In response to a recent article on credit cards closing accounts, a Frugal Dad reader (we’ll call him John) submitted the following scenario and question.  I told him I’d answer his question here with his permission, and solicit feedback from fellow readers who may have more experience with similar situations and be able to add to my response.  Here are the pertinent details of John’s story:

I started my own business 3 years ago.  In that process I got a $15k debt on one credit card.  Since that time I have hardly used it–maybe $500-600 tops.  I make $400-500 or more payments every month.  I have never missed one.  I have been late a few times here recently due to them moving the due date around, and also due to decreased income in the economic crunch. They have raised my rates to 29%.  I have had this card 7 years and been a good customer.  I have never been even 5 days late but they tell me that they can move my due date around by 5 days which they do often now.

I have asked nicely, begged, pleaded, and threatened bankruptcy to them to try to reduce the rate to a reasonable level so I can try to pay it off.  I have made like zero headway in 3 years.

The only option they give me is to cancel the card and they put me on a payment plan which would drop the interest to 4.75% and have no due date as long as I made a payment each month.  Also, if I make the minimum they said it will be paid off in 5 years and I can pay it off sooner with no penalty.  I want all that in writing because I don’t trust them.  Do you know if this would negatively affect my credit score?

John, a couple different things in play here.  I’ll try to address them at a high level and then turn things over for comments.  First of all, kudos to your for starting up your own business.  The entrepreneurial spirit and industriousness of Americans is what built this country, and you had guts for giving it a go.  Having said that, accumulating $15k in credit card debt trying to float your business is not sustainable.  Not much you can do about it now, but I hope others reading this will think twice about funding a business venture on their credit cards.

You mention being late “a few times here recently,” and I suspect that is what triggered the default terms now in effect on your credit card.  Unfortunately, the card issuer was probably within their rights to increase your rate according to the terms you agreed to when you began using the card.  That doesn’t take away from the fact I think charging a 30% interest is borderline usury!

From the sounds of it, the card issuer has offered you a work-out arrangement whereby you surrender your charging privileges in exchange for a lower rate on the remaining balance, and a more manageable minimum payment.  To answer your question, yes, this will probably negatively your credit score, but no more so than being late several times.  I suspect the damage to your FICO score is already done, and if that is the case, having your card canceled by the issuer isn’t going to matter much.

The terms you have described seem reasonable, but your natural instinct to be distrustful is good.  Get everything in writing before agreeing to do anything–especially closing your account! In the near term, I would talk with a local bank or credit union to see if they would be willing to loan you the amount to pay off the card and close it on your own.  Unless you have some collateral to put up, or your FICO score has not been damaged as I suspect, you might not be able to qualify for a signature/personal loan for this purposes.

Another thing to check out is social lending via a provider such as Lending Club.  You may find more favorable rates, and a more forgiving group of lenders (many of whom are entrepreneurs themselves) here than you would at a traditional bank.

If you go the work-out route with the credit issuer, do not allow it to drag on for five years, particularly since there is no early prepayment penalties.  Investigate strategies for getting out of debt and do it with urgency!  I hope this all works out well for you.  Thanks for sharing your story here with us.

Ask the Readers:  Any additional advice you can provide John?

My W-2 arrived with my paycheck today and I was reminded that once again, it is tax time.  I’ll probably run the numbers through TurboTax in a couple weeks, see what the damage is, and then wait until the last possible minute to pay my taxes for 2008.  Fortunately, I made a little extra money this year.  Unfortunately, I think I’m going to owe quite a bit for it (even a little more than I estimated).

The Roundup

Buy American.  I like Steve’s take here, and share his sentiments on the loss of American manufacturing capacity.  Unless you happen to live in one of the few remaining industrial cores in the country, I suspect your town looks a little like mine.  A drive from one end of the main road to the other yields not a single business that manufactures anything.  I hope that changes one day.

How To Work Full Time While You’re In College.  Lots of people are down on the idea of working through college, but I managed to do it with a family and appreciated my grades much more!

15 Uses for Coffee Filters.  Some great ideas here!  We bought a pack of filters a while back, but aren’t big coffee drinkers.  Now we can put the remaining filters to use.

Slow Economy Has More People Learning How To Cook.  One of the things we’ve been doing more often is finding crock-pot recipes.  It is easy to toss the ingredients into a crock-pot in the morning and have a meal waiting in the afternoon.

How I Look at Economic News: Beyond the Talking Heads.  Whether or not the recession is as bad as it is made out to be in the media probably depends on where you live.  Still, I can’t help but think much of this negative news drum was beaten in the name of a creating an “October surprise.” Unfortunately, members of both parties bought into it, and their knee-jerk reaction of doling out billions in bailouts has only worsened our financial position.

2008 Federal Tax Brackets Explained.  The author asks, “Why does it have to be so complex?”  It’s a good question, and one I don’t know the answer to.  I wish we could completely overhaul the tax system in this country, moving to a Fair Tax or similar based on taxing consumption rather than income.

How Long Do We Really Need to Keep Those Papers?  While we are on the subject of taxes and financial organization, this article provides some guidelines on how long to retain paperwork.

Save Money on Airfare.  Traveling soon?  If so, Lazy has some great tips for saving on airfare.

Online Savings Account Interest Rates History.  Looking back a year or so reveals a very depressing trend of rate reductions at once high-yield online savings account.  Since the time I signed up, my ING Direct Orange Savings account has dropped from 5.05% APY to 2.40% APY.

6 Reasons Why Recessions Are a Good Thing.  Hard to argue with these benefits of a recession.  Just don’t tell them to the guy that just lost his job. Assuming your employment is relatively stable, and you have your financial house in order, there are some incredible deals out there now.

On an average day I read about a dozen blogs that have little to nothing to do with frugality.  Several of them discuss saving money occasionally, but most of them are all about making more money, or entrepreneurship, or small business issues, etc.  In fact, many of the books I read are on these same subjects.  You might be surprised to learn I even read a couple blogs that don’t like the idea of living frugal at all.  Blasphemous, I know!

The reason I read these books and blogs is because I believe the path to ultimate success is a combination of improving your income while watching your expenses. It is increasing the gap between what you earn each month and what you spend each month that leads to debt reduction and increased savings. For too much of my life those two amount have been equal (and some of that time the expenditures ran even higher!).

While I am known as the “frugal dad,” I also like to think of myself as the “side hustle dad” because I love the idea of finding creative ways to improve my income.  Some of them are related to my 8-5 job; most are not.

One of my daily reads is written by Ramit Sethi of IWillTeachYouToBeRich.com.  Ramit is an admitted frugal-hater, writing in one post, “I hate frugality and all the frugality sites that waste my time focusing on saving money on frozen orange juice and rice cakes so I can save $1 per week.”  Fortunately, I don’t think Ramit hates me because I’ve never written about saving money on rice cakes.  But if I did, I would point out that generic rice cakes sold in bulk quantities through wholesale clubs…I digress.

Ramit does have a point.  The risk many of us frugal living followers take is that we get too caught up in the small stuff. Yes, I know we are supposed to sweat it, but perhaps we could make bigger strides towards improving our finances if we thought bigger.  Instead of spending our life energy saving a few dollars on homemade laundry detergent (yes, I’m going there again), maybe we should spend that time finding creative ways to make an extra $100 per month, which could add $1,200 a year to our bottom line.

Instead of driving all over town to find the cheapest price on gasoline, or shopping at three different stores to save $7 using coupons, perhaps we should value our time and look for ways to spend it more wisely.  After all, we could use the two or three hours a week spent hunting bargains, rinsing plastic bags, and making homemade cleaners to attend a class at a local college to improve our job skills, or to acquire a skill that we could use to start a side hustle.

Of course, many of us do these things because we are frugal by nature.  We simply do not like to waste things, and we refuse to pay more for something when there is a quality alternative available.  I get that, because I am the same way.  However, I am becoming more and more mindful of how I am spending my time, and making sure I spend it in just as frugal a manner as I spend my money.

This is a guest post by MoneyNing, a personal finance blog that everyone (at least when forced to) agrees is one of the best out there at helping people save and increase wealth.  You can subscribe to his RSS feed or get email updates of his posts, where articles such as 50 Ways to Budget Travel and Save Money on Vacations will be delivered to you.

The details of our decisions can have a significant impact on our finances and wealth.  It is how individuals managed to save while still living a comfortable lifestyle.  It is a major reason why living below our means doesn’t mean depriving ourselves of what we want.  It is also how I can tell you that giving up coffee is not an option when we are discussing about being frugal.

Let’s be honest.  The “$4 coffee per day adding up” example has been thrown around so often that it’s improved my reading speed as I start skipping paragraphs.  While the math is pretty clear, it fails to address that people like me actually like coffee and would give up many material things before I would stop drinking.

It was frustrating at first because I wondered: Is there really no way to be frugal without giving up coffee?

Then one day, I got lucky and let a salesperson sell me on a coffee machine.  That day should be marked “my frugal tipping point” because that was the day I discovered the power of alternatives.

From then on, I found tons of other ways to save my family money without ever giving up anything.  Here are a few highlights:

• TV – Our cable bill used to be $50 a month when we decided save money by cutting it. No TV? Oh we still get TV. Many shows are on the Internet nowadays, and we can order Netflix if we really wanted to. We just found $50 hard to justify when renting a movie is only $1 at Redbox, especially when we can still get TV by buying an HDTV antenna.
• Groceries – Trying out different brands is actually quite fun. I also learned that while I love ice-cream, the mental desire is for ice-cream and not just Hagen Daaz ice-cream. Another habit we developed is to let the coupons and specials decide what our meal would be. Most of the time, we are undecided anyway so why not let those flyers help us? If chicken was on special, let’s have Parmesan chicken tonight. If eggs were for sale, omelet for breakfast sounds great.
• Clothes – My wife still shops, but she likes to go to places like TJ Maxx or Nordstorm Rack where brand name items are sold at significant discounts. Cost of a pair of running pants retailing at $50 she bought recently? $7.99.
• Eating Out – We still ate out on occasion, but we started skipping the deserts and drinks. If we really wanted something sweet, we went to a different place like an ice-cream parlor instead. It actually turned out more enjoyable since we increased variety.
• Vacations – Most people are talking about not going to vacation at all this year, but instead of that overseas trip, why not go to somewhere domestic instead? If Las Vegas is too expensive, is driving somewhere close going to suck? If anything, it’s probably some place you’ve never been to which should be even more exciting!

Don’t let anyone tell you that a frugal life has to be about doing without.  You can still enjoy everything you want to do, if only you look into the details.

Short post today as I’m home sick with a nasty bug.  Since I find myself at home on a workday, it reminded me of a great post I read at Bible Money Matters just yesterday on the subject of retirement.  Pete specifically asks, “Do You Ever Plan To Fully Retire?”

It’s an interesting question for a couple reasons.  “Retirement” means different things to different people, and that idea can change over time.  When I was a kid, retirement meant sitting on a lake fishing several hours a day, and basically being able to do whatever you wanted, whenever you wanted.  I suppose that is still true, to a certain extent.

Today my definition of “retirement” is centered more around continuing to find ways to contribute to causes you believe in, regardless of compensation.  In other words, I look forward to “retiring” from working for money so that I can begin working for something I believe in.  Not that I don’t believe in the mission associated with my current job, but let’s face it, most of us are not lucky enough to be able to wake up every single morning totally inspired by our 8-5 jobs.

At this point I’d like to turn things over to readers, and offer up the following question for discussion in the comments below.  What does retirement mean to you?

Here lately I find myself often reflecting on the current status of our economy, and wondering when and how things will shake out.  My 401(k) has been demolished.  Family member’s 401(k)s have been demolished, even those in target retirement funds that should have been comprised of more conservative options based on their upcoming target retirement date.

The value of our home has decreased, as it has for our neighbors, and for most around the country.  After countless scandals and bailouts, banks are no longer the trusted institutions they once were.  Inflationary fears drive investors to the market in an effort to stay ahead of the curve, but are those fears oversold.  Can we beat inflation (which is really currency deflation) by refusing to inflate our lifestyles and living frugally?  And so I wonder, has everything we’ve been taught to believe about finances just a big lie?

Markets Always Go Up, Given Enough Time

My grandfather is a product of the Depression Era.  He lived the ultimate market meltdown, and to this day believes investing in the market is only marginally better than gambling.  After all, most of us pick stocks, or a basket of stocks, from companies we know little about.  We know nothing of their day-to-day operations, their leadership team, etc.  Warren Buffet has made a mint buying what he knows, but what about the rest of us.

Last week I received a revised and updated copy of my all-time favorite personal finance book, Your Money or Your Life.  The timing could not have been better.  While much of the information is the same, co-author Vicki Robin has gone to great lengths to provide updated statistics, relevant figures for today’s market conditions, and updated stories throughout the book.  I am thoroughly enjoying reading the book through again, with more of an open mind than I did the first couple times.

The first time I read through Your Money or Your Life, and hit the section on savings as working capital, I thought it was a preposterous idea to invest in things like U.S. Treasure Bonds and CDs. After all, I was young, and had been taught since I was old enough to spell “stock” that those were the path to building great wealth.  Maybe; maybe not.

When the authors of Your Money or Your Life “retired” the yield on 30-year U.S. Treasury Bonds were hovering around 6%. Today they hover around 3%, but are trending up.  Still, that is the difference in $1,250 per month and $2,500 per month in interest on a $500,000 portfolio of bonds.  That’s pretty significant, and proof that any investment has environmental risks.  If I had half a million dollars, and rates were back up to 6%, I could live on $2,500 a month assuming I had no debt (including a mortgage).  It’s getting that $500,000 saved that is the hard part.

So, by diligently socking away money in my 401(k) and Roth IRA, only to watch most of my contributions melt away in a matter of months, have I been going about this all wrong?  Instead, should we be simply putting money in high-yield savings accounts, bonds, and CDs, and prepare to live off the interest?

I suppose that answer depends on a variety of factors, including our risk tolerance, age, and other individual situations.  There are a lot of people sitting on some huge losses, and if we sold now we would realize them, and miss out on a market rebound.  I can’t help but wonder how many will get out when and if that rebound occurs and they are made whole again.  That type of selling will probably work to stymie a future bull market.

After watching these wild market swings I’m starting to wonder if I really have the stomach for it.  Maybe I’ll join those described in Your Money or Your Life, and my grandfather, and devise a very simple plan for financial independence.

In just the last week, two readers emailed in with similar situations. They are beginning to set up their debt snowball plan, and both have large student loans (large, as in excess of $50,000, more than half of their annual salaries).  Fortunately, both readers took advantage of consolidation opportunities and have locked in very low rates on their student loans.  Still, they are concerned about owing so much money on school loans in addition to other smaller debts.

We basically subscribe to the Dave Ramsey “baby steps” method of managing our finances, though we’ve tweaked his plan a bit over time to fit out needs.  According to Ramsey, things like large, second mortgages should go to Baby Step 6, “Pay Off Home Early,” which comes after paying off other debts, setting up an emergency fund, and funding retirement and college savings.  I believe this is also a good spot to move large student loan debts.

Both readers indicated it would take “years” to pay off their student loans.  If they could pay off the student loan debt, and all other debts within 12-18 months I might offer different advice, telling them to stick it out to become debt free before jumping on the remaining baby steps.  However, putting other goals on hold for years could be detrimental to their financial health, particularly the missed opportunity of compounding growth for things like retirement and college savings.

My advice is to continue to pay minimum payments on student loan debt until the following three things are in place:

• All other non-mortgage debts have been paid.
• A solid emergency fund of six months of living expenses is funded.
• Contributions are being made to retirement and college savings accounts, if applicable.

At that point, I would continue to pay my mortgage payment, and begin tossing every additional penny I could scrape together towards repaying the student loan.  When it is gone, use that same intensity to pay off your mortgage early.  The entire process may take ten or fifteen years, but when you reach that point you can begin to build some serious wealth.

Please share your thoughts in the comments section, in the spirit of helping out these two fellow readers. In other words, feel free to disagree with me!