Is 79.9% APR Even Legal?

This is a guest post from Ronny Miller, president of Gallup FCU. Enjoy!

The other day a member forwarded to me a link to an article titled, “Credit card had a 79.9% APR from First Premier Bank”; a stunning title to say the least. The member who sent it to me was obviously soliciting my opinion and so I decided it was too much to put in an email and too important not to share it with our readers. So here you go.

You might want to take a look before reading my response. Here’s the link: http://finance.yahoo.com/news/Credit-card-had-a-799-APR-cnnm-137006553.html?x=0

First of all let’s get a few details out of the way. Is this even legal? Yes. Is this predatory lending? Yes. Does this go against every fiber of my being? Absolutely….but in more ways than you might think. Allow me to explain.

Predatory lending has been going on for hundreds if not thousands of years and for just as long there have been groups trying to stop it. Chances are you belong to one of them; your credit union. We are opposed to predatory lending in all of its forms. Any type of business that is designed to rip off people of lower means or that is deceptive in nature should be against the law. I am on the board of directors for the Nebraska Credit Union League and one of our primary responsibilities is to promote consumer friendly and credit union friendly legislation. A dream come true would be to wake up tomorrow with no more predatory lenders, but that’s just not going to happen.

Credit card companies that charge 79.9% APR, believe it or not, are on the milder side of predatory.

Don’t believe me? Consider any of the thousands of payday loan (aka paycheck advance, check cashing, etc) places that charge a $20 fee on a $100 payday loan for 2 weeks. That’s an APR of 520%. I can already hear your rebuttal. “Yeah, but Ronny, that’s just 20 bucks, and they avoided all those overdraft fees from their bank.” You would be right if they just did it once, but that is never the case. One payday loan leads to another and another; each one larger and more expensive than the last. This is the point at which they usually talk to me because they feel completely helpless and trapped. I have never, without exception, worked with a person who had only done one payday loan.

By now it should be pretty clear that I’m not a very big fan of predatory lending. Ok, time to change gears on you a little bit.

How about this for a suggestion? Don’t get a credit card! That’s not a realistic expectation, you might say. Why not? There are scores of people that manage to have perfectly happy lives without credit cards. It can easily be done. If you have poor credit the only companies willing to offer you a credit card are those that are looking for a way to take advantage of that fact. Avoid this entirely.

How about this suggestion: only spend what you make. If you make a dollar, you can’t spend two. Working with a zero balanced budget will ensure you accomplish this. Spend every dollar on paper before the month begins and then live on that budget.

Ok, one more. If you are going through or have gone through bankruptcy change the way you handle money, permanently. Not every bankruptcy is due to poor handling of money, but most are. There are rare exceptions such as in this case; medical debt. Bankruptcy is a one of the most gut wrenching emotional experiences any one can go through; comparable only to divorce, loss of a job that you love, or even the death of a child. Use this as the motivation for changing everything about your finances.

Need some help getting started? Ask us how.

Pod Cast #2 How to Improve Your Credit Score

Andrew Hunt and Jim Collison are together again in the next installment of the Financial Tech Podcast.  In this week’s Podcast we try to expose the myths that surround the credit score industry and what it mean to you to have a high or low credit score.  Can you have a 0 for a credit score?  What is a high score?  How is it figured out?  What affects your score?  How long does a late payment say on your report?  How do I find out what is on my report and what is the best way to get it?  Should I pay for it?  How do I improve my score?  How much should I carry as a balance on my credit card?  If I have bad credit, how do I improve it?

Andrew also talks about the best way to borrow money.  Who has the best rates?  What do I look for in a lender?  How do I get the best mortgage loan?  We cover these questions and much more.  It’s an information packed 30 minutes.  You won’t want to miss this!

The Car Dealership Moment

There was an 18 year old kid sitting in a car dealership anxiously waiting to find out if the car he wanted was going to be his. Everything hinged on the finance manager giving the final approval for the dealer financing needed to close the deal. And then it happened – Denied. My heart sank and I immediately experienced all of the emotion that comes with rejection. Anger, embarrassment, frustration, and resolve.

There are certain moments in your life that when you look back you realize it was a pivotal, life changing experience. I will never forget walking out of the dealership and saying to myself, “That will never happen again, I will never subject myself to that kind of uncertainty and pain when it comes to personal finance.” That was the day I embarked on my journey.

"Not until the pain of the same is greater than the pain of change will you embrace change." – Dave Ramsey

Guys, I was really lucky. I got to experience financial distress from a young age and I was fortunate enough to realize that it did not have to be that way. I realized that I didn’t want to stay the same any more and at a very young age I started the process of digging out of that hole. Have I arrived yet? NO WAY! I am still in process, but I am in a way better place than I was at 18 sitting in the car dealers office.

I got extreme about changing my finances.

I read every piece of personal finance literature I could get my hands on. I went to school for accounting, then graduate school for finance, and then professional education for financial planning – I still feel like I have more to learn! I surrounded myself with people that would motivate me at work and in my social life. But the most important thing I did, above all else, is I chose to talk about it.

A funny thing happens when you start talking about things you struggle with – you start to own it. All of a sudden things that were once a private struggle that you could cover up with some well placed accessories are now out in the open. People want to know how things are going and how your journey is progressing. It’s a funny thing really – the more you talk about it more the more you are committed to doing something. In fact I talked about it so much that I developed an intrinsic duty to do something more.

I have good news and it is my responsibility to share it.

You do not have to lay awake at night thinking about the bills you have to pay. You do not have to carry thousands of dollars on your credit card each month. You can retire with dignity. You can change the financial future of your children. But it does take a moment in time where you choose to change. You must have a “car dealership moment”.

Student Loans On the Mind

Life is expensive, it seems like just yesterday gas was $0.80 a gallon and a ticket to the movies was $4.00. I recently heard that gas could rise to more than $4.50 a gallon this summer and I recently paid $9 to see a movie! There is no doubt that things just cost more and more.

I recently finished up my masters degree – so naturally I have college costs on the mind. When I started at the university a parking pass was $75 for the year (which I thought was outrageous). By the time I graduated with my MBA the same parking pass was going for $275 per year.

Want to see a parent sweat? Talk about paying for college!

With tax time and the FAFSA upon us, I thought I would take a moment to talk about the options out there to pay for college. So here is a brief overview of the options:

1. Federal Pell Grant

• Need based grant which is dependant on the Expected Family Contribution
• Only for students that have not earned a bachelors degree

2. Stafford Loan

• These are student loans
• Primary type of financial aid provided by the Department of Education
• There are two types: Subsidized and Unsubsidized
• Subsidized loan: the interest is paid by the government while the student is in school. These are need based loans.
• Unsubsidized loan: interest is accrued as soon as the funds are disbursed. These are not need based loans.

3. Parent Loans for Undergraduate Students (PLUS)

• Loans used for parents to pay for their children’s studies.
• These loans are not need based and are not subsidized

4. Federal Perkins Loan Program

• Need based loan program for students with very low Expected Family Contributions.

Those are the options out there from the Department of Education. But of course there are several other good options including:

• Scholarships
• Grants
• Work Study
• Part Time Employment
• Private Student Loans

Here is the deal.

Many parents start having heart palpitations when they think about the idea of perhaps not paying for the entire bill on their child’s behalf. I get it – you love little Susie or Jimmy so much that you want to provide every hand-up possible. But let me give it to you this way; which would you rather? Pay for your child to have a great college experience with all the bells and whistles while taking on a load of debt, draining your savings, and pushing you to financial strain.

OR

Put the responsibility back on to your child. Let them take on the financial responsibility of tuition, living on their own, socializing, and experiencing grown-up life.

In simple terms your child has the rest of their life after college to pay back the student loans they took out. You only have the next 20 to 30 years to prepare for retirement. If you choose to finance your child’s college at the detriment of saving for retirement you better start praying that they get a sweet job – because odds are that you will be living with them when you want to retire.

My parents chose the second option – not because they wanted to but because they had to.

I took college more seriously! I suddenly had to learn to evaluate wants versus needs, I learned return on investment in a hurry, and I had to work full time jobs all the way through undergrad and graduate school. And you know what? I am not a very unique case!! I personally know dozens of colleagues who did the same thing.

When you start the process of investigating paying for college everything you see will bombard you with the idea that kids should only be responsible for studying. Trust me – your child can handle some responsibility. The kids who have to work hard to go to school end up being academically superior, they have actual work experience, and they don't end up coming back home to live with you after graduation.

This is obviously a topic that I am passionate about. I have been there, I know how scary and overwhelming it can be. I am a resource to you. Feel free to ask questions, bounce ideas or simply just lament about how much it costs – I get it.