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The Green Ages: Life Before Credit Cards

Guest — Thu, 17 May 2012 09:00:00 +0000

This is the fourth post in a series of guest blogs throughout the month of May, with each writer trying out for a staff writer spot (or two) on Canadian Finance Blog. Once all the posts are online, I’ll publish a wrapup highlighting all the writers and their guest post. There are a lot of talented writers here, so it’s not going to be an easy choice! – Tom

In the 90s, when you ran out of money you stop doing things. -Louis C.K.-

There was a time, not so long ago, before the widespread use of credit cards, a time I like to call the green ages; a time where people carried paper instead of plastic. Now, paper itself is no better than plastic, and vice versa. However, how they are used and what they represent gives the user (you) a very different idea of ones wealth and spending capacity.

During the green ages, if you ran out of money, you stopped doing things (for a good rant on this watch “Everything is Amazing and Nobody’s Happy” on YouTube). Even if you knew that you had money coming in next month, it did not help you because you had none right now. So instead you were forced to budget and manage your money in order to do the things you wanted to do. You also had a better understanding of how much money you had since your wallet would literally feel lighter as you spent more.

Today, if you have no money to go to the movies, you would just use the credit card company’s money to pay for it instead. You would accumulate a bunch of these purchases over the course of the month, and when the money came in you would pay part of it off. Wash, rinse and repeat! Keep on doing this and you magically accumulate debt. Welcome to why the average Canadian consumer debt is 25 960$ as of February 23 2012 according to an article in the globe and mail.

Now it is so easy to say: “I’ve got a paycheque coming in, therefore I can afford this”. The problem is, you can’t. You actually don’t have the money to buy it; the credit card company can afford it, not you. Most people assume they are spending their future earnings when they use a credit card, or that they are alleviating the cost of a large purchase by paying it in smaller more manageable chunks.

The truth is that you are not spending your future earnings; you are spending the credit card company’s money (I know I’ve said it before and I will say it again). Now there are some purchases that are too large to make and require some form of debt and/or leverage combination, but lets be honest do you really need to finance your movie ticket, that new jacket you will probably only wear once or twice, those shoes you just had to add to your collection of 50?

Let me put it this way, if the general population used credit cards the way they are supposed to the credit card companies would have gone out of business a long time ago. If everyone paid their bills in full and on time, the general population would remain richer and the credit card companies would become significantly poorer. Fortunately for them (and unfortunately for you), the average person is absolutely terrible at understanding this concept.

Here it is: If you have expenses on your credit card which are not critical to your life (i.e. your life or the life of people around you) and you are unable to pay them off on time in full, chances are you are incorrectly understanding how much money you actually have.

What can you actually do about it? Well the first step is realizing how much money you actually have to spend. This is done, like in the green ages, by budgeting your money. If you don’t know how much things cost you over time, how will you ever know how much you can actually spend before falling into debt?

Secondly, realize that sometimes you actually can’t afford certain things, and most of the time those things are actually quite useless. If you took a look at your credit card statement from 5 years ago, I bet you that for half the purchases on there, you wouldn’t remember what happened to the items.

Thirdly, think forward instead of backwards. For the items that cost a lot of money save up for them instead of paying interest on them. Allow the bank to help pay for part of the cost by giving you interest on your money even if those interest rates are at record low levels. And the items that are not worth it, well if you can’t buy them with your money don’t buy them with someone else’s.

There will always be unforeseen events were a credit card will come in handy. However it should not be your main source of payment. Not to say you should not pay things with your credit card; this should be done when you have the money before hand to pay it off in order to accumulate cash back and points from your credit card company as well as increase your credit rating.

Just a little tip to get you started:

My college roommate did this, and although it was weird at the time, I have to say it is quite helpful to understand the statements I made above. If you can’t do it for the full duration, at least try it for a little while, or until you go insane and cannot go without spending someone else’s money.

The next time you pay off your credit card completely, try the following.

Take your credit card (s), freeze it (them) in a block of ice in your freezer
Try making your purchases for the month with the money you make and have
At the end of the month, see how much money you have left over

This is how much money you actually have to spend, and this is what your lifestyle should actually be like. If you want a more lush lifestyle start working towards making more income, not spending the credit card company’s money (told you I would say it again).

Note: if an emergency does come up, don’t put it in the microwave to un-thaw it…. A bowl of warm water is your best bet.

Author Bio: My name is Joey Odman and the reality is that I am not a financial expert, nor do I claim to be. I studied something completely unrelated, managed to get a decent job with a good degree and quickly realized that although I was not an expert, over my short time on earth I had acquired a series of skills and convictions which made me quite good at managing money, accumulating wealth and staying away from debt. I am currently trying to teach these skills to the people around me in a way that everyone can understand and use everyday.

The Green Ages: Life Before Credit Cards originally appeared on Canadian Finance Blog on May 17, 2012.

Get Rewarded for Smart Spending

Tom Drake — Mon, 19 Mar 2012 09:00:17 +0000

Sometimes, it seems as though those who use their money responsibly and intelligently get the short end of the stick. There are no bailouts for those who have made smart decisions. However, there can be rewards for smart spending if you plan your purchases.

One of the things I’ve discovered as I’ve used the TrueEarnings Card from Costco and American Express is that it’s possible to be rewarded for smart spending decisions. As you decide what purchases you make — and how you will pay for them — consider how using your rewards credit card can help you get the most bang for your buck.

Plan Your Purchases

Smart spending requires that you plan your purchases ahead of time. Consider what you actually need (or even what you want). Make sure that you already have the money to pay for it. If you want to spend smart, you need to have the resources to cover the cost of your purchases right now. Create a budget or spending plan that reflects your financial priorities, and then only buy what fits. This will prevent you from getting into debt over items that you don’t truly need.

The next part of smart spending is deciding how to pay for what you purchase. To maximize your money, you can use a cash-back credit card, like the TrueEarnings card, which allows you to earn a percentage of spend on all of your purchases. You can actually be paid for buying things you had planned to buy anyway.

Use your cash-back credit card to make as many of your planned purchases as possible. Then, when your statement comes in, pay off the balance in full. That way, you earn extra cash back for your purchases without incurring interest. Bonus points if your money has been sitting in an interest-bearing account, working on your behalf, all month.

Look for Accelerated Earn Opportunities

As you plan your spending for the month, consider the places your credit card earns you a higher percentage of cash-back. When I agreed to test drive the TrueEarnings card, I took a look at the everyday spending categories it offers a higher earn rate in – and they are consistent items on my monthly budget.

Every time I fill up at the gas station, I earn 2% cash back (up to spending of $3,000 a year). And for all of the times I visit restaurants, I earn 3% cash back. Of course, this doesn’t mean that I fill up or eat out more often than I need to, putting stress on my budget. It’s just great to know that I’m being rewarded for some of the purchases I make on a daily basis.

Buy in Bulk

Another great way to improve the value of your dollar is to buy in bulk, which often means lower per-unit prices. Consider what you use a lot of and what you are most likely to need to have on hand. Paper products can become more cost-effective when you buy in bulk, and you don’t have to worry about them spoiling.

You can also buy non-perishable food items, such as canned and frozen goods, in bulk. Your total cost is reduced, and you have food storage that can help you in a financial emergency or natural disaster.

Purchases made at a warehouse store like Costco can save you hundreds of dollars in the long-term. Use your TrueEarnings card to get cash back, and the per-unit cost is effectively lowered even further. You can receive up to 1% cash back when you use your TrueEarnings card for purchases made at Costco (as well everywhere else you use it).

Credit cards can be a smart part of your spending plan. As long as you are smart about your purchases, and pay off your credit card balance each month, it is possible for you to benefit from cash back and save money on the items you do buy.

Get Rewarded for Smart Spending originally appeared on Canadian Finance Blog on March 19, 2012.

How to be Financially Responsible in 2012

Tom Drake — Mon, 13 Feb 2012 10:00:43 +0000

With a new year well underway, you may have had good intentions to improve your finances in 2012. In order to get your finances in check, you need to have a plan. This plan should include living within your means, spending according to your priorities, and doing what you can to get cash back and other rewards.

That’s right: You can be financially responsible and still use a credit card. I’ve been using the TrueEarnings Card from Costco and American Express for a few months now, and it is clear that you can incorporate a rewards credit card into your efforts to be financially responsible and get ahead.

Start the New Year off Right

The very first thing to do is to stop spending more than you earn. Take a look at your income and your expenses, and make sure that what you make exceeds what you spend. Consider your priorities, and what’s important to you. Look at the spending you have that doesn’t match your values and financial goals. Those are the purchases you can stop making to bring your spending in line with your income.

Make a plan to pay down any debt that you have, and stick with that plan throughout the year. You want to make sure that you are getting rid of debt so that your financial resources are your own. Consider a realistic plan for paying off debt, and work on that.

Next, look for ways to earn more money. If you are concerned that there is only so much cutting you can do in your budget, or if you are looking for ways to increase your income so that you have more available cash to help you invest for the future, consider your options. You take a second job, start a side hustle, or look for passive income sources. And, if you want to earn money without doing anything markedly different from what you do regularly, you can consider using a cash back credit card.

Use Cash Back as Part of Your Plan

Cash back cards can be a great way to improve your ability to live in a financially responsible manner. Make a list of all your regular expenses — the things you plan to buy anyway. Then, use a cash back card to make those purchases.

You will be surprised at how quickly you can earn money — earning up to 2% on eligible gas purchases, 3% on eligible restaurant purchases, and 1% everywhere else. Let your money sit in an interest-bearing account all month, and use your cash back card as much as you can, all the while adhering to your budget and living within your means.

When you pay off your card each month, that money becomes earnings that can be put to good use. The year-end rebate from Costco when you use TrueEarnings is a lot like a windfall. I received nearly $50 cash back after having the card for less than six months, a full year would technically pay for my Costco Executive membership on it’s own! I received a rebate in the mail which I could use at Costco or exchange for cash. I used the cash reward while I was shopping, so it helped cover the majority of my grocery bill. If you are not shopping that day and want to be financially responsible, some of the ways to use this money can include:

Put it in your emergency fund so that it is ready to be called into action when you really need it.
Pay down debt so that you get ahead that much more.
Buy something you need, that you have been saving up for.

When used wisely, there is no reason that your TrueEarnings credit card, or other rewards card, can’t be part of your efforts to get on the right track with your finances in the coming year.

How to be Financially Responsible in 2012 originally appeared on Canadian Finance Blog on February 13, 2012.

My Thoughts On The TrueEarnings Card from Costco and American Express

Tom Drake — Mon, 09 Jan 2012 10:00:00 +0000

I’ve been trying out the TrueEarnings Card from Costco and American Express since the summer and whether it’s for purchasing clothes, gas or groceries, it is now the rewards credit card I use the most. With no annual fee and a cash-back rebate each year, this card has some great benefits for the rational consumer. In this post, I’d like to recap some of my favourite features of the Card.

Front of The Line

American Express offers Front of The Line, which gives advance ticket access to Cardmembers. I haven’t had the chance to take advantage of this perk, but there have been some very big concerts, musicals and plays to which Amex offers Cardmembers an opportunity to buy tickets in a presale to beat the rush. After many failed attempts at buying decent tickets in the past, I will definitely be looking to see what I can get in advance through Front of The Line.

Insurance Benefits

The TrueEarnings Card has some great insurance benefits as well. What’s impressive is that this card offers benefits equal to many cards that charge an annual fee. There is travel accident insurance for up to $100,000 as well as a purchase protection plan that insures eligible purchases against accidental physical damage and theft. The buyer assurance protection plan will double the manufacturer warranty by as much as one additional year.

Cash-back

The TrueEarnings Card is probably best known for its cash-back rewards, and it’s what attracted me to it since I’m a Costco member and shop inside the store and get gas there every week.

First off, there’s the 1% cash-back on most of your regular purchases. And that’s not just at Costco, the cash-back applies anywhere you use your card. But it gets better for certain purchases. You’ll get 2% cash-back when you fill up on gas and 3% cash-back at eligible restaurants.

Since I first tried the TrueEarnings Card from Costco and American Express, it has been a great tool to help with budgeting, and the cash-back and other perks of the card will keep me using it as my main credit card in the future.

My Thoughts On The TrueEarnings Card from Costco and American Express originally appeared on Canadian Finance Blog on January 9, 2012.

Better Budgeting with a Credit Card

Tom Drake — Mon, 21 Nov 2011 10:00:00 +0000

So far in my series of posts where I’ve been sharing my thoughts on the TrueEarnings Card from Costco and American Express, I’ve discussed how to choose a rewards credit card so that you get rewarded for money you’re spending already. But something not often touched on with credit cards is how you can use them to help you create a budget and track your spending.

The Importance of Budgeting

Budgeting is important because it helps you ensure all bills are covered and sets limits on your spending, all within the amount of income you bring in. To improve your financial situation, you have to increase your cash flow by spending less than you make.

To budget properly, you need to know where you’re spending your money. This isn’t so easy if you spend mostly cash, though it can be done if you keep a notebook on you or save all receipts.

How to Plan a Budget and Benefit from Rewards

Using a credit card can help you keep track of your spending so that you have a meaningful budget that you can stick to. If you put all your spending on one card, then the statement becomes your monthly spending report. And likely all cards now allow you to login online to review your spending every day. Then, every month, you simply use your paycheque to pay the credit card bill.

But if you’re doing all your spending on a rewards card like the TrueEarnings Card, not only can you track your spending, but you’ll also be earning towards a nice cash back reward at the end of the year. This payment can help fund an annual budget goal like saving into an RRSP or TFSA.

How You Can Use Your Credit Card to Reduce Your Budget

While I’m using my TrueEarnings Card for all my purchases, it will also help me stay within budget since I get up to 2% cash back on gas, 3% on restaurant spending and up to 1% everywhere else, including Costco, where I’m doing most of my spending anyway.

And if you are shopping at Costco quite a bit like I do, reduce your spending budget for the year even more by getting Costco’s Executive Membership and receive another 2% annual rebate on most of your Costco purchases.

A credit card is a tool in your personal finance toolbox. Helping you create a budget and earning rewards are just a couple examples of the benefits when you use it responsibly!

Better Budgeting with a Credit Card originally appeared on Canadian Finance Blog on November 21, 2011.

Five Lies About Your Credit Report

Tom Drake — Mon, 14 Nov 2011 10:00:00 +0000

Your credit report is important and because of that, a lot is written about it as well as talked about over dinner or as topics of water cooler conversations. Although some of the advice comes from well meaning people trying to help, misinformation or failing to go to trusted sources could make for some unfortunate surprises if you were to later view your credit score.

“Once I Pay Off the Collection Agency, It Will Leave my Credit Report”

Wouldn’t that be nice? In most cases that’s not true. Once you pay off a debt that was in collections, the best you can hope for is the debt to be listed as “closed” but often it’s listed as “paid collection”.

When an account is listed as a collection, it remains on your credit report for seven years. Once you pay the debt, it is listed as “paid collection” for the remainder of the seven year period. It may be a bit of good news to know that the seven years doesn’t start over. The other bright spot is that an account listed as a “paid collection” is not as bad as an unpaid account that was referred to a collection agent.

“I make my minimum payment. That’s good enough”

Not true. Although paying the minimum balance is certainly better for your credit than not paying at all, those outstanding balances are strikes against you when your score is calculated so paying off the debt in a timely manner is the only way to help your credit score.

“Only errors involving money affect my credit score”

Once again, not true. What if your credit report has a wrong middle initial and the information in your credit report is actually the information of somebody else with a bankruptcy on their report? Fixing errors on your credit report takes a lot of time and if you wait until you try to qualify for a loan, you may have to reapply at a much later date. Check your credit report today.

“I shouldn’t shop online because it’s not secure.”

This one may be true but there are ways to check. Any time you are entering sensitive information in to a website look at the address at the top of your internet browser. If the address begins with “https” the site is secure and you’re safe to shop online. If it only says “http” do not enter any information about you or your credit card.

“Debit cards are as safe as credit cards”

Fraud protection and other safeguards that come with credit cards are quickly being adopted for debit cards but your debit card is a direct line to your bank account where a credit card is not. If somebody steals your credit card information, they may run up a balance but you still have money in your bank account until the problem is resolved. That’s not the case with a debit card. Be careful

Remember…

Don’t believe everything you hear and verify everything, including the information in this article, with a trusted source before you make financial decisions based on it.

Five Lies About Your Credit Report originally appeared on Canadian Finance Blog on November 14, 2011.

Guide to Choosing a Rewards Credit Card

Tom Drake — Mon, 31 Oct 2011 09:00:00 +0000

A few weeks ago I pointed out why you might as well get rewarded for money you are spending already. But what should you look for in a rewards credit card? Different people prefer different types of rewards, and there’s no shortage of options available. Some offer airline miles, others will let you chose items from a catalogue. I’ve never really bought into these types of rewards though. It’s a bit of a hassle to jump through hoops to book a trip and I don’t really want to build up points to choose an item from a limited selection.

Cash-Back Credit Card Rewards

I would much rather have a credit card that pays me back in cash. Both of my major credit cards give me cash rewards. I can spend the money on things I actually need like groceries and gas, not vacations and kitchen gadgets. Or possibly even better, with the TrueEarnings Card from Costco and American Express that I’ve been trying out for this post series, I can cash the cheque at Costco and really do anything with the money. I can redeem my rebate in January and get cash or goods and services.

How the American Express TrueEarnings Card Can Work For You

So how can the TrueEarnings Card work for you? That depends on what your goals are. Are you trying to pay off debt or save up an emergency fund? Then simply take the annual reward money and use it to get you one step closer to your target. If you do a large portion of your shopping at Costco, then you can easily spend the money in store. Since I’m at Costco every week for some of my grocery shopping, as well as occasional clothing and household purchases and even gas, I’ll likely just spend the money there when I get my first cash-back rebate. But that still helps my bottom line greatly…less of a drain on my monthly spending means I’ll have more money to stock away in my TFSA.

But as I mentioned before, the cash-back rewards are not the only benefit of the TrueEarnings Card. First off, having no annual fee is a must for me. If your credit card has an annual fee, take a good look at what it offers and decide if the cost is worth it. For example, if you’re carrying a balance then it might be worth the annual fee if it’s a low- interest rate card. However, if you’re carrying a balance every month, you’d probably still be better off transferring that balance to a line of credit until you get it all paid off.

Another great way to get the most out of your cash back reward is to take advantage of supplementary cards. My wife has a supplementary card under my account so when she uses it at Costco or anywhere else, we are accumulating a larger cash payout in the new year.

Do you have the TrueEarnings Card from Costco and American Express? What perks have you taken advantage of? How do you use your cash-back rebate?

Guide to Choosing a Rewards Credit Card originally appeared on Canadian Finance Blog on October 31, 2011.

Get Rewarded for Money you are Spending Already

Tom Drake — Mon, 26 Sep 2011 09:00:00 +0000

We all have to spend money on groceries, though we try to reduce our grocery budget where we can. Most of us drive a car, and there are only a few ways to save money on gas. While I try not to go very often, we’ll also all end up in a restaurant occasionally. But by using a cash-back rewards card, you can get some of that money back. That’s extra savings on top of all the other steps you have taken to cut your bill on these day-to-day expenses.

As I mentioned in a previous post, I agreed to test drive the TrueEarnings Card from Costco and American Express and let Canadian Finance Blog readers know what I think of it. This time I want to look deeper into the cash-back rewards and how you can benefit by earning money on some regular purchases you’re already making every week.

2% Cash Back on Gas

While most purchases with the card will give up to 1% cash back at the end of the year, gas purchases at eligible stores will have you earning up to 2%. I normally get gas at the Costco gas station since the prices are a little lower, but this 2% reward isn’t limited to just Costco. If you have a gas station you prefer, you’ll also earn up to 2% on your gas purchases there and collect their points at the same time!

3% Cash Back on Restaurants

The upsized cash-back rewards are not only for gas either. You can get 3% cash back at restaurants. So you could use a coupon like many of the Buy One Get One offers in the Entertainment Book or SUTP and then pay with this card to get an additional 3% cash-back coming to you in January, when rebates are issued.

How to Double Dip on Grocery Savings

You can save a lot by shopping in bulk at Costco, but that’s just the start. Not only are there very good regular prices, but I try to take advantage of their weekly coupons to get an even better deal. If you shop there regularly, get the Costco Executive Membership, which gives you 2% back once a year. While the Executive Membership does cost more up front, I use my annual cash back cheque to pay for the membership in full and still have some remaining to put towards that week’s purchase. Linking an Executive Membership to your TrueEarnings American Express can mean a 3% combined reward on your Costco purchases.

We also shop at other grocery stores too. Whether it’s Club Sobeys points, Air Miles or whichever loyalty program your favourite grocery store offers, I can use the TrueEarnings Card and the points card to get the best of both at the till.

You should make the most of your money when you can. By combining some money saving tips with a cash-back rewards card, you’ll spend as little overall as possible on everyday purchases!

Get Rewarded for Money you are Spending Already originally appeared on Canadian Finance Blog on September 26, 2011.

Allocating Funds to Fight Credit Card Debt

Guest — Sat, 24 Sep 2011 20:00:00 +0000

When individuals are faced with credit card debt, they sometimes get a little creative in coming up with ways to swiftly eliminate this problem. And we always find it a bit ridiculous when people look for various other ways to pay it off rather than using funds from a savings account. While we fully understand the reluctance people have over accessing this money – especially if it’s designated for a specific or important purchase – most of the time it’s arithmetically boneheaded not to use it. The negative stigma of dipping into savings, however, prevents many people from making logical financial decisions when dealing with substantial credit card debt.

Before we take a closer look as to why you should pay off your credit cards with the funds from a savings account, let’s first look at the few places in which you shouldn’t extract money.

First, never pay off your credit card debt with a retirement account such as an RRSP (or Roth IRA in the United States). These funds typically impose penalties for earlier withdrawals, plus withdrawals before maturity can drastically gouge the value of the account in the long term.

Second, while some financial experts say this is a strategy worth considering, we wouldn’t necessarily recommend using a home equity loan to pay off credit cards. By some calculations you could theoretically use the loan proceeds to pay down your debt by trading something like a 20% interest on your credit card(s) for a 6%-7% loan on your home. However, refinancing unsecured debt with secured debt isn’t really a fantastic plan. The overall goal of a personal debt reduction should be to minimize risk and offering your house as collateral against unsecured debt just to save a few points of interest increases the downside risk immensely. To better illustrate this risk, let’s look at worst case scenarios: The worst case scenario in failing to pay off your credit cards is an unfavorable credit rating (and of course the financial consequences of having this negative rating), however, the worst case scenario in defaulting on a home equity loan is losing the home itself. Plus, to a greater degree than defaulting on credit cards, you’re credit score also crumbles as a result. Therefor, we’d always risk defaulting on plastic before defaulting on your home – even if interest rate exchange is tempting.

Paying off Credit Cards with Savings:

This should be your go-to move in today’s economic climate. The annual percentage yield provided on a savings account NEVER warrants a decision to keep it locked in rather than using it to eliminate debt. Especially today when typical money market accounts aren’t even able to churn out a 1.0% return, keeping money stashed in these financial vehicles isn’t practical when your credit card debt is accumulating at a rate of 18% annually.

Allocating Funds to Fight Credit Card Debt originally appeared on Canadian Finance Blog on September 24, 2011.

How Credit Cards May Be Obsolete in 5 Years

Guest — Fri, 23 Sep 2011 20:00:00 +0000

One technology that could affect how many financial transactions are done, is the “digital wallet”. Some experts believe that monetary transactions will move completely away from paper currency or credit card payments in the next 5 years. They think that mobile phones with NFC (near-field communications) will completely take their place due to their ease of use. These phones will allow money to change hands by simply swiping our phones next to an NFC receiver. NFC chips allow for the exchange of money (or information) wirelessly, when 2 these devices are brought near each other. This new system of payment may change many aspects of finance, because it may not be centered around credit.

So, in what ways will this change how our credit history is created, how fraud is done, and how our credit scores are calculated?

Changes to The Credit System

How technology will change our financial system is difficult to answer at the moment. All of the major credit card companies are investing heavily into mobile transactions, but new players like Google or Paypal are big names that may treat these payments differently than traditional credit cards. They may decide to deduct fees for every transaction (like paypal currently does) or use a monthly fee, rather than setting up a credit system. These systems will also be open to EVERYONE, without an application. Since no credit is being used, people with bad or no credit will be able to use them.

One important thing that these mobile payments will change, is how our credit scores are calculated. A mobile payment system may operate differently than traditional credit cards. Credit scoring companies like FICO will have to change how they calculate credit scores. Responsible use of a credit card requires a different set of skills than a debit system. The ability to spend beyond what is in our bank accounts, makes them difficult to handle for certain people. How people deal with credit can provide proof of how responsible they are with money. If most consumers switch to a system that deducts money from an account or takes fees from each transactions, the credit scoring system will have to change. A credit score will have to be created from different metrics like rent, mobile phone contracts, and utilities. Currently, “alternative credit scoring” companies like PBRC use this data, but FICO hasn’t yet incorporated it into their algorithm.

New Opportunities for Fraud

Unfortunately, with any new type of technology, there will be the ability of certain people to exploit it. With Near Field Communications chips, fraudsters may be able to steal money by interacting with these NFC chips without a person’s knowledge. Hackers have been dominating the news lately and may see a “digital wallet” as a new target. Security holes are a huge problem for these new systems and must be ironed out before these systems go live.

In Europe, these mobile payment systems are being tested right now. They are starting out by limiting all transactions to £15 or less. This will allow these systems to be used only on low dollar items. This gives them the opportunity to fix most of the bugs before it goes into wider use.

Already Being Used Overseas

A different kind of mobile payment system is already used in developing areas like China and Africa. These mobile systems are used as an alternative to credit cards in these countries. Payments from a mobile phone allow small transactions to take place using a monthly bill. They allow a convenient way to transfer money, that is very similar to how a credit card works. Some experts believe that these type of transactions will “reach more than $600B globally by 2013″.

Credit scoring companies will forced to adapt when consumers use completely new ways to exchange money. Our credit system, bank accounts, and how we transfer money from one place will change as new technologies come online. It is important to stay on top of what metrics these credit scoring companies use, so we can keep our financial histories in good shape.

Author Bio: Ross runs the site GreatCreditScore.org which focuses on personal finance, credit, and staying out of debt. He also plans to document his experiences with the stock and bond markets.

How Credit Cards May Be Obsolete in 5 Years originally appeared on Canadian Finance Blog on September 23, 2011.