I’m a believer in creating your own financial rules of thumb.
It’s a practice I learned from my grandmother Big Mama. As a general rule of thumb, she didn’t use a credit card for anything other than major purchases. My grandmother used her Montgomery Ward credit card to buy an oven when it needed replacing and a washing machine when it broke. She wouldn’t get the matching dryer. “That’s why God invented sunlight,” she said.
But even on her tiny nursing-assistant salary, Big Mama accelerated payments to get rid of the debt as soon as she could, because her second rule of thumb was “hate debt.”
A study conducted by the Urban Institute, in partnership with the D2D Fund, used the theory of creating rules of thumb to see if it would change the behavior of some credit card users.
The target group was people who carried debt on their credit card from month to month. Nationally, 43.6 percent of credit card holders carry a balance, according to the American Bankers Association.
The Urban Institute and D2D partnered with Arizona Federal Credit Union based in Phoenix, Ariz., to find subjects for the study, which was funded by the Consumer Financial Protection Bureau. The people they studied were mostly homeowners in their 40s and 50s.
The credit card users were given two rules of thumb:
• “Don’t swipe the small stuff.” Use cash for purchases under $20.
• “Credit keeps charging.” Using credit can add about 20 percent to your total.
The rules were sent to almost 14,000 card users. There was a control group who didn’t get the rules. Others randomly got information about the rules through email, online web banners at login, and on a mailed calendar magnet.
The change in behavior wasn’t astounding, but it was encouraging. The “don’t swipe the small stuff” rule helped decrease credit card balances by 2 percent compared with the control group.
“For some subgroups, this effect was even more pronounced,” the report said. “For example, participants under 40 exposed to either rule saw a 5 percent lower credit card balance.”
The study also found that the “credit keeps charging” rule resulted in fewer credit inquiries.
“Financial education relying on rules of thumb may be effective at improving financial outcomes because they are easy to understand and easier to follow and stick with than complex financial calculations,” researchers said.
There’s hope that this study could lead to more research to test the impact of rules of thumb.
My grandmother taught me that creating rules for your finances could help in your money management. One rule has saved me a lot of money: Pay your bills early.
One of the best ways to improve your credit history and therefore your credit score is to pay your bills on time. But Big Mama believed that if you were on time, you were late. She left for her job, appointments and church long before she was due to arrive. She was always concerned that something might delay her so it was best to build in extra time so that you would not be late. The same rule can be true for paying your bills. Big Mama always paid bills early.
Pay late and you incur a fee.
If you use your credit card to pay a bill because you don’t have time to mail a check or haven’t set up electronic bill paying, you could be charged a convenience fee. For instance, if I want to pay my children’s college tuition using my credit card, I would have to pay a processing fee of 2 percent.
So you better believe that I make sure I arrange for their 529 college savings money to be withdrawn in plenty of time to be deposited in my bank account so that I can pay by electronic check — for which there is no fee.
Thanks to Big Mama I’ve got a lot of rules to govern how I save and spend. But I want to hear from you. What financial rules of thumb have worked for you? Send your rules to colorofmoney@washpost.com. In the subject line put “Rules of Thumb.”
Michelle Singletary welcomes comments and column ideas. Reach her in care of The Washington Post, 1150 15th St. N.W., Washington, DC 20071; or singletarym@washpost.com.
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