Warren Buffett and His Credit Card Fiasco

Did you know that Geico was in the business of issuing credit cards at one time? That was until Warren Buffet put a stop to it!

Warren Buffett may have thought it was a good idea to go into the credit card business, but his chief executive decided otherwise due to the rate at which the company was losing mine at the end of 2009.

The problem centers around Geico, the auto insurance company which has been famously represented in TV commercials by cavemen and a little gecko as its spokesperson. The company that owns Geico as of 1996 is Berkshire Hathaway, one of Warren Buffett’s companies. Geico made a recent attempt to release credit cards which turned out to be a “very expensive business fiasco” according to a letter disclosed by Buffett himself. As an auto insurance company, Geico has become a major contenders against other players in the industry. As a matter of fact, it is the third largest auto insurance company in the United States right now. Since 2002, Geico has acquired more than 4 million new policyholders and, as a result, has become the leading auto insurance company in many states, including New York.

As a result of the insurer’s major successes, Buffett thought it might be a good idea to issue a credit card to loyal Geico policyholders. Despite the advice from Geico executives, Buffett released the Geico Platinum MasterCard. He felt that policyholders would be good credit risks and if they were offered a credit card, they would be more likely to switch to Geico’s services. Buffett even went so far as to ask people to sign up for a Geico credit card in his investor letter for 2005. He said it was the one he uses for all his charging needs.

Unfortunately, many of the people who signed up for the Geico credit card were not as “well-to-do” as Buffett is. Before long, the credit card aspect of the business had more than $6 million in pretax losses. At this point, Buffettt decided to pull the plug on the Geico credit card and his company sold the outstanding receivables for nearly half of what they were worth. In total, the Geico credit card fiasco cost his company more than $50 million.

Buffett admits to making mistakes in business in the past. This was not the first time he jumped into something that did not work out as he had planned. One time he purchased some ConocoPhillips stocks at a time when the oil prices were at a record high. He also invested in some Irish banks whose shares fell by almost 90% shortly after making his investment.

Buffettt isn’t too worried about the situation, however. While he is not happy about losing money, he said he made a bad decision and while he isn’t as old as a Geico caveman, he has come through the experience a wiser person.

Editorial Disclosure: Opinions expressed here are those of the author, and have not been reviewed, approved or otherwise endorsed by any bank advertiser, card issuer, airline or hotel.

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Five Ingredients for Debt Disasters

Five Ingredients for Debt Disasters

Many of us have financial habits that get us into debt trouble. Here are some of those habits so you can look at your self and see if there are some changes that need to be made.

Credit cards can be a great way to pay for emergencies and other necessities when you are running low on money. However, it is so easy to fall into a financial disaster of debt if you use them unwisely. We often have bad habits that could mean a world of difference to us if we could only change them. Here are five financial habits that can mean a debt disaster. Look for these habits in your own life so you can change them if you need to.

1. Using balance transfers as a means to pay your credit card debt. If you do not change your spending habits, transferring balances is not going to help your debt situation because you are likely going to keep charging on the card from which you transferred your balance. Instead, concentrate on paying down your debt and changing your spending habits before transferring balances.
 

2. Ignoring your credit report. If your credit report has inaccurate information and it is negative, your credit score could suffer greatly. This could have an effect on your interest rates and the money you are paying on your credit card balances. Check your credit reports a couple times each year and report any inaccurate information to get the best interest rates possible for your financial situation. It’s easy to report errors so there is no excuse for not doing this.


3. Not letting your creditors know about your financial hardships. By alerting your creditors immediately when you come upon some financial hardships, they are more willing to work with you than if you miss a few payments before contacting them. The creditor may be willing to lower your interest rates or suspend a couple payments until you get your finances back in order. But you will never know unless you call them first.


4. Making late payments. It might seem like just a small fee when you make your payment late, but paying late can cause your interest rates to go up and that can increase your balance quickly.


5. Being satisfied with only making the minimum payment. It can take several years longer to pay off your credit cards if you only make the minimum payment each month. The interest and other fees build up and you could be paying double, triple or even quadruple what you would have paid if you just paid more than the minimum payment. Trying paying double the minimum payment and you will see your credit card balances drop quickly.

Editorial Disclosure: Opinions expressed here are those of the author, and have not been reviewed, approved or otherwise endorsed by any bank advertiser, card issuer, airline or hotel.

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National Capital Also Leads in Credit Card Debt

National Capital Also Leads in Credit Card Debt

Which states have the highest and lowest rates of delinquent credit card payments? Is there good news coming from the credit card industry? Hardly.

Residents in Washington, D.C. have an overall credit card debt than the national average, according to a recent report from TransUnion, a major credit reporting bureau. However, D.C. residents are also better about paying their credit card bills on time as the delinquency rate is lower in the city.

In the fourth quarter of 2009, 1.21 percent of credit card holders were delinquent by at least 90 days on their credit card payments. However, in D.C. and Baltimore, the rate was about 1.07 percent for delinquent payments. That figure is just a little better than it was around the fourth quarter of 2008. As another bonus, none of the states showed an increase in credit card debt during the last quarter of 2009.

Across the nation, the average credit card debt during the fourth quarter of 2009 was about $5,434. That figure is about 5.15 percent lower than it was at the end of 2008. In the D.C.-Baltimore area, the credit card debt among residents fell by more than seven percent from $6,147 to $5,707.

One of the main reasons for the drop in credit card debt during the last quarter of 2009 is due to the fact that people are more conscientious about paying down their debts as a result of the financial problems. When people are uncertain of their financial futures, they want to have a “cushion” to fall back on in case they need extra money for bills, groceries or other necessities. Since many people are faced with those realities today, they are taking a more proactive approach with their finances and trying to solve problems before they become an even bigger issue.

As far as other states go, Nevada had the highest delinquency rate when it comes to credit cards with a two percent rate. Florida and Arizona were the next highest rates of delinquent payments while South Dakota, North Dakota and Alaska had the lowest rates in the nation.

According to TransUnion, if this trend continues, we could see the delinquency rate drop as low as 1.2 percent by the end of 2010.

On a less positive note, the number of charge offs during the first month of 2010 increased by as much as 0.83 percent up to 11.15 percent overall. Analysts think this rate could reach 12 percent in the next few months due to the unemployment problem and other financial issues facing our society today.

What are you doing about your credit card payments? Have they fallen by the wayside or are you trying to keep them up in case you need some extra credit in the future? Desperate times call for desperate measures and people are certainly feeling the pinch and finding creative and unorthodox ways to deal with the problem.

Editorial Disclosure: Opinions expressed here are those of the author, and have not been reviewed, approved or otherwise endorsed by any bank advertiser, card issuer, airline or hotel.

Advertising Disclosure: This site may be compensated for hosting offers.