United Shakes of America

So, the US averted a near default by raising the debt ceiling. But according to the same news source, ratings agency, Fitch, says that the prized AAA rating of US debt may still be downgraded. In just a matter of three days, the US (stock) market sank. The Dow Jones has fallen by over 1000 points since its peak. The S&P on the other hand, is no better and the bad news continue to pour in as there were people saying it has formed a head and shoulders formation (a bearish pattern in technical analysis). I imagine that if the debt ceiling was not raised, far worse things could have happened.

A lot of countries hold US debt, especially China. We (The Philippines) are no different and in fact, the BSP is contemplating diverting some of our funds away from US debt. So, will US debt become subprime as well? I am sure that they will get their acts together, otherwise, we will have a lot of countries none too happy with what is happening. Think about it, if you are holding US debt, and the debtor seems unlikely to meet his obligations, what would you do?

At a personal level, what is happening to the US is similar to you as a consumer maxing out your credit card limit. Further compounding this is that you only pay the minimum amount due. So by the time you are able to pay off all your outstanding debts, you would have been charged more interest than the principal amount.

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I had been thinking about whether or not to post that the local stock market would be in for a correction soon. But when the PSEi sank close to 60 points the other day, I knew that I had to.

We've been going up and reaching historic highs recently. So far, listed companies have had positive earnings. However, I know that some ominous signs are there.

Lately, it has been the basura stocks that are being actively traded. If I remember right, that's usually the last wave of the current bull run. Late entrants to the stock market may want to hold off on the purchase.

It doesn't help that Mr Mobius thinks our market is getting expensive.

So far though, with the exception of the correction the other day, our market has been holding up despite the worldwide sell off, especially the mining sector. Still, the skeptic in me thinks that our market will just need to take a breather for the meantime.

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The American Dream has now turned into a Nightmare. I just hope that we don't have our own bangungot.

Until then appreciate the (heightened) risk first, then appreciate the capital!

Using Credit Where Cash is Due

You've probably heard personal finance gurus, authors, etc. saying that when you purchase something, it should always be in cash. While that is true in most cases, I believe that using a credit card is far superior than paying in cash, provided that the payment term is full settlement at the swiping machine.

I say full settlement because some retailers continue to impose a different price when you pay on (supposedly) 0% interest rate term, usually in 3, 6, or 12 month tranches.

The cash and card price are often the same. However, if you ask if they have promotional offers like 0%, some retailers give you a different price than the one reflected on the price tag. I know that the DTI issued an order before prohibiting this so I researched a bit (online) to see if I could get a copy (and try to understand) its provisions for consumer protection.

I stumbled upon this website, and I suppose the only line about installment offers can be found in Section 3, to wit -

"3. When the retailer offers the consumer an option to pay in cash, card or on installment, the same is allowed provided the payment options shall be disclosed by way of a separate information to the consumer but not in the price tag."

Upon further skimming of Administrative Order No 10 Series of 2006, I suppose the order centers more on how the price tag is used, rather than to restrictions on surcharges.

While Section 5 states that retailers are not allowed surcharging, it perhaps refers to cash price = card price; but not cash price = installment price.

Anyhow...

Obviously, when you will pay on terms, I suppose the rate is going to be different. If this is the case, then cash is truly king. Except for those cases, the credit card will be more advantageous.

For one, you don't have to bring a wad of cash in your wallet.

While government officials say that "Manila is safe", I've heard numerous urban legends (or true stories, I suppose) of thieves just across Manila City Hall, i.e. the Lagusnilad underpass. A friend of mine was riding a jeep and the friend including all the other passengers, got held up near historic (past and recent) Luneta.

Crime rate is a statistic that's based on reported cases. So if a victim does not report a criminal activity, then obviously, we're looking at some distorted statistics.

I digress.

This being the case, having a credit card is not only more convenient, it's safer. Provided, it's not stolen. For other tips on safe use of credit card just hop on to this page of the Credit Card Assoc of the Philippines.

Depending on your credit limit, you are carrying an amount of money that's no larger than the palm of your hand and no thicker than your finger nail.

Another advantage of using a credit card is the usage points you get with every swipe of your card. Usage points can be converted to premium items or flyer miles, saving you money from spending on a gadget/item or taking a flight.

Then there are promotional offers. Credit cards can have tie ups with restaurants, boutique shops, hotels, spas, etc. With cash, hmmm....

Lately, the major credit card companies / banks have been vying for a piece of consumers' wallets with intriguing sets of freebies depending on the amount you spend. If I remember right, the pioneer was BPI, with its tie up with Jollibee. (I wonder who's the genius who thought of this promotional offer).

Then there was Red Ribbon, Greenwich, Pizza Hut, Starbucks, Time Zone, Free Movies, and lately, McDonald's. On a side note, which do you think was the most effective offer?

The free meals were surely a hit, and so were the coffee and movie. Consumers even go to the length of breaking their purchase receipts to get more freebies. For example, if the card company states that a minimum 2,500 gets you a meal, and the purchase bill is at 7,000, you're going to see 3 receipts, 2,500 + 2,500 + 2,000. Instant two meals!

With cash, hmmm....

Of course, the only problem with credit cards is that at times you get deluded into thinking you have lots of money.

To be continued in the next post....

Giving Credit to Credit Cards

I feel bad whenever I miss my posting date. My excuse for this week is that I was out with friends for a birthday celebration (not mine) Friday night. Before I left the house, I caught an interesting news item on our use of credit cards. Due to the hard times Filipinos are turning to credit cards for their money needs.

Instead of waiting for the paycheck, many are using credit cards to buy basic necessities. Apart from impatience with paychecks, the higher costs of virtually everything eats up a big chunk of the previous paycheck. We all have to live, and armed with a credit card, one can buy groceries ahead of their expected pay date.

This is just a mundane benefit of using a credit card, but it's an insight credit card companies can use. Marketers have drummed up every possible avenue to entice people to get a card. They can be points, miles, free cellphone for a new card, etc. Most of the times, people use cards for unnecessary purchases, fueled by the magic number of "0" percent interest rate. But using cards ahead of their pay dates for basic necessities? That's something unique.

While there will be peculiarities with the shopping habits of a Filipino, depending on his social class, I am pretty sure that the time will come when credit cards eradicate the informal lending sector (I hear 5-6). One day, even mid-sized stores outside of malls might start accepting credit cards.

Ever wonder about a scenario where auto shops in Banawe or furniture shops in Binondo start accepting credit cards? What about shopping in Divisoria using credit card? You can shop like crazy and you won't even have to bring loads of cash (and fear thieves) to do your shopping. That would be something right?

According to the Bangko Sentral (Central Bank), credit card receivables are up 19.7% from last year. As our country progresses (yes, we are), so does its capital market, albeit at a slowed pace.

Like I said in my previous post, we are going to see developments where we can save more, invest longer, and retire comfortably. Personal finance is now more pervasive in media, particularly on the Internet. These are developments people take for granted, especially the younger ones who will now grow up in a Philippines with many avenues for them to save and grow their money. And with credit cards becoming more and more of a necessity, younger Filipinos grow up in a world with 12 months 0% interest shopping and purchases.

I hope that the next landmark legislation for the country would be the establishment of a more transparent and fixed system of tracking credit history. I've read horror stories about individuals being chased by credit card companies, individuals being blacklisted from loans unilaterally, etc. It's something to look forward to, and hopefully we won't have to wait another 10 years (like the PERA bill) for it to pass as law.

For now, credit history is vague. We don't have a FICO score like Americans do. Locally, using credit cards, according to most news articles I have read, is your one best weapon to build up a good credit history. A good credit standing will allow you to faster processing of your loan applications - whether it's for business or personal needs (housing, car, etc.)