In a recent post I reported that the Frugal family was nearly debt free. Well, we’ve crossed that pinnacle point, and are now enjoying life after debt. A comment from that post, and my initial experiences, have me wondering if life really is any easier after crossing over from being in debt to enjoying a life without it.

The first thing we did after reaching debt freedom was realign our financial goals. The first, of course, was to secure a fully-funded emergency fund, one that represented about six months of expenses. Admittedly, it was tough to keep up the same intensity towards saving money as we had for paying off debt. That brings me back to the thought-provoking comment left by Rob from PassionSaving.com. Here’s a portion of that comment that struck me:

If your experience is like mine, it won’t be all smooth sailing from this point forward. I say this not to be discouraging, but to point out what might be a basic reality of human life — it is a journey of ups and downs no matter how skilled one becomes at handling one’s money issues.

What I believe today is that accomplishing a big money goal like paying off one’s debt does not so much solve all your problems as open you up to a higher class of problems. The old problems truly are solved. But solving them provokes you into taking on new adventures, which lead to new problems. You will continue to find yourself frustrated and stuck and in pain and in fear in days to come.

My initial reaction? Yeah right! What could possibly be any more painful, financially, than going through the motions of paying off debt? What money struggles could we face that are even close to the struggles faced in the past? I suspect most people still deep in debt probably had that same reaction. But as I thought more about Rob’s comment, and began to experience life after debt, I understand his point.

Yes, we no longer have to contend with debt, but that doesn’t mean more daunting financial challenges aren’t ahead. My oldest child will soon be ten years old, which apart from terrifying me as a father, also serves as a wake-up call to get her college savings in order. Because we spent so many years toiling with debt and trying to get on solid footing, her college savings have suffered. The good news? Without debt we can afford larger contributions to her 529 plan, which should help us make up ground.

It’s a similar story for our own retirement plan. I diverted money we could have, and probably should have, used for retirement savings to pay down debt. Unfortunately, this means we missed a great opportunity to invest in our 20’s and let that money compound for a few decades. Are you reading 20-somethings? Make long-term savings a priority now!

In the final analysis, I would have to admit that yes, life is easier after debt. Paydays are now an exciting event because it means making more contributions to savings, rather than distributing most of your income to credit card and auto finance companies. But life after debt is not without challenges. And those challenges can conjure up the familiar fears and anxiety felt when looking at a pile of debt.

How will I even save enough to retire? How much will my kids need for college? Will I ever be able to save in taxable investments to chart a course to early retirement? I’ll approach these new challenges the same way I approached, and overcame, the ones related to debt. We’ll tackle them head on, and remain disciplined through the same frugal approach we take towards nearly all of life’s ups and downs.

There have been few more controversial credit card practices than the one known as Universal Default. With the arrival of the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, it is soon expected to be a thing of the past.

The elimination of universal default is one of the most important provisions of the sweeping federal legislation, signed in May and going into effect in stages through next August, that is expected to change the face of the credit industry, probably including ways that we do not yet expect.

What Is Universal Default?

Universal default provisions, often buried in credit card contract gobbledygook, have allowed the credit card companies to charge cardholders more interest for late payments that had nothing to do with that specific account. Simply put, this common provision has allowed the credit card companies to increase the interest rate when a consumer fails to make a payment on another unrelated account, be it another credit card account or some other type of credit account. Like a phone bill. Or a water bill.

The CARD Act would limit increases in interest rates to “a specific, material violation of the card agreement by the issuer,” according to a Senate Committee report on the bill. It also requires credit issuers to lower penalty rates after six months if the cardholder meets his obligations.

The dollar amounts involved in Universal Default can be significant. The finance website The Motley Fool calculated that an $8,000 balance could see an increase of $1,200 per year with an interest rate rise of 15 to 30 percent. If you are on the border of being able or not being able to pay your credit card bills, the default provision can make the difference, particularly when compounded over several cards.

Advocates of the universal default provisions would say that they are accepting the reality of a consumer’s overall credit profile. If a person fails to make a payment on another account, it could indicate that they will have a more difficult time making a payment on the subject credit card account when the time comes. Therefore the increase in interest rates can discourage further borrowing that cannot be met with payment. In addition, it keeps more reliable cardholders from having to pick up as much of the tab if in fact that person eventually defaults on the balance.

Critics of Universal Default, however, point out that having multiple creditors simultaneously raising the interest rates and charging the consumer more can create a credit card death spiral that would not have existed without the universal default provisions. In addition, they have questioned the fairness of altering a contract when the contract has not been violated. It is perfectly reasonable to think that a person can miss a payment on one card for a variety of reasons and still make the regular payments on another.

Is Universal Default really dead, or will credit card companies figure out other ways to accomplish the same goals? Only time will tell.

In what could ultimately be a game-changer in the credit card industry, it appears credit card companies are considering charging customers a new sort of annual fee – for paying off your balance each month. The information is coming slow, but I did find a good article by USA Today, Latest Bank Fee is for Paying Off Credit Card On Time Every Month, that runs down a few of the cards and their new tactics.

Credit card companies, and their defenders, will of course point to the new Credit CARD Act, which will limit revenue opportunities for credit card companies. However, in my mind, this is yet another customer-losing reaction to the impending legislation. You can blame the law of unintended consequences and thank the government, or you can blame the credit card issuers and close your accounts.

In the past, any time I’ve mentioned closing all my credit cards and living on cash, I get dozens of comments extolling the benefits of using a credit card. There are reward programs, and added consumer protection policies, and of course the convenience factor. To sell their position, fans of credit cards always pointed out that you could simply pay off the balance every month to avoid interest and fees. What if that isn’t true in the very near future? Does that change their opinion? Does it change yours?

Just when I start to get comfortable using my one remaining credit card (I use it to run through gas and utility payments and pay it off at the end of the month), news like this comes out and makes me skeptical of credit card companies all over again.

At what point do we just make ourselves immune to the whims of bank CEOs and government officials and say to heck with credit cards? Just shred ‘em! Well, I am getting pretty close to that point. If the issuer of my last card decides to play these fee games I’ll take a pair of sharp shears to it and live on cash. Come to think of it, I doubt I’d miss them.

Melissa writes in with the following question about closing credit cards:

I have an old credit card account where my charging privileges were revoked because I was having trouble making my payments.  I have since then paid off the card and it is at a zero balance.  Do I now close the account?  Would it help my credit more if I left it open?  I am trying to rebuild after years of bad credit decisions.

Deciding to close a credit card or leave it open is a tough decision. Unfortunately, it sounds like the credit card issuer beat you to the punch. Chances are they closed your account due to past due activity, which is a major blow to your credit score because it reflects that the account was closed by the issuer, rather than by you, voluntarily.

Now that the card is paid off, you might try contacting the issuer to ask if they can update the account to reflect it was closed voluntarily. They probably won’t change the account’s status, but it’s worth asking. The very fact you paid it off will help heal your credit score, as will time since the last activity (negative information should drop off your report in seven years after the last activity).

If in fact your account still reflects “Open” on your credit card, you may want to consider leaving it open to help rebuild your credit. To do so, charge something you buy every single month, and don’t have a lot of discretion in the amount spent (gasoline, or a utility bill, comes to mind). When your credit card bill arrives, pay it off promptly. This continued, responsible use of credit will help boost your credit score over time.

There is, of course, another side to this argument. Some would argue to close it and leave it closed. Don’t play with snakes. I used to feel this way myself, but since turning around my own finances over the course of a couple years, I’m now empowered by the fact that I can buy something on my credit card for purchase protections (particularly when shopping online), and simply pay it off in full later in the month. I’m in control now; not the credit card.

It sounds like you’ve made a lot of progress in your own financial turnaround, and I applaud you. Whatever you decide to do, don’t repeat those same mistakes from the past that led to problems paying your bill. The road back to responsible credit use can be a slippery slope, so if you feel yourself start to slip, put that credit card away and go back to spending cash.

When I worked in a credit card customer service call center a decade ago I bet I took a dozen calls a day related to overlimit fees being charged to cardholders’ accounts. I was of course trained to toe the company line, explaining that fees were well documented in our terms and disclosures, and by using the card customers agreed to those terms. Inside I always felt a little dirty.

Ultimately, I decided to leave the industry altogether for a variety of reasons, not just because the companies I represented charged fees. But one that always got me was the overlimit fee. To me, overlimit fees were an interesting example of human behavior mixed with strange business practices.

On the surface, you would think a $39 fee would be enough of a deterrent to keep people from charging above their credit line. Unfortunately, that is not the case, but it is not the whole story either. Credit card companies are nice enough to include an “authorization pad” (usually a few hundred dollars) so charges in excess of your available credit may be approved by merchants. Nice service, huh?

It would be a nice service if they didn’t follow up their generosity with an overlimit fee. Theoretically, a $10 purchase that barely puts you over the credit limit could cost you $49 thanks to the additional fee.

Why don’t credit cards decline transactions in excess of the available credit? Their answer (spin) is usually something like, “We are saving customers the embarrassment of being declined.” Gee thanks. And what a bargain! The real truth is they allow the charge to go through so they can charge overlimit fees.

That practice may not be happening for long though. As this Consumerist post points out, Amex and Discover have already ditched overlimit fees. Before you feel too sorry for Amex or Discover (yeah right), realize that this loss of income will be made up elsewhere – probably by reducing reward program benefits, and increasing rates.

This move to get rid of overlimit fees can be credited mostly to the CARD Act passed in the spring. When enacted, the CARD Act will require issuers to “opt in” to the feature of being able to exceed their credit limit, and be subject to a fee. That involves a lot of maintenance to cardholders’ accounts, so Amex and Discover decided it wasn’t worth the hassle. I’d expect other issuers to follow suit, except the subprime credit card issuers who would tack on a fee for being charged a fee if they could.

Any worries over credit card overlimit fees can be ignored if you simply decide not to spend on a credit card, particularly one that is nearing its credit limit. Charging in excess of your credit limit is the financial equivalent of spending more than is available in your checking account, and both actions may result in nasty fees.

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.

Yesterday, I had an opportunity to do something I very rarely do – spend time with my son during the day.  While his sister was in school, and the rest of the world was out working, we snuck away to a small lake and brightened the day for a few ducks.  Before leaving for home we rounded up slices of bread that were past their prime, but not yet molded.  We spent an hour or so tossing small chunks of bread to a group of ducks, including a mama duck and her babies.

It was a great timeout from the daily grind, and a nice reminder for me about what is really important in this world.  My son didn’t care that we drove to the lake in a twenty year-old truck, or that the lake was surrounded by homes four times the value of our home, or that we passed up a dozen restaurants on the way home to enjoy peanut butter and jelly sandwiches.   All he remembers is that his dad took a couple hours out of a busy schedule to enjoy some one-on-one time to feed those ducks.

Fab Five

The Secrets of Financial Freedom: An Interview with the Millionaire Next Door.  I find stories like this so compelling because they serve as examples that people really can reject our consumer debt-driven society and experience financial freedom on their own terms.  (@ Get Rich Slowly)

How to Prepare for a Power Outage – Without a Generator.  Severe weather is starting to crop up here in the south (there is a brilliant lightning storm occurring as I type this), and it won’t be long before hurricane season.  That means we’ll probably have to spend some time in the dark in the not-s0-distant future.  Take note of these tips for making life without power a little more bearable. (@ Five Cent Nickel)

How Much Do You Need to Save for Early Retirement? I’ve been pondering this very question here lately.  And on a related topic, I’ve been wondering if I should do more investing outside of retirement accounts so that I can access the money before the IRS says I’ve hit “retirement age.”  (@ Million Dollar Journey)

No Credit Cards – Here’s Why.  A very convincing argument against using credit cards.  I know this argument will never go away, but the more antics credit cards pull the less I want to use their product. (@ Gather Little By Little)

Ways To Save On Mother’s Day.  I urge anyone with a fracture in the relationship with their mom to take this Mother’s Day as an opportunity to reach out and make the first move towards healing that relationship.  After nearly losing my mom this past year, I am even more appreciative of the special relationship we enjoy to this day.  Happy Mother’s Day to all the moms out there! @ Free From Broke)

Best of the Rest

• Cheap Housing Option: Buy a Mobile Home
• Announcing the New Money Tips Network
• Financial Confession – I Don’t Budget
• Save Money on Cell Phones
• When Things Go Right
• An Auction Experience to Remember
• How to Save Money on Life Insurance

Site of the Week

No site of the week this week because honestly, I just haven’t had much time to look around.  Perhaps you could share one of your favorites in the comments below.