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That’s quite a scowl!

A literal use of an anchor. Credit: Beth Rankin/Flickr

Current or original price. What resonates with you when considering a purchase?

A blog called You Are Not So Smart argues that even the savviest bargain hunters, like you and me, are swayed by the original price, called the anchoring effect. I’d never heard of the term anchoring effect until reading this post, but the concept is very familiar. You Are Not So Smart shares this scenario:

You walk into a clothing store and see what is probably the most bad ass leather jacket you’ve ever seen.

You try it on, look in the mirror and decide you must have it. While wearing this item, you imagine onlookers will clutch their chests and gasp every time you walk into a room or cross a street. You lift the sleeve to check the price – $1,000.

Well, that’s that, you think. You start to head back to the hanger when a salesperson stops you.

“You like it?”

“I love it, but it’s just too much.”

“No, that jacket is on sale right now for $400.”

It’s expensive, and you don’t need it really, but $600 off the price seems like a great deal for a coat which will increase your cool by a factor of 11.

You put it on the card, unaware you’ve been tricked by the oldest retail con in the business.

The con being the anchoring effect, also called, you mean I can get a $1,000 leather jacket for $400? The number that sticks in your head is $600, not $400. So the jacket seems like a deal, because you are getting it for less than half of what it’s worth. Except that it’s not worth anything because you don’t really need it.

The problem is that we unconsciously use the original price as a guideline.

The anchoring effect comes up often in our lives – not just when we are shopping.

Think about the last time you negotiated a salary or raise. Your entire discussion with your boss or manager references the first number or range stated. At a garage sale, when you haggle on an item, the negotiations are based on the starting price set by the seller.

Here’s another example from You Are Not So Smart of the anchoring effect:

In a 1975 study by Catalan, Lewis, Vincent and Wheeler, researchers asked a group of students to volunteer as camp counselors two hours per week for two years.

They all said no.

The researchers followed up by asking if they would volunteer to supervise a single two-hour trip.

Half said yes.

Without first asking for the two-year commitment, only 17 percent agreed.

What about the last time you negotiated a chore with your spouse or partner or boyfriend?

I’ve noticed that if I come right out and ask my husband for what I want, say, for him to make a dish for tonight’s dinner, he’ll counter with a lesser contribution, like setting the table. But if you ask him to make the entire dinner, then a compromise to make part of it doesn’t seem so bad. Use this strategy sparingly or it will backfire!

Let’s go back to the shopping scenario. A true bargain is based on an item’s value, not the actual price. I would pay more for a high quality pair of shoes, even though I could find a lower price (for lower quality) elsewhere. Plenty of people would disagree, as evidenced by Walmart becoming the world’s biggest retailer.

When we see sales signs, which are everywhere these days, we get skewed by those big percentages off. Discounts above 50% are no longer a dream, but quite common. Stores that roll out a constant stream of sales are playing into the power of the anchoring effect by wowing us with a massive difference between the price tag and what we’ll pay at the register.

So what’s a bargain hunter to do? As GI Joe said, knowing is half the battle. Being aware of the anchoring effect will give you pause at the store. Maybe, just maybe you could wait a day before deciding. Sleep on it and you’ll often find the next day you’ve completely forgotten about that leather jacket.

Comment to win this book!

Discovering secret credit cards, unpaid bills, and debt is a blow many couples cannot survive. In fact, money is the number one cause of breakups, says the married authors of “First Comes Love, Then Comes Money: A Couple’s Guide to Financial Communication.” Comment below to win my review copy.

Unlike most personal finance books, this one is not going to teach you to balance your budget or live debt free:

Why? Because without healthy financial communication, without a commitment to putting an end to financial infidelity, none of that stuff works. After more than thirty-five years of combined experience as financial advisers, we’ve learned that if you don’t know how to talk about money with your partner, if you don’t know how to keep financial infidelity from destroying your relationship, budgets and plans and payments won’t mean squat.

The first part of the book deals with discovering each partner’s financial personality, and how they can create conflict. The book divides everyone into five personalities: the saver, spender, risk taker, security seeker, or flyer. I’m definitely a saver or security seeker. Clashing financial personalities can cause major damage, even divorce.

The second section is about uncovering financial infidelity using what the Palmer’s call the Financial Relationship Index. Both partners take a quiz, earn a score of 0-100, then read what that score means. A lower score is best! The third and final part shares three basic financial communication tools to move forward, including a monthly “Money Huddle.”

All this in 189 pages spread over eight chapters and three appendices. The only trick is to be most effective, you’ve got to read it with your other half.

To win my review copy, comment below on why you need this book. Comment by Aug. 16 at 11:59 p.m. to win! If you can’t wait, buy a copy from Amazon for $6 (orig. $15).

Free credit score?

Reader Ruth needs help finding a free place to get her credit score. She writes:

i have found places where you can get your credit report for free. do you know of anywhere to, safely, get your credit score? seems like the ones i have checked charge for it.

Ruth, you allude to getting your free credit report through the legit site AnnualCreditReport.com, which is a great place to start. The contents of this free annual report is what makes up your score, so making sure it is accurate is essential to improving your score. But I can understand your desire to know your credit score number.

CreditKarma, which I wrote about in August 2009, provides a score free, but it is not the FICO credit score which you are seeking. The only other offers I’ve seen are “free” when you buy something else. Anybody got an answer?

MyFico.com

Curious about what goes into your credit score? It’s been more than a year since I wrote about this, so it’s time to revisit this ever useful information.

There are five parts to your credit score. Payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%), and

types of credit (10%). FICO, a financial analysis firm, uses these categories to rate consumers’ credit risk with a three-digit score. Within each category, there are up to seven factors.

For example, in the payment history category, credit rating agencies consider how many accounts you are up to date on, whether you have a bankruptcy or lien, and how long an overdue bill has been past due, among other factors.

In the length of credit history category, they consider how long it’s been since you opened an account, how long each specific account has been open, and how recently you’ve used each account. Read all the factors that are considered for each part of your credit score.

This is important stuff to know, but unfortunately the three credit rating agencies, TransUnion, Experian, and Equifax, don’t share specifics. How many points do I lose if I have a bill past due seven months instead of two? How many points do I gain if I am paid up on three accounts instead of one? We don’t know because they won’t tell us.

More information would help consumers improve their score, but getting a copy of your free credit history report (sans FICO score) through the FTC, is a good start. Look for open accounts that can be closed, errors, and mistakes. Fixes can take months, so get started early if you plan to apply for a mortgage or car loan.

When should your student get credit? Credit: Phil Scoville/Flickr

Credit.com recently listed its top three credit cards for students. Being unsure if teenagers should even have credit cards, I was curious what they recommended. Do the cards encourage responsible use? Are the usage rules and fees clearly stated? How do the cards compare to those aimed at adults?

Credit.com considered 41 factors to determine the top three cards, including annual fees, rewards to dollars ratio, online shopping discounts, APR, fees to cancel the card, how user-friendly the application is, and more.

The evaluation was run by Credit.com writer Beverly Blair Harzog, who started with 45 cards. I was surprised that out of a 100 possible points, the winning cards only scored between 50-52 points. Either Bev has ridiculously high standards, or these cards leave a lot to be desired. Here’s what she said about each one:

Winning card – 52 points – Discover Student CardBuilder: Build Your Own Credit Card

Pros: Discover’s CardBuilder allows you to create your own card. Well, it sort of does. There are some restrictions on the combinations you can create. I created a student card using CardBuilder and came up with a pretty terrific credit card. I chose the 5 percent cash bonus rewards, with rotating categories such as gas, restaurants, department stores, and groceries.

I like the reward categories because they fit in with the student lifestyle. The only hitch is that on purchases other than the rotating categories, you get a low .25 percent before you reach $3,000. Hint: Get there in a hurry by putting some of the semester’s expenses on the card and paying it off during the 25-day grace period. I pay tuition regularly, so trust me, it’s not hard to spend this much quickly. After you reach $3,000, you get 1 percent on everything. Right away, you’re teaching your child how to take advantage of rewards cards!

Cons: The card I created offers a 12-month zero percent introductory APR, which I highly recommend for someone who’s new to credit card payments. It leaves a little margin for error if your child has to rotate a balance for a month or two. Here’s the downside to my Frankenstein credit card: a 19.99 percent APR. But guess what? The goal is to teach your college kid that a smart consumer pays off the balance every month. If a credit card is handled properly, the APR shouldn’t matter. If not handled properly, well, your child will learn a painful credit card lesson. There’s no annual fee.

Second Place – 51 points – PenFed Visa Platinum Cash Rewards for Students

If you don’t have a family member in the military, you can qualify your child for this card by joining the Pentagon Federal Credit Union (this requires a $20 contribution to the National Military Family Association). There’s one other caveat: you must also be willing to be a joint owner on the account.

Pros: You get five percent cash back from gas purchases paid at the pump. On all other purchases, you get one percent cash back. Not bad at all for a student card.

Cons: You get a 13.99 percent variable APR on purchases, which is an excellent rate for this category. There’s no cash advance fee and there’s no annual fee. You can also get a 24-month, 4.99 percent introductory rate (and pay no fee) on balance transfers made between July 1, 2011 and September 30, 2011.

I don’t usually recommend that parents co-sign for a child so I consider this a disadvantage, or part of the “cost” of getting this card. There are too many legal and emotional issues that can arise. But this is an excellent card and if you think your child won’t have problems paying off the balance on time every month, this is a good option.

Third place – 50 points – Journey Student Rewards from Capital One

I continue to love the way Capital One presents its credit cards to consumers. It’s simple and direct. And on this card’s home page, they include credit education for students. I think that’s a great touch.

Pros: You earn 1 percent cash back on all purchases. That’s a rewards program that’s easy to explain to your kid. But you know what I really love about this card? If you pay your credit card bill on time, you get a 25 percent bonus on the cash back you earn each month. Positive reinforcement is always a good thing, right?

Cons: This card has a fairly high 19.8 percent variable APR. If your kid pays the full balance on time, this won’t matter. There’s no annual fee, no foreign transaction fees, and no balance transfer fee.

Note: Credit.com receives a commission when someone applies for and has his/her application for the Journey Capital One card accepted. It does not receive remuneration for the other two cards  mentioned in this post.

Credit.com is currently updating its disclosure policy to include a statement at the bottom of any credit card reviews for which the site receives a commission (upon successful application). The site also has an FTC disclosure in the right sidebar. Together, these two disclosures make it one of the most transparent credit card sites I know of.

Credit.com was founded in 1995 by Adam Levin, who used to be the Director of the New Jersey Department of Consumer Affairs. The company is based in San Francisco and New York.

The.Comedian/flickr

You know how many credit cards say they they double the manufacturer’s warranty? It’s the reason why I pay for major appliances with credit, not my debit card or a check, and why I almost always turn down an extended store warranty.  I’ve read about the warranty doubling in promotional materials but, until today, I never knew what this perk really meant and how it worked. Here’s what I found out.

I purchased a rather expensive window air conditioner from Sears one year and three days ago. I purchased this item from Sears only because I could not find this A/C unit anywhere else that included free shipping. I knew Sears did not have a friendly return policy. I did not buy an extended warranty because I knew my Discover card included an extended warranty.

Now it is 368 days later. I discover that

an important part of the A/C unit has disintegrated and needed to be replaced. I called Sears and was told “3 days past warranty. Nothing we can do. Call your credit card company.”

I was so proud of myself. I actually found the copy of the credit card statement that showed when, where, and how much I spent for the air conditioner. I called the credit card company. They kindly gave me the phone number of the insurance company I had to call to file a claim.

I called the insurance company. The guy on the phone let me know that it would take 15 minutes to complete the phone call. I said, “OK.” He wanted my name, all my contact information, the day, place and price of purchase. He also wanted the model number and the serial number of the unit. He also wanted to know what day my unit broke. He then told me that I would be receiving an email with paper work that I needed to fill out, a claim number, and a website for further instructions. To fill out the claim, I would need all the above information he already took, plus the original receipt, the original manufacturers warranty in writing, a picture of the unit, and a written estimate of what it would cost to fix the unit. I would then submit those and they would consider the claim. I would hear from them within 4 to 6 weeks! If they decide to pay the claim, they send me a check.

Wow! That certainly is NOT easy. Had my unit broken 3 days earlier, I would have had a part sent to me for free and/or I could have taken it directly to Sears for a fix. I’m lucky that my air conditioner still functions. Otherwise, the extended process to redeem the extended warranty would render the warranty useless to me because I don’t want to go without air conditioning in the middle of summer. I’d buy another unit or pay for the repair myself.

Hummm. I’m not really all that enthused about my extended warranty through my credit card anymore.

Of course, I do not know how this story is going to end. The good news is that I have found my original receipt (I have a great filing system) and the original manufacturers warranty. I submitted my paperwork — but I’ve still got at least 4 to 6 weeks before I hear back from them.

Have you ever used your extended warranty option on your credit card? What happened?

Real or fake? Credit: dreamglowpumpkincat210/Flickr

The fraudulent email I received from my credit card company, well, turns out it was real! After receiving the suspicious email and phone call asking for my social security number, I alerted the company and shared the email and phone number. Here is the (edited) response I received this morning from its Abuse department.

Thanks for checking with us on this e-mail. It actually is a valid e-mail that we sent to our customers and we’re sorry if it alarmed you. We appreciate your bringing it to our attention.

The response also included tips to detect phishing e-mails.

- Be careful of urgent-sounding e-mails that ask for your personal information.
- If you get an e-mail that claims to be from us but you aren’t sure, or you think it’s suspicious, don’t click any of the links. Just send it to us then delete it.
- Notice typos and grammatical mistakes. It’s a dead giveaway in fake e-mails.

And the email from my credit card company suggested these steps to make sure no one gets access or my personal information. Interesting that it omitted credit card freezing to prevent theft.

- Log in regularly to your online accounts and notice the last log in date.
- Check your bank and credit card statements to make sure all that you recognize all the transactions. If something looks suspicious, give us a call.
- Make sure you update your browser with the latest version and install any security patches that come with it.
- Make sure you have up-to-date anti-virus software and that run a scan on your computer at least once a month.
- Be careful when you download free software off the Internet. A lot of that free software can have viruses or other malicious software that could steal your information.
- Pay attention to e-mails from us—or other online companies—that tell you about e-mail and address changes, or any other activity on your accounts.

Lastly, the response said here’s what to do if I’m worried I clicked on a fraudulent email.

- Call us immediately to report that account information may have been compromised.
- Log in to Capital One Online Banking and change your password and security questions.
- Check your accounts for suspicious activity.
- Run your antivirus software on your computer.

I’m still concerned about the phone call, and replied that asking for my social security number was “a ridiculous question and one that should not be asked, even by legit callers. Your company should know better.” But I am a tiny bit relieved.

• Decide on the type of credit card you need. There is a wide variety of credit cards available from those designed for students to professional business people. There are different pros andcons with each type of card, so it makes a difference on the type you need.
• Look for the APR, or Annual Percentage Rate, for each credit card. Some cards will offer a very low APR as an introductory offer, and at some point in time a higher interest rate will apply. These periods of time can range from a couple of months to a year. There are credit cards offering 0% APR for up to a year!
• Keep in mind credit cards with a low APR (4.99 to 8.99% is considered a good rate) apply to those with good credit. People who have less than stellar credit will be looking at interest rates of much higher than that. A credit card that assesses an interest rate at 20-30% is really not worth it, as that high of a rate will most likely make it close to impossible to pay the balance down if you don’t pay it off every month.
• Determine if the credit card allows 0% balance transfers, which will come in very handy should you need to transfer a balance from one card to another.
• Compare credit card reward programs. This can be a good way to get an extra bang for your buck. If you travel a lot, credit cards that offer air miles or hotel discounts may be a great choice for you. If shopping is your thing, many credit cards offer both online and offline deals.

Make sure you read all the fine print. It is dry and boring, but the more you know the better you can protect yourself. Sometimes making a simple spread sheet can help you detail the benefits of different cards. It’s worth the time and trouble now, to save you money and to save you from financial concerns in the future.

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Freeze your credit beyond ice! Credit: paalia/Flickr

The best way to prevent identity theft is to freeze your credit, a little known and little used tactic. The second is to chose a harder password (more on that below). I learned both these tips last week during a savvy-shopping summit hosted by ShopSmart magazine, which is published by Consumer Reports.

New York Times’ Ron Lieber, who writes the Your Money column, shared the first nugget. The good thing about freezing your credit, which is NOT the same as literally freezing your credit card in a block of water, is that no company can open an account in your name this way. (The exception is any company you already have an account with.) So if a criminal, or your next door neighbor, is trying to open an account in your name, no dice. A bank, mortgage lender, or other company won’t be able to

access your frozen account, disabling them from establishing a new line of credit.

The downside is that it costs about $20 to freeze it, and then it costs a little more money to thaw it. You can set a credit freeze online that takes place almost immediately at all three credit bureaus: set a credit freeze at Equifax, Experian, and Trans Union.

The second nugget comes from Amazon CEO Jeff Bezos, who spoke at the ShopSmart summit.

“Chose harder passwords,” Bezos said. Your online bank might be super secure, but if you use the same password for a low-security site, criminals may get access to the weak site and use that password for sites that are harder to crack.

Do you use the same password for multiple sites?

Shhhhhheeeeyyyeeeeesss. (That’s me shushing you while admitting guilt.)

A good way to remember all those uber-difficult passwords you’re going to set is a smartphone app that save your passwords. Remember the password for the app, and up pop all your other passwords so you don’t have to remember them. Anybody got one to recommend?

Don't let your credit cards turn into a headache. B Rosen / Flickr

This is a post by BargainBabe.com writer Yazmin Cruz.

With recent breaches of personal data security from Sony, Michael’s, and a Dallas-based email management company, consumers must take steps to keep their information safe. Think you’re untouchable? Take these easy six steps to make sure.

1. Monitor accounts – If you notice something out of the ordinary in your bank or credit card statements, give the company a call. Keep an eye out for charges in other states, online transactions, and gas charges. These transactions are the most commonly made by hackers because they require little, if any, personal interaction, making them an easy way to test a stolen card.
2. Change your passwords – Keep your online accounts safe by frequently changing your passwords and making them as strong as possible by using allowed characters and numbers. Make sure to use different passwords for each of your accounts and most importantly don’t share your passwords with anyone. (A good way to keep passwords safe is with a password app or manager.)
3. Change your PINs – Like passwords, these numbers need to be kept in a safe place and not in your wallet. Avoid identity theft by knowing what should and should not be in your wallet. Call your bank and credit card company to change them when necessary. Do not use birth dates as PINs as hackers tend to attempt these numbers first.
4. Report phishing emails – If you ever get an email asking for your username and password, do not respond. Keep in mind that most banks and credit card companies do not ask for such information via email. Instead forward the email to the bank or credit card company so they become aware that their customers are being targeted.
5. Check your credit report – Make it a habit to check your credit report every year to keep your finances clean of any mistakes. You can get a copy of your report online. It’s free once a year.
6. Know your rights – Buying identity theft insurance is pricey and not necessary. Under federal law, if unauthorized charges are made with your credit card, the maximum amount you can be liable for is $50, that’s if you report it after the charges have been made and not within 60 days after the billing error. If the charges are made after you report the card lost or stolen, you have no liability.

Got money on the brain?

Credit: neon_neon/Flickr

Financial psychologist – that’s what Brad Klontz is. I chatted with him recently about why kids should fail financially, how our money problems stem from unconscious beliefs, and the money disorder test that can save us.

What is a financial psychologist? I’m trained as a clinical psychologist and in the last 10 years I’ve developed an expertise in personal finance. I created a treatment program for money disorders.

What is the most common money disorder? This will come as no surprise, but it’s overspending. We have a negative savings rate, credit card debt, and we’re modeling all these behaviors for our children.

So we’re teaching our kids bad habits? Yes. They watch what we do and model it. When kids see parents head down to the store, swipe plastic, and bring home a TV, what do they learn? One thing that I encourage parents to do is to break down the skills of money management. Even if you can afford to buy that TV, put a jar in the living room, put money in it. Talk to your kids about saving for it. 80% of college students have credit cards now. On average they have about $3,000 in revolving debt. Half of college students have four or more credit cards. (My emphasis.) We require kids to take a drivers ed class before they get behind the wheel, but there is no class to get a credit card.

What are three money lessons kids need that they are not learning in school?

We have to teach them self control. We have to talk about money with our kids. We need to model savings. The best way to involve kids in modeling is to use allowance purposely. Most parents give their kids allowance and then complain that it’s gone right away. Kids are impulsive. They want to feel now. Have structure around allowance. You can start this with a four year old. Have them save a dollar, have them spend a dollar, have them give a dollar away.

What’s the biggest complaint you get from parents? My teenager ran up a $1,500 cell phone bill! Get them on a prepaid card. There is a certain number of minutes and then it’s gone. The first month inevitably the minutes are gone in a week. You say, “Wow, you really burned through your minutes. You get 1,000 more minutes next month. Maybe there are ways you can stretch them out.” You can’t bail them out because you’re teaching them that if they are in trouble someone else will swoop in. You have to let them feel some of that pain. Help them fail.

Why would a parent want their child to fail? Because that is a really strong learning experience. Let them fail when the stakes are small. When it’s not repossession of a car or something big like that. Help them see the consequences of not delaying gratification.

You’ve won awards for your work money and wealth issues. Can you make me rich? Oh yeah, sure. Absolutely. Just start saving when you’re five. It’s interesting because if we all had a financial education when we were 18, there’s no excuse for all of us not to have a million dollars when we retire. It’s actually very simple. Save for the future. Don’t spend more than you make.

So are we all just really stupid? I think that we have not been educated. I remember economics form high school, but there was no applied economics, balancing checkbooks and managing money. The other thing is when we are engaged in destructive financial behaviors, which is always the result of money scripts.

What is a money script? A money script is a belief about money, typically unconscious, that drives all our financial behaviors.

Sounds powerful. They have a powerful negative impact. They are typically taught from our parents and they can go through generations. For example, my grandfather watched his family lose all their money in the Great Depression. Watching this he learns you can’t trust financial institutions. My grandfather died at 92 never having put a penny in the bank. He kept all his money in a box in the attic.

And he passed it down. My mother had an intense fear around money and not having enough. She wouldn’t invest in the stock market.

What are the other money scripts? Another is money avoidance: the belief that centers around anti-rich statements. Rich people are greedy. People get rich by taking advantage of others. Money corrupts people. I do not deserve to have a lot of money if others have less than me. You’ve associated having money with being bad so you subconsciously repel money. Or if money comes into your life you spend it or sabotage it in some way. You might be comfortable at a certain socioeconomic level. So you get rid of the money somehow.

The second pattern is money worship, what my family had. Things would get better if I had more money. Money is power. Money will solve all my problems. You either become a hoarder where you save religiously, or you spend money as soon as you get it. I’m never going to have money anyway, so get what you can when you can get it.

The third one is money status. Your self worth equals your net worth. People are only as successful as the money they earn. If you are good, your financial needs are taken care of. If you really believe that money is going to give you all these things, you take unreasonable risks in your business ventures or become a workaholic. You’re likely to overspend because it has to be new. You want everyone to see you in that car because it raises your status.

So if we could just uncover our personal money script? There are some questions you can ask yourself. I created a money disorder test. The assessment code to take it is mindovermoney.

Post-interview: I took Dr. Klontz’s 4-minute test and was told I had two issues:

• Your response style suggests that you are at-risk of developing a problem with workaholism.

• Your response style suggests that you exhibit one or more symptoms of financial infidelity.

I can certainly relate to the money avoidance script. I save intensely, but then am distrustful of financial institutions so I may be losing money by not properly investing it. What did your test say? Do you think it’s true?

Many credit cards offer some sort of incentive, but some credit cards which offer air miles also have decent typical APRs, inviting balance transfer offers and 0% on purchases, so as well as getting a good deal on the card, you could also be earning air miles every time you use it. Some credit card providers even offer special deals for new customers, so you can start building up your miles more quickly.

Some people may be wary of air miles credit cards, but providers are joining forces with reliable companies and banks, all over the world. The credit cards associated with banks, rather than airlines themselves, are often a lot more flexible about which airlines you can redeem your miles on, so that is something to remember when choosing a deal.

So when you spend, you receive air miles which can then be used for free air travel. As well as the flight itself, many providers offer other related rewards, such as travel insurance. And if you would prefer to travel in style, you can use air miles to upgrade yourself from economy. There is also the option of ‘topping-up’ your air miles by paying the extra it would cost to reach your preferred destination, if you find you do not have enough miles to get where you want to go.

Of course, even if you do not travel frequently it is still worth saving up air miles, as they will accumulate and you may find one day that you have saved up enough for your dream holiday abroad!

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