Credit Card Debt Management

The committee of they says there’s no such thing as bad press, and they may just be right, given the fact that MasterCard was picked Thursday to join the S&P 500 and S&P 100 indexes starting July 17. The news comes on the heels of reports that MasterCard will pay a $1.8 billion settlement after American Express accused the company of engaging in unfair competitive practices. And the day that bombshell news broke in late June, MasterCard shares rose while AmEx shares dropped. Go figure.

Seemingly unstoppable, MasterCard shares are still going strong. Apparently, much stronger than General Motors Co., which MasterCard is replacing on the S&P 100 (thus far, no reason given for the GM snub). MasterCard’s sudden elevation to the Big Boys Club is hardly a surprise. It’s stock is like the Google of the financial services sector, hovering around $250-$300 over the past couple months while Visa, American Express and Discover shares stand at only $75, $50 and $14, respectively. And to think that MasterCard’s May 2006 IPO debuted just under $40, amidst widespread skepticism.

So what does all this S&P hype mean for the already-stable MasterCard stock? More than likely, it means really, really good things. According to The Economic Times:

Shares of companies joining the S&P 500 often rise because many portfolio managers try to track the index, and are required to buy shares of companies that enter it.

It also means it’s probably a really, really good time to jump on board before the MasterCard madness peaks, even if you weren’t lucky enough to get in on the ground floor.

The U.S. Senate finally passed a controversial housing bill, designed to help overextended homeowners deal with mortgage pressures. Many critics say the bill would ultimately do more harm than good in many ways. They say it would increase pressures on mortgage giants Freddie Mac and Fannie Mae, onto which the government would essentially transfer some of the financial burden accumulated by overeager lenders stuck with bad loans. Furthermore, critics say the bill would cost the federal government some serious coin.

But, as always, the government has a plan — it may arguably be a terrible one, but it’s there. To offset some of the costs associated with government assistance, there will very likely be an increase in government regulation. Sounds vaguely familiar, doesn’t it, China and Russia?

Lingo inserted last-minute by Sen. Chris Dodd (D-Conn.) would require credit card processors (including online ones like eBay and Paypal) to report businesses’ credit card sales to the IRS. According to the Wall Street Journal, this would raise $1 billion per year for the next decade and “would allow the government to identify possible cases of underreporting when determining who to audit.”

The measure is also considered a source of revenue to offset the costs of another bill currently floating through Congress revising the Alternative Minimum Tax. This whole credit card reporting thing is probably going to happen, but those crying privacy invasion and intrusive government may be knee-jerk reactionaries. This is what Kate Szostak of the Senate banking committee staff, said to the Hartford Courant’s On Background blog:

“This is not a controversial provision or a new one. Republicans and Democrats on the Senate Finance Committee have supported it for months, and it has been included in the Administration’s budget proposal for years. This provision simply requires banks–not small businesses–to report sales transactions to the IRS each year and to merchants at the end of each day. It makes the tax system fair for everyone, without burdening small businesses and without putting consumers’ privacy rights at risk.”

One of the great quandries of life — and fodder for so many financial columns — is how to save enough money for retirement. Add yet another theory to the mix: credit cards.

Frank, author of the Milk Your Money blog, points out that your plastic can turn into some serious paper when handled carefully. He also points out that nobody paying interest on their credit cards should even attempt this strategy. “No [rewards] program will out accrue your current card’s interest rate,” Frank writes. It bears repeating: “No program will out accrue your current card’s interest rate.”

The idea of credit card companies is generally to turn a profit off you, not to help you get rich. That said, please approach this plan very, very carefully, if at all. If you are a savvy cardholder who pays your bill in full each month and keeps your debt to credit ratio well under 50%, read on and ruminate.

Frank and his wife use their credit card to pay for nearly 100 percent of their purchases and about half their monthly bills. It requires great discipline, Frank says, acknowledging the tendency to spend more when using credit cards. It also requires discipline to constantly pay the card balance off like they do, not monthly but several times a month.

Anyway, with a whopping $36,000 charged on the card in one year by Frank and his wife, it amounts to a $360 annual cashback reward at 1%. When deposited for 40 years in an account with 8 percent average return, it yields over $100,000.

A couple comments: Fortunately, most IRA accounts yield around 12 percent on average, so the yield would likely be even more when invested there. Secondly, with all of the discipline being exercised by Frank and his wife, I wonder why they didn’t go for a card with better cashback rewards? It might mean receiving a check directly instead of being deposited directly into an IRA, but would that really be a problem? It’s something to consider - if you’re gonna go, go all out, right?

If you think this plan might work for you, research your cashback cards carefully. Many have cut back their rewards programs recently during these tight times. Furthermore, some set limits on the amount of cashback rewards you can receive in any given year, or the payment method by which you can receive them. And as always, beware of annual fees.