Category Archives: Predatory Lending

Debt Is An Addiction

Debt is very much like an addiction, and it needs to be approached like and addiction. Getting out of debt takes time and it takes sacrifice. It takes determination. You have to want to get out of debt. It will be hard and there will be withdrawals. It requires a change in lifestyle, but you can do it!

Our motivation has been gearing up to homestead. Going through our finances and credit reports as we work towards being debt free. Twenty years ago we, mostly me, had accrued a mind-numbing six-digit personal debt, with no real assets to show for it.

Over that twenty years, we have worked very hard to shake ourselves from the grip of credit indebtedness. We had developed many bad spending habits over the years. More importantly, we had never learned how to be fiscally responsible in the first place. So we forged ahead, with an occasional backslide, learning as we went.

The best step toward fiscal responsibility is to start out young. Start with a cash-only personal financial plan. Save credit cards for a few years down the road after you have established good financial habits. Credit, when you are young and starting out, works against you by not forcing you to really learn how to live within your means and manage your money. Floating a little extra here and there on a credit card gets you into an instant gratification groove that undermines fiscal responsibility. Especially when everything we do these days seems to be encouraging instant gratification and easy convenience.

With credit, it’s all digital, ones and zeros over a wire, there is no cash-in-hand, nothing tangible to see and feel. There is no tactile value in credit. In cash-based personal finances, you can hold your hard earned money in your hand. It doesn’t take long to develop a desire to actually hold on to some of that hard earned cash.

When you are cash-based, you can see the money come and go, physically, in and out of your hand. You develop a tactile and visual link to what you have earned and how far it really goes. Which is not that far. Spending becomes a physical thing. Buying something with a credit card, or even a debit card, you hand over the card and they hand it back to you. Physically you have neither gained or lost anything. Monetarily on the other hand… But there is no connection.

Personally, I have come around a little on the matter of credit. For a long time, I viewed it as the source of all my financial woes, which was not true. I was the source of those woes. I don’t know how to properly use credit. I still struggle to keep credit debt at a minimum. Fiscal responsibility is a lifetime effort.

For the last ten years, we have been operating primarily on a cash basis. As the money flowed in and out I gained a physical sense of the value of that money, not just a mathematical one. A sense that connects directly the hours worked, cash in hand, and goods and services purchased with that cash.

Another thing that will through a wrench in the works is automatic payments. They will undermine you every time. Turn off all autopays and find a way to make that a cash transaction if possible. If not, make an effort to pay manually with a debit card or checking account. “Conveniences” like linking accounts and autopay take those transactions out-of-mind and make them easy to overlook, and over spend. Think about all those over limit and insufficient funds charges.

Cash based personal finances requires you to save receipts and account for your self, litteraly. When you are working in cash, you have to know how much you have, you have to set asside what you need for the basics. You have to learn how much you actually spend on food and transportation. Some people are very surprised to find out just how much they spend on food each month, especially when you don’t eat at home.

For those who think it’s impossible to live on a cash basis, you’d be amazed. All utilities, gas, electric, phone, internet, cable, they all have physical locations you can go to make a payment. Having to take the time to go pay a bill is actually good for you. It makes you see just how much you are spending on these critical items and how much you need to budget for them. It also helps you develop skills in planning not just your money, but running errands efficiently. Avoid mall keosks for paying cell phone bills if you can, especially if you like shopping at the mall.

Non-utilities can be paid through the mail with a checking account or on line with a debit card. Like paying utilities in store fronts, going to the bank and making a deposit when you need to write checks, pay an online bill, or to cover a special purchase reenforces that connection of labor, money, and goods and services. It is a physical connection. You have to think about it and plann accordingly.

Living cash based, not money-in-the-bank, prevents you from impulse purchasing. It requires you to take extra steps to buy something not planned for. You have to go back home for more money, or go to the bank and make a deposit. It requires you to plan your shopping. It developes that fiscal diciplin most of us never learned as kids and now have to teach ourselves.

It sounds like a lot of hassle, and it is. It’s supposed to be. It forces you to develope skills in personal bookkeeping and financial responcibility. It forces you to develop a physical sense of the value of money and what you spend it on. It forces you to think ahead and prepair for potential problems.

Had I known as a 20-year old what I know now… Convinience is the enemy of fiscal responcibility.

Now for a confession, credit is not the bad guy. The financial industry is predatory, and it does hope you don’t know how to manage your money. It hopes you maintain high balances on your accounts. Keep paying your bils on time and a balance of 50-75% of your limit and they will keep raising the limit until you spiral out of control or are under huge debt load. That’s how they mak their money. They will happily set you up for a massive fall, but you are the one who signs the contract. It’s all on you. I learned this the hard way.

If your outstanding credit bills total more than a months salery (excluding house and car), consider trying cash based personal finances for a while and pay off those credit accounts.

If the outstanding balance for your car is more than six months salary, same thing, try living cash based for a while and pay that sucker off.

A note on leasing; unless you drive your leased vehicle for a living, leasing is a zero sum game. There is no equity in a lease unless there is a buy-off at some point and you get to keep the vehicle. All of the money you spend on a lease is lost, there is no asset to justify it. Sure you may be driving a new car every two years, but you don’t own anything. This goes for the vast majority of people who lease cars.

Houses and property are a bit more dificult to calculate. As a baseline, if you owe more than 5 years salary and/or have less than 50% equity in your house or property, consider living cash based until you get there. This is dubbely important if any of your livelyhood comes from the property or you work from home.

I won’t even go into luxury items like boats, vacation homes, and the like. As the name implicitly states, they are luxuries. Own it, or unload it if you aren’t debt free or very liquid.

Take a close look at your credit accounts and add up the limits to one big credit limit number. Now add up all of your balances and see where you are. If your balance total is more than 50% of the limit total, and/or you can’t pay all of that off in 3 months, you have some work to do. You should be able to pay off credit debt in 3 months or less without it putting you in a bind, or at least have a plan if something happens.

Now the really important number, add up all of the interest charges from all of your credit accounts for one month and multiply that by 12 (this time include the interest from house and car loans/leases). That’s how much of your hard earned money you are giving away every year.

Unless you are debt-free, or nearly there, that much money should make your head spin a little.

I did this again recently and it nudged me to zero an account. Now I can apply all of that interest to the principal of another account. It’s like knocking over dominos.

It doesn’t mater how much you make or how big your house is. Most americans live outside their means. It’s what we were brought up with. It is said that most americans, a percentage in the 90s, carry less than $20 in cash most of the time, and are unable to scrounge up $2,000 in 48 hours when needed for an emergency. Over 90% of us!

The more you make the farther outside your means you are likely to be living. Nice house, nice car, a boat, a vacation time share, these may seem like signs of prosparity, the All American dream, but if your credit-to-debt ratio is greater than 10%, and statisticly it’s more likely somewhere around 80%, a hiccough in the job, a medical issue, or larger economic glitch will send you scrambling.

I’m saying all of this because it has taken twenty years to get our own finances uder control and learn the lessons I have been writing about here. We have been, and are, living by these guidelines. It’s not an easy road, scaling down, not getting to do some things, but in the long run, we haven’t gone without what we need. We have developed a lot of good habbits; we eat better, we are healthier, we communicate with eachother very well, and we recognise the difference between wants and needs. It may take some time, be if we really want something, we can usually make it happen.

After 20 years, 10 on a cash basis, we are just begining to slowly rebuild our credit responsibly. It’s been a long road to recovery and it requires daily vigelance. Currently our revolving C/D ratio is under 6% and that balance is interest free for 6 months. It will be paid off well before then, and it was a consious decision intended to rebuild credit, not out of nessesity. Back when credit was a new thing for the middle class they used to say you could only get credit if you didn’t need it. That is how it really should be.

We bought a little over 2 acres in June last year and have accrued about 15% equity to date. By the end of this year, we should have about 60% equity and be able to pay it off early next year.

I still have a big chunk of student loan debt that needs to be addressed and that’s the big finance project once we get closer to paying off the property. Our goal is to be completely debt free by 2020.

As I said, getting there takes time, but developing those skills early can save a lot of time and prevent a lot of head and heart achs. We still have a few years to go until we can claim Debt Freedom, but the light at the end of the tunel now is actually daylight. A few years ago it might well have been a train.

Everything you need to know about getting debt free is that all-to-uncommon common sense.

  • Start living on a cash basis now.
  • Don’t spend what you don’t have.
  • Cut out non-essentials, and be honest about what essentials are.
  • Focus on paying off creditors one at a time, usually high-interest accounts first.
  • Be vigilant, you can do it!
  • If you stumble, don’t kick yourself; get up and get back to it.

One extra word on organizing. You can stay on top of spending with a register or columnar pad and a calendar. Software, like Quicken, helps a lot and there are free bookkeeping programs available as well as templates for spreadsheet programs. We use Quicken and I post reminders on Google Calendar all the time. It works well for us. You may have to test the waters when it comes to software. Also in terms of software, don’t use the software to connect to financial institutions. Hand enter all of your transactions, your trying to get an intimate understanding of your finances, don’t

Also in terms of software, don’t use the software to connect to financial institutions. Enter all of your transactions by hand, you’re trying to get an intimate understanding of your finances, don’t take shortcuts.

2000+ words later, lecture over. Debt Free is doable, seriously.

Until next time,
~FlyBoyJon

Predatory Lending

I just couldn’t let this one slide by. After getting home from running some some errands I went down to the mail box and found a bill (the only paper bill we still get), from our only remaining credit account, Fingerhut. I think I will let you read the letter for yourself before I make any comments.

***** Begin Letter *****

Great News!
Your Credit Line has
been increased to
$1,267.00
 

Limited Time Only
 
Customer Number: xxxxxxxxxx

Dear Xxxxxx Xxxxxx

Congratulations! You are being recognized with a well deserved Credit Line Increase on your Fingerhut Credit Account issued by MetaBank. This increase has been approved exclusively for you and is good for a limited time only:

Your new increase brings your Credit Limit up to $1,267.00 for use until January, 15, 2011. Your AVAILABLE CREDIT* is now $1,062.05.

Only select account holders like you qualify for this privilege.

Fingerhut reserves credit line increases like this to reward special customers like you, Xxxxxx Xxxxxx. It expands your buying power so you can get the things you want and need for you and your family. Use its convenience to shop the latest Fingerhut catalog – or order from the expanded product selection available online at fingerhut.com.

BONUS: The more increased credit you use, the more you keep.

You can make your credit line increase permanent! Just use the credit available on your account by January, 15, 2011, and your credit line will stay increased by the amount of your purchase(s) up to the Total Credit Limit listed above.

Take advantage of your new credit privilege now, Xxxxxx Xxxxxx. It’s your reward for being such a valued customer, so order today.

Best regards,
Brian Smith
Chairman, President and CEO

***** End Letter *****

On the surface you might be saying to yourself “Wow, what a nice company. A thousand dollar credit increase right before Christmas? Awesome!” Not on my Aunt Bippy’s bunions buddy! There is nothing awesome about this at all.

I have made it abundantly clear on numerous occasions via telephone that not only were we not going to buy merchandise from them any more, but that we would be closing our account as soon as it was paid off. I am reasonably sure that none of that has been added to any record the marketing and promotions people would see, if a human was even looking at any of this before it was sent out anyway. It just yanked my chain enough to post about it.

First off you get the butter-up about how special you are, then they tell you how much buying power they are giving you (at 24.9% APR of course.) The kicker here is the part about your ability to make the limit increase permanent. All you have to do is spend a thousand dollars on your account, the account you can’t afford as it is. How empowering of them! SCHMUCKS!

Fingerhut’s primary client base is below or near the poverty level. They pray on people with low incomes by sucking them in around the holidays every year. Exorcise your buying power and buy the things you and your family want. How magnanimous. This year’s you’re so special increase is considerably more than usual. I am not sure what that means overall, but it indicates that they are looking to accumulate a lot of customer debt. Did you catch the part where they are practically begging you to push your credit to the limit? That’s where they make most of their money you know, late and over-the-limit fees.

We are just about payed off on our Fingerhut card from Christmas last year. Credit experts say you shouldn’t be in debt for a whole year from the Christmas season. I recall hearing somewhere that you should be back to normal finances by the end of March. From a forecasting and budgeting perspective, you should be able to pay off all of the holiday debt using your income tax return. From a purely pragmatic point of view, you should be saving money and making purchases for the holidays throughout the year so there is no added holiday debt. I know it doesn’t really work out that way very often, but we are making an effort to that end result anyway.

I am hear to spread the Gospel of Pragmatism! Just say no to holiday credit increases! Live and buy within your means. Believe it or not, the more you stay within those means the sooner debt will decrease and you will see more disposable income and be a hell of a lot happier in the process.

I’m just saying…

*** Due to the overwhelming volume of SPAM commenting on this page comments have been turned off. Since there is a Captcha field to ensure that a real person is inputting comments, that means that there are a bunch of douchebags spamming my site. I do not appreciate the total and complete lack of class or netiquette the spammers have exhibited. ***