Thursday, 31 March 2011

Should you get a credit card?

by Rob d'Apice
There are three and a half reasons to get a credit card:
  • Value creating - yes, credit cards can make you money; they return value to you through reward program points (eg Frequent Flyer).
  • Income advance - the interest free period on most credit cards means that you can spend part of your next pay packet interest-free; effectively a cash advance on your salary.
  • Emergencies - credit cards are an instantly available loan available to cover an unexpected and significant expense (eg medical bills, car repairs, etc.)
  • Ease of use (the half reason) - Visa and Mastercard are accepted almost everywhere, and are super easy to use.
(The astute reader might notice I've left off a probably the biggest reason: buying things you can't afford.  I want to spend this post delving into the more ambiguous credit card motivations, but, to be clear, this is a bad idea.)

One of these reasons is a good one; the remaining two and a half aren't.  Let's start from the bottom up.

The (two and a half) bad reasons

Ease of use 
What? Getting a Visa/Mastercard to use on the internet, when travelling overseas, etc, because they are more reliable and more widely accepted than EFTPOS, cash, or cheques (haha cheques).
Why is this a bad reason? Visa and Mastercard debit cards are available with almost all banks.  This gives you credit card functionality that draws from your savings account, like a superman EFTPOS card.  No need for attached credit account.

What? Keeping a credit card tucked away, just in case something bad happens.
Why is this a bad reason? This is arguable, but I see three clear reasons not to do this.  One, an 'emergency' credit card can be very quickly maxed out when buying that macbook pro suddenly becomes an 'emergency'.  Two, even if you have a sudden need for cash, credit cards are a terrible source of funding - the interest rate is very high.  You'd be much better off with a personal loan, or better still, a loan from a family member (you could offer them an attractive interest rate that is much lower than a credit card, and - shameless plug - you could even use dapShare to track the loan).  Three, as a friend of mine suggests, it is much more financially prudent to proactively build an emergency savings fund (of say, $1,000), and have that fund earn interest, than take out a $1,000 loan at a 20% interest rate.

Income advance
What? Buying that macbook pro now because you can afford it when you get paid at the end of the month.
Why is this a bad reason? There's clearly a bad smell about this kind of spending behaviour.  The logic is fairly plain: if you spend all your income before you get it, then what will you live off between then and the next pay day?  The likely answer is: your credit card.  This creates a rolling paycycle debt that doesn't go away quickly.  In theory, this purchase is as an interest free loan; in practice, it's a never-ending and amorphous debt that you probably want to avoid.

The (one) good reason

You guessed it (to be fair, it was pretty obvious) - they can make you money.  This sounds a bit ridiculous, and for good reason: credit cards make banks a lot of money, so how can that be good for me?

Credit card companies make their money in several different ways: an annual fee, a merchant fee they charge to retailers that is a % of each transaction, and interest charges on outstanding balances.  Interest charges are the biggest component of their revenue, but they still make money when a customer spends money via the merchant fee, even when the customer pays off their credit card balance straight away.  They can then return some of their revenue back to the customer through reward programmes.

On top of this, the reward points you get from your card are not taxable income, even if they are generated from work-related expenses on your card, as per a 1997 ATO decision.

Not everyone can make money from a credit card. In fact, whether you can earn money from your credit card depends on two key factors:
  • Spend per month: how much you would spend on the card, including any work-related expenses you could put on the card and then reclaim from your employer; and
  • Outstanding balance: how much debt you have that is currently accruing interest (ie outside the credit card's interest free period, which is generally somewhere between 30-60 days)

Four types of credit card users

If we combine these two factors, we end up with four types of credit card users:

We all know how Charlie Sheen uses his credit card - like a Winner, of course!  He would spend a lot on his card each month (hookers, drugs, etc.) and pay it all off before he's charged interest (because he has roughly a zillion dollars).  The worse place to be is highly debt laden with very little spend on the card, what I call the 'Shopaholic Mum'.  If you're the Shopaholic Mum, get rid of all your cards and consolidate your debts into a lower interest loan.

This may seem like a trivial insight: of course it's better to spend more and pay less interest.  The real question is: at what point does it make sense to get a credit card?  When will it begin to pay you, instead of you pay for it?  Well this next chart is a little more revealing (and a little more boring):

Basically, you want to be in the green zone, and the more green the better.  If you're in the red, credit cards aren't for you.  Two examples:

  • You have no credit card debt, and expect to pay off your card every month - therefore your average outstanding balance = 0.  You spend roughly $2,000 on the card every month.  This puts you on the cusp of the first and second green bands; expect to get about $200 worth of reward points over the year.  Yes, you're winning.
  • You have a $2,000 credit card debt that isn't going away.  Every month, you spend (and pay off) $1,500 on your card.  This puts you in the second red band, probably costing you around $300 net per annum.  Get out.
Obviously, this is a bit simplistic.  First, I prepared that chart using just one card type (the no annual fee American Express Frequent Flyer); it will inevitably look quite different for each card.  Second, in reality, there are a few other ways credit cards return value (eg extended warranties, free travel insurance, bonus points) and there are other costs we haven't discussed (late fees, additional cardholder fees, etc.).  Dealing with these complexities is where Prosple comes in, so stay tuned.

So, what have we learnt?
  1. If you are spending (or could be spending, if you had a credit card) more than about $1,000 per month on a credit card (including work expenses), it could be well worthwhile to get a credit card, if you avoid any interest charges.
  2. If you are considering getting a credit card for another reason, think hard about it.  It may make sense in your circumstances, but be aware it may come at a cost to you.
  3. Having an outstanding credit card balance greater than (say) $1,500 is not good.  Consider cutting up your card, and getting a personal loan to cover the balance, or get a new credit card with a low interest rate balance transfer.
  4. However much you win, you'll never win as much as Charlie Sheen

Tuesday, 22 March 2011

Modern Consumerism: a full time job

by Rob d'Apice
I find it very difficult to deny the power of a free market to get stuff done - and get it done well.  The market is a genius mechanism that incentivises individuals to contribute to the satisfaction of the needs/wants of others, ultimately marrying individual ambition with community benefit.

Sure, a completely free market is a terrible idea (and even the most hardcore economic liberalists would tend to agree): we need rules and regulation to ensure that our society's belief system is properly reflected in the market's design (an obvious example of such regulation is a carbon price).  Sure, we need taxation to ensure essential infrastructure exists that would not be otherwise funded by private enterprise, and to ensure that those that aren't able to obtain an income are protected.  But overall, it's a pretty neat little thing.

I've got one fairly major gripe, though:  market design assumes consumers have infinite computational power, and over the last century this has meant consumerism has become a full time job

How it works (in theory)

Let's say I want to buy some milk to nourish my brittle, child-like bones with some calcium.  My long-time milk-monger Frederick sells me milk at $5/L.  But one day Hamish comes on the scene selling milk for $4/L.  As much as I loved Frederick and our long, dreamy chats over several glasses of delicious ice-cold milk, I'm taking my business to Hamish to save that $1/L and spend it on my online poker addiction.  As do all of Frederick's other customers.  So Frederick decides to undertake an MBA at Harvard and then spends several years redesigning his business processes.  He comes back into the market, having reduced his costs, selling milk at $3.50/L.  Bam, another 50c in my poker fund.

Thus the free market works - Frederick and Hamish both compete on price to get my business, and in doing so are incentivised to make their businesses more efficient, to the community's benefit.

But now Hamish comes back and says he will offer me 10 litres of milk per week for $30.  Any additional milk will cost $2.80/L.  By committing to a bigger purchase, Hamish will offer me a reduced price, since Hamish benefits from a guaranteed demand volume and lower transactional overhead (ie less effort per litre of milk sold).

At this point, your humble consumer needs a calculator, because the best option for me now depends on how much milk I buy.  In fact, if I buy more than 8.57 litres of milk, I should go with Hamish, otherwise I should stick with Frederick.

I call it 'dapMilk'

This wasn't a walk in the park, but it still is nothing to cry about.  There is a good commercial reason for Hamish to structure his prices as he has.

But what if Frederick comes and offers to bundle your milk purchase with your home broadband plan, offer 100 minutes of free iMilk talk time (but only to other iMilk users) and also throws in 5% off selected restaurants in Suburban Sydney? Well, this leads us to...

How it works (in practice)

Basically, this:

Thanks for nothing, commerce

In reality, businesses are incentivised to complicate their offer.  It means that consumers struggle to compare the true value of the offerings of each competitors, and end up selecting based on perceived value.  Many businesses attempt to position their brand and their advertising/marketing content in an attempt to build a high level of perceived value among consumers, without necessarily having a high level of true value.  An example that leaps to mind is Virgin, who pitch themselves as the best value for money, saving the consumer from evil big business; their true value proposition is hardly relevant as they have great perceived value (and to prove it, we'll take a look at their credit card offering down the track).

The solution: Prosple

The core mission of the Prosple is to fix this problem - to equip consumers with tools and information they need to both:
  • make the best product choices based on true value for them; and
  • more broadly, optimise the management of their personal finances

dapShare, made by the same team as Prosple, aims to help people living in sharehouses, on group holidays, on roadtrips, or sharing assets with running costs (eg holiday houses or boats) manage their shared expenses.

Now our focus is Prosple. Our first stop is to help you decipher the complex world of credit cards:
  • understand whether a credit card is right for you
  • select the best credit card given your circumstances
  • learn how best to use your credit card

Ultimately, our longer term vision is to turn Prosple into your one-stop-shop for unbiased, automated and highly personalised financial management tools and information.

UPDATE: Prosple is now live! Check it out now.

Sunday, 6 March 2011

Sneak peek of new dapShare design

by Rob d'Apice
Work on the new website is well underway!  A first draft of the new design is complete, and we've started putting together all the ropes and pulleys that will make the thing work.

Here's a sneak peak at the new homepage (click to expand):

Let us know what you think!

Thursday, 3 March 2011

Major dapShare.Com update is in the works

by Rob d'Apice
dapShare is 5 years old this year, and still going strong. With competitors billshare shutting down, and sharemate never actually launching, dapShare is still your best option for sharing bills and expenses in your sharehouses, roadtrips, holidays, bunga bunga parties, etc.

But it's going to get better. Here's what we're working on:
  • Rebuild from scratch. Scrapping all current code, and reprogramming in Ruby on Rails. No more 12 decimal debts.
  • Multiple groups. Belong to multiple groups with one account. Have one group for your sharehouse, start another for a group holiday.
  • Dashboard report. See all the important information you need when you login, with quick links for things you want to do.
  • Better notifications. More information in your email notifications that is relevant to you. Debt reminders when debts exceed a pre-set $ value.
  • Easier sharing. Select who needs to share an item and dapshare can split it evenly.
  • Beautification. We're going to make the site much hotter. Seriously this time though.

On top of this, we have a few ideas that are still a twinkle in the eye: an iPhone app, Paypal integration, and facebook integration.

If you have any suggestions for new features or improvements, PLEASE let me know now by clicking on the 'Feedback' button on dapshare or emailing us.

Not a member of dapShare?  dapShare is a great way to share bills, groceries, etc. in your sharehouse or on your roadtrip.  It's also 100% free.  Sign up now.

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