The Amateur Financier

Happy CARD Day!  If you’re asking yourself, ‘just what the heck is Roger talking about?’, you’re in luck; in honor of CARD Day, I’ll take a few moments to go over the fun and joy of the CARD Act and how it affects you, and your credit cards, too.

The Credit Card Accountability, Responsibility, and Disclosure Act of 2009, more commonly called the CARD Act (get it?  get it?) imposes new rules on credit card companies.  The rules are designed to protect credit card users from some of the more, uh, ‘questionable practices that credit card companies have used in the past.  A fact sheet goes over all the gory details of what is now longer allowed in the world of credit cards; a few of the highlights include:

-Restricting rate increases on existing balances.
-Contract terms must be constant for at the least first year of service
-Ends ‘double-cycle’ billing (when the balance from the previous month would be used to calculate the owed interest, enabling the companies to charge for balances that had already been paid off)
-Requires credit card users to opt-in before they can go over the limit on their cards.
-Applying payments over the minimum to the highest interest rate debt.
-Most sobering to anyone who keeps a balance, the credit card companies will also have to provide the amount of time needed to pay off the total amount owed if only the minimum payment is paid.

All told, a great victory for credit card users!  Take that, credit card companies!  Under these new rules, things are going to be much better for consumers; no more worries about abuse from credit card companies.  If a one or two major credit card providers have to go bankrupt, so be it.

Except…they haven’t, have they?  You may have noticed that American Express hasn’t packed up their bags and left town, nor that MasterCard didn’t tell their employees not to bother coming in today.  Heck, if you’ve been following the Olympics, you’ve probably noticed that not only is Visa advertising repeatedly, but they are offering the opportunity to win trips to every Winter Olympics in the future.  If these regulations are rein in credit card companies so much, how do they still have so much money.

Unintended Effects

As you might have guessed, the credit card companies haven’t spent the nine months since this bill was first signed (back in May of 2009) just waiting for the new rules to come into effect.  In the time they had to prepare, there have been signs of the credit card environment as it will exist under this law; higher interest rates, more fees, and less rewards.

It’s also harder for customers with low credit scores to get cards (or to keep cards when they don’t use use them often), and credit limits are being lowered for many credit card users.  Ironically, some of the people this legislation was designed to help may end up suffering the most by being unable to get any credit at all.

(All of this doesn’t touch upon one of the more controversial elements of the CARD act, preventing those who are under 21 from getting a credit card without either (a) proof of income or (b) a co-signer.  I’ve maintained that this is just common sense; if we were talking about 4o year-olds rather than typical college students, I can’t imagine it being a major issue.  The only reason college students get targeted by card companies is the assumption that the Bank of Mom and Dad will be around to bail them out.  Of course, there are those, like Stephanie of Poorer Than You, who might vehemently disagree.)

What to Do as a Credit Card User

What are you, the hapless credit card user, supposed to do?  For the most part, the same thing you should have been doing even before this act went into effect.  Pay off your credit card balance in full each month, don’t charge more than you can pay off, and work to pay down your debt as aggressively as possible.  Basically, the Commandments of Credit Card usage are still in effect.

You will may have to make some changes to your behavior as a result of the new rules, though.  With companies more likely to cut your credit limit or close your card, it’s important to regularly use all your cards in order to keep the accounts from being closed.  It’s also important to have an emergency fund other than your cards, as the credit line you are depending on may disappear just when you need it.  If you’re trying to build up points for rewards, also be sure to keep an eye on the rules; it’s possible that the number of requirements and restrictions will increase as companies try to maximize their profit levels.

Follow these precautions, the CARD rules will be nothing but good for you!

After nearly a year of rising stock prices, with falling unemployment (albeit rather slowly) and higher than expected economic growth, there’s been a decided change in the commentary from many in the media.  The pitchforks and torches have been put away, and being an investment banker is no longer something you don’t mention out in the bars.  The question has begun to shift from “How do we recover?” to “How do we prevent this type of thing from happening again?”

One potential answer to the latter question is to start taxing financial transactions.  A financial transaction tax (or FTT, to save me some typing every time I mention it through the rest of the article) would be a small tax on most types of investments commonly traded, such as stocks, bonds, options, futures, and swaps.   The goal is to increase the stability of the markets by increasing the costs of buying and selling financial instruments, thus decreasing the volatility of the market (and earning the government a little money on the side).

The tax would be 0.25% on stock transactions and 0.02% on bonds, futures and swaps, with options taxed according to the underlying value of the security which it is optioning.  (Mutual funds would be affected indirectly; while mutual fund purchases or sales would not be taxed at the individual level, the purchases within the fund will be taxed, increasing the expense ratio.  I didn’t find any explicit comments on how ETFs would be taxed, but since they are bought and sold on the same exchanges as stocks, I would guess that the same 0.25% stock FTT rate would apply.)

This tax would be pennies on the dollar

The FTT is being designed to avoid affecting small investors as much as is possible.  In addition to the small amount of tax being considered, the tax as proposed at the end of last year would not apply to mutual funds (as mentioned already), pension funds, or retirement, education or medical savings accounts.  Further, the tax would be offset for small investors by a $250 tax credit, enough to offset the costs of investing $100,000 in stocks during the year.

National Effects

-Increasing the Cost of Trading: While the tax is on the small side, it will increase the cost of trading, particularly for large and/or frequent transactions.  Some of these costs will be passed onto individual investors regardless of the intent of the law; for stocks, this could mean higher trading costs at all levels, while it will mean higher expense ratios for mutual funds.

-(Possibly) Decreases the Amount of Short Term Trading that Occurs: The stated goal of the tax is decrease ‘churning’, rapid and repeated short term trading that adds little real value to the economy but increases the volatility.  Of course, how much of an effect such a tax will have is up for debate; compared to the costs charged by brokerages to buy and sell most financial instruments, the tax is rather negligible.

-Raise Tax Revenue: A study by the Center for Economic and Policy Research (CEPR) notes that this type of tax could generate a sizable amount of income.  Even with a fifty percent reduction in trading volume (cutting the amount of all financial instruments being traded in half), the tax could still raise more than $175 billion each year (over $350 billion if trading volumes remain where they were in 2008).  Granted, when the government routinely runs budget deficits in excess of one trillion dollars, even the most optimistic projections mean that this won’t be enough to plug up the deficit, but it represents one more source of funds available to the government.

Personal Effects

-For the Passive, Buy-and-Hold Investor-Not Much: As mentioned, the tax is pretty small; if you aren’t buying and selling repeatedly throughout the year, you’ll incur rather little in the way of FTT tax liability during the year.  Add in the exceptions for retirement and other tax-advantaged accounts and the tax credit to offset small investors’ expenses, and there’s a good chance that you’ll end up profiting from this tax.  The only real problem you have is that the expense fees of the mutual funds in which you invest will increase, as they pass the expense of the tax onto you.  However, as the Financial Adviser magazine notes, the increases will be rather small; actively managed funds will see an expense fund bump of 0.15%, while index fund fees will go up 0.05%.  At worst, that’s about a 50% expense fund bump to the lowest of the low index funds.

-For Active Traders-Could Have a Larger Impact: If you’re buying and selling multiple times in a month, a week, or even each day, the impact of tax will be much greater.  The cost of the FTT on a $1000 transaction is only $2.50, but if you do ten of those each day, two hundred days each year, that’s a total cost of $5000 each year that you’ll have to pay toward the FTT.  Of course, let’s put that in perspective; if you’re paying $5 per transaction each time you buy and sell stocks, you’ll end up spending $10,000 in commission costs, twice the amount you’d pay in the tax.  It will increase your expenses, of course, but that’s all part of the plan, to convince you to trade less often.

My View

Being a passive investor (as well as someone young enough to worry about spending much of my life paying extra taxes to cover the national debt), I like this plan.  It seems to be a pretty good method of raising tax funds, decreasing speculation, and encouraging a more passive approach to investing.  I approve.

(To be fair and try to give some time to the opposite side, here’s an argument against the FTT (or Tobin Tax, another term for this type of tax), although it seems to argue most strongly that building a ‘financial security fund’ from the FTT in order to bail out financial institutions in the future is impossible, because the government will spend it well before we reach another financial crisis.  You’ll get no argument from me there; but if we just pour the money raised into the general fund from the start, I still don’t see much of a problem.)

As you may know (from reading Tuesday’s post), I’ve recently taken the GRE.  I did rather well, at least on the portions that were instantly graded (the Quantitative (Math) and Verbal sections; there are two Analytical Writing segments that need to be graded yet).  I received a 610 in the Verbal Section and a whopping 750 in the Quantitative section; since the GRE, like the SAT, is on a 200-800 scale, both scores are better than average, and the 750 is near the top.  Needless to say (although I’m about to say it anyway), I’m pretty happy with my score.

While I’m on the subject of good news, here’s another positive development: my fiancee Sondra had a gallery opening last night to display some of her wood working, and it went over very well.  Granted, the gallery was at her school, and she had to share it with the other people in her wood working class, and a good number of the people at the gallery opening were more interested in the food than the wood working, but still, it was nice to pieces she had worked so hard to complete on display as part of a gallery.

So, as I’m in a very happy mood and also filled with GRE related knowledge, I thought I would take a moment to share some of the tips and lessons I’ve learned about how to do well on standardized tests, like the GRE, the SAT, PCAT, assorted AP tests, etc.  This is hardly a be all, end all list to getting a perfect score, but should hopefully help you to boost up your score at least a bit if you ever find yourself forced to take one or more of these tests in the future.  Let’s begin:

1) Know the format of the test: One of the biggest advantages of standardized tests is that they are well, standardized.  This makes them easier for test makers to grade; feed them into a computer or hand the answer key to a grad student and before you know it, the grading is done.  It also means that you, the test taker, can familiarize yourself with the format of the test and the questions, so that the actual test seems similar to what you’ve already done.  You won’t know the questions ahead of time, but at least you’ll know what they should look like.

2) Use the Process of Elimination: Another advantage of the standardized test format to test takers is that most of the questions are multiple choice; the answer is listed right there on the test, you just have to determine which one is correct.  Even if you can’t come up with the right answer immediately, take a moment to eliminate ones you can obviously identify as wrong, and pick one of the remaining answers.  If you can eliminate three of the five choices on most GRE questions, for example, you can more than double your change of guessing correctly (from 1 in 5 to 1 in 2).

3) Pace yourself…: It’s easy on a timed standardized test to try to rush through the questions, moving as fast as you can to get everything answered.  Don’t.  You’ll do much better (and leave the test much less stressed) if you try to pace yourself, taking the time you have available to give yourself the time to think about the questions.   (This is especially true at the beginning of computer adaptive tests like the GRE; the early questions affect your final score more than the last ones, and the difficulty of the final questions depends on how you did on previous questions.)

4)…But don’t go too slow: If you’re a perfectionist (as I tend to be on tests), you might spend more time than you have available trying to answer a single question.  It can be hard, but sometimes the wisest course of action is just to take a guess, especially if you can easily eliminate a few of the answers to boost your odds.  You’ll score higher by finishing all the questions than by spending five minutes to get one right and either not answering or making completely random guesses on the last five questions.

5) Use the preparation material available to you: ETS, the company that does most of the standardized tests in the US (including all the ones I have listed above) has a pretty snazzy website that includes prep material, practice tests, and other resources to help you, the test taker, prepare for your exam, all provided for free.  In addition, there are any number of for profit test centers that put out guide books, practice tests, flash cards, and a wealth of other material to help you prepare.  (I’ve had good luck with the material from Princeton Review, but there are other groups as well.)  The more you practice, the better prepared you’ll be when the actually test comes around.

6) Relax: One of the most important, but hardest things to do when it comes to standardized tests.  Just take a deep breath, exhale, and remember that even if you don’t do as well as you’d like (knock on wood), you can retake the test at a later date.  It’s not the end of the world.

That’s enough advice to get you through most standardized tests; if you’re taking a test like this in the future, please drop a comment to let me know.  If there are any tips or tricks that I’ve missed that have worked especially well for you on these types of tests, please share them with me and my readers so we can learn from your experience.

Today is going to be a shorter than normal collection of my thoughts, because most of my thoughts have been about things other than blogging this last week.  I am going to be taking the Graduate Record Examination (R), better known as the GRE, on Wednesday.  I’ve spent a lot of the past week studying various test prep materials, unfortunately spending less time than I would like on other things in my life, like blogging, spending time with my fiancee, and sleep.  (Just kidding on those last few, although not nearly as much much as I would like.)

Anyway, by this time tomorrow, I’ll be on my way to take the test.  I plan to do very well on it, then after spending the night attending my fiancee’s gallery opening, I’ll come home, relax, recover, and start tomorrow on blog posts for the coming week.  It’ll be nice to be able to search for jobs and work on my blog without worrying about how this test will turn out.

With all of that out of the way, I hope you’ll excuse the smaller than usual selection of quality articles from this past week; when I no longer have an upcoming test (and flashbacks to standardized tests from high school), I should have longer lists, filled with all the good articles I’ll catch up on in my spare time.

Good Yakezie Articles This Past Week

Should You Pay Off Your Mortgage or Your Credit Card? – At one time, this might have been an easy question, but changes in ethics (foreclosure is no longer a red mark) and the broader financial picture (many houses are underwater; why put more money in when you’ll never get any out?) have changed the answer for many people.

What Are The Definitions of Liberal and Conservative? – While not directly related to personal finance, it’s good to know these terms, which get tossed around rather loosely (particularly in an election year) really mean.  There’s also a link to a short quiz to find out where you stand.

Would You Sell Yourself for One Million (British Pounds)? – An interesting question, inspired by a British entrepreneur’s offer to sell 10% of his income from this point on in exchange for 1 million pounds up front.  (I would do so in a heart beat, although I doubt I could fetch anywhere near that amount; although, from what I gathered, neither could he…)

The Best Superbowl Commercials for 2010 – It’s probably already been well hashed out around the water cooler, but here’s a bit more fuel for the ‘Best Super Bowl Commercial’ Discussion.  (Although, I defy anyone to tell me that the beaver commercial for Monster.com was not absolutely hilarious.)

The 5 Worst Superbowl Commercials of 2010 – On the other, more horrifying side of the coin, we have th five worst commercials during this year’s Superbowl.  Sadly, there were many more that could be up for this reward…

Alright, that’s about it from me; it’s back to hitting the books (and the practice test screen).  Have a great day, and wish me luck!