struggling.

        What could you have done differently in the above scenario? My advice is to have at least 3-4 cards on hand and to keep the debt utilization score below 20% on each of them. As a rule of thumb, balances should stay below a 20% level before creditors treat it as a warning sign. You should be well versed in what these companies are looking for and be detail oriented regarding the terms. If you meet the expectations of credit card companies and don't set off any warning bells of struggle, you might just get along with your creditors.

The Flip Side

         When you are on cruise control financially, credit card companies are going to great lengths to win your business especially in 2013. A person with a great credit score should be collecting the rewards of merely signing up for cards. The rewards can be miles, points, or even no interest for multiple years to carry a balance. Signing up for one card can net you a free round trip ticket to Europe without any effort by way of example.
         If you are signing up for one card, you may want to consider doing multiple applications on the same day. The credit card companies will catch on to the strategy and will decline an application on that basis, but it usually takes them a while to see what's happening. Therefore, you can get approved for multiple cards at the same time and collect all the rewards. Just don't cancel right after collecting the signup bonus as it will have a negative impact on your score. I'd wait a year to close each account that you don't have further use for.
         Your credit score is hardly affected by multiple inquiries unless your score is right on the borderline of acceptance criteria or you have a very short credit history. Inquiries over the previous 12 month period are tracked, so you get a fresh start annually. Of course, credit card companies might get antsy if they see too many inquiries wondering what you're up to. I personally wouldn't be tepid about doing 6-7 inquiries on the same day. Let them tell me that my inquiries are too many. Just because I have too many inquiries according to one company doesn't mean that all companies will respond the same way. Every company has their own acceptance criteria and warning signs to decline. If you are declined by one company, that doesn't mean another 3-4 companies might still be happy to get your business. The bottom line is that you can be fearless if you have a great credit score. You have nothing to lose unless you happen to be buying a house/car in the near future where you absolutely need a loan.  The Points Guy writes about this all the time on his blog. Even if you see the following letter, it doesn't really matter if you don't absolutely need the new credit card and were merely motivated by the signup bonus:

Conclusion

       Credit card companies only care about the terms of their agreement with you and are cold-hearted about extenuating circumstances about you not meeting your obligations. They'd like nothing more than for you than to become their average profile of making minimum payments on high interest debt. Compound interest particularly at high levels can run amok over your future plans. Be very careful about running up balances without a game plan to pay it back quickly. 

        On the other hand, there are great advantages to those who have no need for credit cards, but have them anyway. You can collect their rewards and maximize their special offers with no fear that you'll be stuck getting run over by compound interest. Turn about is fair play, so getting all the upside and none of the downside of having credit cards can be a refreshing position to be in.

Nightmare flight story!

            As I get ready to jump on my longest flight yet (12 hours 55 minutes) later this week, I was asked by a colleague whether I've ever had a particularly nightmarish experience on any of my past international flights. The reason I am sharing this story is that it may allow some of you to tolerate a little better some of the minor annoyances of flights in the future. You can thank your lucky stars that you weren't on my flight back in 2011 where the standards of this particular airline for treating its passengers were far below that of any U.S. based airline.  

           I was traveling with my youngest brother on Asiana Airlines flight 767 from Seoul to New Delhi. Our flight was expected to arrive at 11:45 PM in New Delhi and we fully expected to do so based on the flight crew preparing us for landing around 11:00 PM per the usual drill of making sure all the seats were upright, collecting all the headsets, shutting down the electronic devices and the entertainment tvs. We were prepared to land!  

           Instead of landing, we circled the airport in such bumpy weather that several of the passengers we observed got motion sickness inducing vomiting. I should note that I've only gotten motion sickness twice in my life and this was the only time that I have ever vomited. It was not a big surprise when our plane was finally delayed and diverted due to inclement weather. The plane ended up landing in Ahmedabad around 2:00 AM.

           Thinking that we’d be back in the air within a couple hours, my brother and I just chalked up the delay to bad luck. Little did we know that we’d be delayed and held captive in that plane for more than 12 hours with very limited communication and no amenities that were clearly available if the airline had even a speck of thoughtfulness toward its passengers!

             An announcement was made shortly after landing in Ahmedabad that the airline was deciding what to do. Apparently, the previous 90 minutes since they announced where we’d be landing wasn’t close to enough time to make a decision. So we waited and waited until about 3.5 hours since the diversion was announced that the pilot was sent to a hotel to rest, because his workday was over.  The official announced reason why the pilot was able to deplane while everybody else was held captive: a law (not clear if it’s a Korean law, Indian law, or an airline policy) required him to rest after a certain number of hours worked. Concurrently, all passengers were prohibited from leaving the aircraft. Since the crew had limited English speaking skills, no further explanation could be attained.

           During this entire time period, no food, drink or entertainment was provided to any of the passengers that we observed. The temperatures outside soared above 104 degrees Fahrenheit on a crowded plane where tempers were flaring among the passengers. Furthermore, the headphones were not redistributed and the entertainment systems shut down. It is as if Asiana Airlines had never faced a similar situation before.

            In sum, the Asiana Airlines held all of its passengers captive with no food, water or entertainment on a hot and crowded plane and no explanation as to why we couldn’t stay in the airport. Finally at around 8 AM (6 hours after having landed and 9.5 hours since our last snack) a meager snack was provided with about 6 ounces of drinks. It was finally announced at around 10 AM that the pilot was almost back and that we’d be taking off for New Delhi shortly. We arrived back in New Delhi with a total delay of more than 12 hours. I lost a few hundred dollars in prepaid fees to change my plans from the delays and Asiana never provided one penny in compensation even after respectfully requesting a nominal reimbursement. 

           The positive to all of this is that this was far and away my worst experience in all my flights over the years. Airlines still do stupid things, but I can always think back and thank my lucky stars that it isn't quite as bad as flight 767.

What is Grit?

           My favorite Olympic race of all-time, which also happens to be widely considered the biggest upset in Olympic history embodies grit to the extreme. Billy Mills, a Lakota Indian from South Dakota, would never have won the 10,000 meters if he had listened to others who doubted him. Nobody thought he had a chance to get a gold medal other than him. Let's start by looking at a video of the actual race:

            What's so amazing about this race other than the dramatic finish is that Mills ran 46 seconds faster than his best ever time that day and was, therefore, not considered a threat to win. Although he was a very good runner in both high school and college at the University of Kansas, he had never won any significant races in his career prior to the 1964 Olympics. Mills was a complete unknown, so that's why the announcer was so exuberant at the end!

            What's even more amazing about Mills is his background. He came from one of the poorest Indian tribes in the country and was orphaned at age 12. The probability of becoming the best in the world at anything from that tribe was minuscule. Most men from his tribe were going nowhere with their lives and with an unfortunate high rate of suicide. All of this took a toll on Billy along with some heavy discrimination he faced at KU that lead him to consider committing suicide. He also quit the KU track team his senior year. In parting, the coach told him that he'd never amount to anything.   

            It was right after he almost committed suicide that he wrote down the goal of winning the gold medal at 10,000 meters. The goal was impossible to reach at that stage! He would need to decrease his PR by 3 minutes to have a chance. He was in the deepest valley of his life and somehow managed to find hope by attempting to climb the highest mountain. 

         He eventually graduated from college and joined the military where he went from running 40 miles per week to 100, which helped him get much faster. A movie was eventually made about his life called the Running Brave. Here's another video of interest well worth your time:

            

           One of the lessons we learn from Billy Mills is that we don't have to be perfect in our resolution to reach our goals. He almost gave up and there will be times that we will too. Nonetheless, if we keep our eyes on the big picture with passion and determination it will lead us to things that even we might not have thought was possible at the beginning of our own journeys.

         The Billy Mills story reminded me of an excellent TED talk by Angela Duckworth, although her observations were more in the realm of academics than athletics. What she found in her experience as a 7th grade teacher is that there isn't a direct correlation between intelligence and which students ended up getting the best grades. Some of the most intelligent students had poor grades, whereas a few of the less intelligent students were at the top of the class. What she concluded to be the determining factor in academic success was that the top students all had a high amount of 'grit'. 

   

 

        Grit is having the perseverance and passion for a long-term goal and entails working strenuously toward challenges, maintaining effort and interest over years, despite failure, adversity, plateaus in progress, and negative feedback. The talent of someone with grit is that they persevere through circumstances where the majority would have given up. The gritty individual approaches achievement as a marathon; his or her advantage is stamina. Billy Mills had all those things.

          It's not always easy to stick with things when we give it a shot and don't show natural aptitude right away. My parents put me in violin lessons as a kid at 5 or 6 years old. I wasn't naturally inclined based on the first lesson and as it turns out my instructor quit in frustration. From that one experience, I always assumed that music wasn't my thing and never tried again.  

           How often do we write ourselves off based on a nominal effort and initial negative feedback? This is a huge mistake in most cases. We really can't know how good we could be without becoming fully invested in trying to reach our potential. You often don't improve until becoming fully immersed. It's easier to label ourselves as deficient and quit trying. 

         I learned German fluently at age 19, but I didn't turn the corner until I was living in Germany for 6 months after having taken 5 years of classes beforehand. It would have been easy for me to conclude that I didn't have the aptitude to learn a language before ever reaching Germany. After all, I was below average for someone who spent 5 years learning German in a classroom. After finishing my two years in Germany, I can definitely conclude that my initial assessment of learning a new language was way off!    

           How often do we give up because we value the opinion of one person over our own? My high school counselor didn't think I was college material. She was right that I needed to work on my study habits, but she was wrong in assessing my capacity and determination. It's a good thing I didn't listen to her or anybody else in my life who was skeptical of my ability to reach my goals.

         This is very good advice by Steve Jobs:

Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma — which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition ... Stay hungry, Stay foolish.

         That's probably a good place to end this week's post. We all are driven to succeed in various realms in life. Forget what everybody else is saying about your probability of success and roll up your sleeves and go to work. It's the day by day and year after year progression that eventually gets us to the peak of the mountaintop.