We are in the home stretch of paying off credit card debt balances. As a reward for the extra large payments we’ve been sending our credit card issuer, they have graciously offered us the opportunity to skip a payment this month. Thanks, but no thanks.

When It Might Make Sense To Skip a Payment

Several months ago when we were just starting our plan we received a similar offer from a different credit card (they’ve since been paid off and closed). At the time we had very little in savings, and the balance was comprised of a low-interest balance transfer offer. Since we were not being gouged with an awfully high interest rate, we decided to save the minimum payment to help build our beginning emergency fund.

It might also make sense to to take advantage of a skip a payment offer from your credit card issuer if you are in the middle of a crisis – medical disability, recently laid off, etc. In these cases, cash in your pocket to pay basic bills is more important than a relatively small reduction of debt made by a minimum payment.

Why I Don’t Like Skip A Payment Offers

Assuming you have the money to make your payment, and you are not in the middle of a real emergency, I recommend not taking advantage of a skip a payment offer from your credit card issuer. Here’s why. The credit card company offering to let you slide without a payment does not suspend the charging of interest that particular month. Since interest is calculated on the outstanding average daily balance on your account, not making a payment means you will pay a little more in interest.

There is also a psychological risk associated with not making a payment. This risk is similar to the one associated with conducting a balance transfer, or debt consolidation. You think you’ve made progress, but you haven’t, you’ve simply shifted your money around. In the case of skipping a payment you are taking the $50 you were going to pay towards debt and tossing it in savings, or spending it, two activities than will not likely improve your situation that dramatically.

However, using that same $50 to pay down debt means a permanent $50 reduction in the amount you owe (minus a little interest accumulation, and assuming you don’t run credit card balances back up). If you owed $700 on a credit card that would look like a 7% reduction in the amount you owe. Not bad, especially considering that money tucked away in savings would probably be earning less than 2% interest a year.

The bottom line is to keep the right perspective with any offer from your credit card company: skepticism. Credit card issuers are in business to make money. It’s certainly not illegal, or immoral to turn a profit, but remember that every offer, every decision they make, has been run through numerous profitibality models, and risk assessments. They are not extending an offer to skip a payment, or increase your credit line, to help you.

Just hearing the words “teen credit cards” creates a visceral reaction in many people, one way or the other. It sparks debate faster than the classic question of whether or not to pay kids an allowance. I have a strong opinion on the subject (imagine that), and I’ll share it with you below. But I’m really interested to get your take on the issue of credit cards for teens.

Should You Give Your Teenager a Credit Card?

My short answer is no. I do not think teens should have a credit card, but not because they cannot be trusted, or because it encourages the use of plastic. I don’t think anyone should have a credit card if they do not have the means to pay it back themselves. Now if I could be convinced that my kids earned a steady income of $300 a month at their part time job and their limit would never increase beyond $300, then theoretically they would not accumulate debt. We all know that is not the way it works.

Credit cards companies give thousands of dollars in available credit to college students every day, even those with no income and no ability to repay. I know because I signed up for one my freshman year in school, and the first thing I charged was a Sony PlayStation video game system. After all, I could pay it back over the next couple months thanks to my part time job.

Over those next couple months I had two small emergencies that wiped out my part time earnings, and a third that I had to charge on the new credit card. So began the minimum payment game I would play for years to come.

Proponents of teen credit cards point out that allowing kids to have a credit card will help them learn to use credit responsibly as an adult. Good thing those same people don’t feel the same way about alcohol.

No, there are some things that young teenagers should not have to contend with, and one of those is the pull of available credit. Using cash hurts, and the lack of transactional pain missing when spending with a credit card will warp their spending habits. In fact, it has been shown to warp even adult’s spending habits – you just simply tend to spend more with plastic than with cash.

But It Will Help Their Credit History!

Maybe, but there will be opportunities to prove a history of creditworthiness later when they are finished with school, have their own jobs and are ready to buy a home. I tend to believe credit scores are overrated. Sure, some employers are now using them to screen employees, and other companies are using them to set rates for insurance, etc, but for the most part there is little incentive for a teenager to have an 800 FICO score. What can they do with it besides get into more debt?

As the Readers: What do you think about credit cards for teenagers? Bad idea, or good introduction to credit? Feel free to agree or disagree in the comments below.

Last weekend my wife and I took the kids to a local department store for a little back-to-school shopping a couple months early. I recently cashed in some very old credit card rewards from a card we paid off recently in exchange for a gift card to a well-known department store. Combined with a 30% store sales flier we figured we could snag a couple deals before school starts at the end of summer.

I consider myself a fairly patient dad when it comes to shopping. During most shopping excursions my son and I take up our post outside the girl’s dressing room and hold “buy” and “put back” merchandise as my wife scurries back and forth from the dressing room to the clothing racks.

During this particular visit I noticed a garbled announcement over the store’s intercom system every few minutes followed by a rowdy cheer from store employees. By the fourth of fifth time I was curious enough (and sufficiently annoyed by the irrational exuberance) to ask a nearby employee what the celebration was about. “We just signed up another credit card,” she replied enthusiastically. My sarcastic reply was, “And why are we celebrating?” She scowled and went back to folding new shirts to put on the store shelves.

After what seemed like half a day my wife and daughter emerged from the dressing room with a reasonable number of new outfits. We put back those that didn’t fit, or were a little too expensive, and made our way to the register. “Attention associates, Julie just signed up her sixth credit card. Only four more and Julie wins the referral contest!” The store immediately erupted with cheers from store associates. Had I entered the debt Twilight Zone or something?

“Would you like to sign up for a (store name shall remain anonymous to protect the not-so-innocent) card today?” No thanks, I replied. “But sir, you can save 10% off today’s purchases in addition to the sales price.” Again, I declined, and this time added, “I don’t shop with credit cards any more, and we’re paying off our remaining card.”

At this point I could see her preparing her final pitch to add another notch in her credit card sign up belt. It would probably sound something like, “If you are approved for the card you can save 10% and then pay if off when the bill arrives.” Sounds logical, I know. However, she failed to tell me if I was just one day late her department store would charge me 24.99% interest for the privilege of using their store card. No thanks.

While I am not totally “anti-credit card,” I’ve grown less and less fond of them over the last few months. It seems like every day there is a new story out about a credit card issuer raising interest rates, lowering credit limits, doubling minimum payment amounts, and other sleazy tactics. I’ve even experienced some of this myself.

Card issuer’s defense is that the impending credit card reform legislation will eat into their profits, so they are merely reacting months in advance to offset those losses. From a profit/loss perspective I get that, but I still believe a credit card company, or store, that wants to retain customers, should show them the same loyalty they ask for in return.

When I was younger I used to work at a variety of retail stores and had to push credit cards to customers. I didn’t particularly enjoy it, and I would despise it today. There is nothing more annoying than a store employee greeting customers at the door with a clipboard filled with credit card applications. I respect stores rights to market their card, but a simple stack of applications at the register would suffice.

Today’s “Ask the Reader” question comes from Sherry.  She writes:

How does one go about canceling unwanted credit cards?  You know, those credit cards you get so you can get a 10% discount on your 1st purchase…I think I have a 2″ stack of unwanted, unused credit cards.

We recently refinanced our house and superior credit (no reason to worry about our credit) and no debt…so how do I get rid of these cards?

Sherry, closing credit cards can be a little bit tricky in that it does affect your credit score, but probably not enough to be greatly concerned. Your FICO score is calculated by a number of factors, and two of them related to your question are credit utilization ratios, and the average age of your credit history.

Your credit utilization takes into account the amount of debt you have outstanding against your total credit limits.  For instance, if you owed $3,000 on a $10,000 credit card, your credit utilization would be 30%.  It is generally accepted that you should aim to keep your utilization ratio below 30% to improve your scores.  By closing accounts you are eliminating the $10,000 credit line from that formula, and instantly increasing your credit utilization.

In your case, it’s a moot point.  You are debt free.  Having a number of open trade lines may actually be detrimental in your case as lenders may see the cards as an opportunity to accumulate future debt.  Another risk is the more open accounts you have floating around, the higher the chances of falling victim to identify theft.

The length of time your credit accounts have been on file also affects your credit score.  Closing accounts you have had in place for several years effectively lowers the average age of your credit history, and may negative affect your score.  I wouldn’t let this deter you from closing out the unwanted credit cards, because the effects on your credit will be minimal.  I suspect you’ve accumulated the cards over a number of months or years, so closing them all will likely have little net effect on credit scores.

As for the mechanics of closing out these cards, the best way to do it is in writing.  I typically call customer service and advise that I would like to close the account.  Some places will try to negotiate, or talk to you like you’re an idiot for not wanting their card.  Stay cool – be adamant that you would like the account closed, and then follow up with the same request via letter to make sure it is in fact closed.

In order to keep your credit cards to a minimum you should only apply to the best credit card offers. Some of the bigger banks offer some pretty good rewards cards that you might want to have for your daily purchases. However, if you’re looking at savings accounts, then an internet bank is usually your best bet to find good savings account rates for your cash.

Do you have any tips to add for Sherry?

Debt Consolidation Alternative for Today’s Consumer – Reduce Credit Card Debt – Debt Free 12-36mo

In the interest of consolidating the number of bills, accounts and general financial noise in our lives, my wife and I scaled back some months ago to two credit cards.  At one time we had several more opened for store accounts, gas cards, etc. I carry one of the remaining credit cards in my wallet for gas purchases only, and the other stays at home.

The credit card stored at home is our oldest account, in both our names, so we keep it open for general credit health and in case of some major emergency.  We use it a couple times a year to keep it somewhat active, usually to pay a utility, and then pay it off when the bill arrives.

Out of curiosity, I surveyed Twitter followers and of those that carried at least one credit card the average number in follower’s wallets was two – often reported as “one personal, one for business.”

While I certainly don’t miss the credit cards we’ve eliminated (nor their balances), I do miss some of the rewards programs and their perks.  Of course, these perks are dwindling as credit cards issuers pull back on bonuses in the currect economic environment.

Another aspect of carrying more than one card was the idea of having a backup.  It was a mental block, really – just an excuse to keep more than one card in my wallet.  Seriously, I couldn’t tell you more than one or two times in my entire life that my primary credit card did not work (and at least one of those times it was because I had maxed out the small limit).

Now days I carry a debit card for 90% of my purchases, and that would be a sufficient backup if my gas card failed me.  Funny how we rationalize the need to have more than one credit card.

When I worked in the credit card industry I used to talk to customers who had a card for each budget category.  Can you imagine having six cards in your wallet labeled – food, entertainment, gas, utilities, clothing, etc?  Actually, it’s not a bad idea, but who wants to keep up with six credit card bills!

So tell us, how many credit cards do you have in your wallet?  Is this number higher or lower than it was a year ago?

Stacey from familylifebydesign.com gave me a heads up last week on a new product being peddled by Discover. While I like the Discover More card for grown-ups, I am not fond of the new product aimed at teens, and here’s why.

The new Discover Current card is being sold as a debit card alternative for teenagers. Parents can load money on to the plastic via their own credit card (wonder if this counts as a cash advance), and can place limits on how much can be spent and where it can be spent, all the way down to individual merchants. All this for a $5.00 monthly fee.

According to the Discover website you can even “browse Teen Card designs that are way cooler than cash.” It makes for great marketing speak, but it made me stop and reflect back on my own years as a teenager and wonder, when did cash stop being cool? I can distinctly remember how it felt to get my first $20 bill. I thought I was rich!

As an early teen I spent a summer day at my great aunt’s house installing a mailbox and post, and doing general yard cleanup on her property. At the end of the day she gave me $20, and I felt like a million bucks! I resisted spending that $20 bill for quite a while simply because I liked seeing it in my wallet. She could have given me a piece of plastic with a fancy design on it and the feelings of excitement would have turned to, “What am I supposed to do with this?”

Thanks to years of Visa and Mastercard (and Discover) pushing their products down to our youth, and our youth watching their parents use and abuse the same products, kids know exactly what to do with plastic these days – swipe it! The problem is, they don’t see Mom and Dad opening the bills and the end of the month in tears wondering how they are going to come up with the minimum payment. It is a one-sided view, an incomplete picture into the world of credit.

No, I would rather my kids grow up thinking cash was still cool. I pay my kids allowance and commissions for extra jobs in cash, and will resist giving them plastic as long as paper currency is still a legal tender. Call me old-fashioned. I just don’t think kids are able to fully grasp the transactional differences in swiping plastic and watching that $20 leave their hand and receiving $0.70 in change back.

It hurts to spend cash. It is supposed to hurt. We are exchanging our money for some good or service. That is money we worked for, or saved for, or could spend on something in the future. Instead, we are trading it in for something we feel is of equal value today. These concepts are difficult for many adults to understand, and something I didn’t really “get” until my late twenties. Why do we expect young teenagers to get it before we did?

Some will make the argument that giving teens a product like the Discover Current card will help them learn budgeting concepts, and how to use plastic wisely. Maybe. But I’m not convinced. Besides, how can teens learn these concepts when parents have restricted purchases to certain merchants, or blocked ATM transactions, or only allow them to spend a certain amount each day.

One could make the argument that normalizing the use of plastic too early could be dangerous.  I would tend to agree with this argument. I read a great analogy once (I think it was from Trent at TheSimpleDollar.com) that compared credit cards to power tools.  Sure, they make things convenient, but they can be dangerous in untrained hands.

If my son wanted to cut a piece of wood at eight years old I wouldn’t mind helping him guide a handsaw, but I wouldn’t fire up the skill saw and hand it over to him, even though he will use it when he gets older and it is more convenient and “cool.”  I know, I know, kids aren’t going to lose any fingers over swiping a Discover Current card, but they just might grow up with bad habits that cost them their financial future.

I believe it is good for kids to go through a few cycles of earning money, blowing it all in an afternoon at the mall, and being broke until the next Friday when they get their allowance. Eventually, they just might learn not to blow all their money on “payday,” and will hold some back for the next week. But if parents artificially manage this for them using the card’s technology, how will kids ever learn to budget their money?

For now the only Discover credit card in our household will be the one I use to buy gas. When my kids are old enough to apply for their own card, and they are earning their own money, then maybe they can have one, too. But for now they will stick to cash for spending and handsaws for cutting.

Last weekend my daughter and I had a talk about credit cards after she saw me use my debit card at the store.  Here’s a sample of our exchange:

Her: “Dad, I thought you weren’t supposed to buy stuff with credit cards.”
Me: “That’s true, but that was a debit card I swiped in the store.  Debit cards take money right out of my checking account instead of borrowing money from the bank.”
Her: “Borrowing money? You mean credit cards are like a loan?”
Me: “Well, yes.  They are a loan – one that you have to pay back in a short time or you get charged interest.”

You can see what she was thinking.  Most people think of loans as something you apply for inside the bank, across the table from a neatly dressed banker. You fill out mountains of paperwork and sign your name a dozen places and then you shake hands with the banker across the desk.

Borrowing money on a credit card is much easier, and therein lies the danger. Once approved, you are free to spend right up to your credit limit (and often times beyond) without any additional scrutiny. No one asks if you can afford that item, or asks how you plan to repay the item. No one asks for collateral in case that item cannot be paid for long term. No, we simply swipe the card and go.

Maybe I could have avoided going into debt in the first place if I thought more like my daughter.  She’s right – credit cards are a loan. And in most cases, they would represent loans on very bad terms. Imagine sitting down at a bank to finance new bedroom furniture and agree to paying 24.99% interest!

So to those struggling with credit cards I offer up this bit of advice.  Shift your thinking about credit cards. Imagine every single time you use the card and sign the receipt it is the equivalent of signing a note for that amount. But banks don’t want you to see credit cards this way, which is why they go out of their way to improve the design and “convenience” of credit cards.  You didn’t honestly think they let you pick your own card design, or have it available in key-chain sizes to help you?

Banks recognize that the less their credit products look like a loan the better. So they wrap them in plastic, and cut them down to fit in your wallet (or on a keychain, see picture above), and maybe even pay the NFL to let them put the logo of your favorite team on the background.  Pretty snazzy, huh?  Well don’t be fooled.  Those things are miniature loans riding along in your back pocket, and they have the potential to wreak havoc on your financial life if not used properly.