Have you ever viewed something at a distance that completely changes when you get up close? Perhaps not, unless you are near sighted, as I am. It is quite a revelation to think that you saw something and you got it wrong. Well my friends, whenever I write about credit card debt, I am told that I am just an enabler and that the only solution to the spend thrifts is a cold turkey, head in the sand approach so these credit card losers can "learn their lesson".
The problem with this approach is that the premise -- that all people who have large credit card debt are spend thrifts -- isn't correct. In most cases, not even close! The remedy of staying the course with the credit cards is as foolish as running them up in the first place by reckless spending (which in reality is probably done by less than 1/3 of the people). The idea of separating your credit card debt from your house is yesterday's solution because the laws have changed. Last, but not least, the thought that all debt is wrong and cash is the only answer to living is a wonderful thought, but might just cost you your job. Let's take a look at these notions.
From my almost two decades of experience I have seen more about people's lives than I ever imagined I would in the mortgage business, especially their finances.
Before I start explaining my experiences, I want you to realize that credit cards were designed for a purpose: to give instant credit to consumers for a various number of reasons AND they were suppose to be paid off at the end of every month. When it didn't happen, the credit card industry was born.
Have you ever tried to live without a single credit card? I did in 1975. After paying off a small ton of back credit card bills, I decided to pay cash for everything. Bad idea.
Really bad idea. In my work at that time I was required to travel, and so I did. Try and check into a hotel without a credit card. Even though I went to the same city once a month and stayed at the same hotel each month and had a letter on file with my financial information and a small deposit, it was a nightmare. Not to mention, if I had checked out and then found I needed to stay longer -- it was so hard the one night I slept in my car.
The bottom line is you need at least one credit card.
Back to the root causes of credit card hell. It really isn't spending, it is lack of reserves. Cash reserves. The real root cause goes beyond lack of reserves; it is called life. Life happens to people whether you expect or want it. It's there. Let start with accidents (usually auto); illness, theft, sudden loss of job, plant closings, error, forgetfulness, etc. So much can happen to a person that did nothing wrong, walked the straight and narrow, behaved, and yet there it is. I talk with so many people who had life happen to them, many with reserves that were wiped out because of something beyond their control, that I could write a book and I guarantee that at the end of the book you would say, "I had no idea".
I will mention forgetfulness before I leave the point. My oldest daughter, an English major in college, who created our web site and most of the great marketing ideas for my Company, used to get out of her car and put her purse on the roof while she got the rest of her materials out of the front seat. I don't think I have to draw you a picture of how many times she drove down the street and the purse was launched. She didn't lose a lot of money over her young life, but it was a lot to her. Because of a few moments like this and some over spending she actually quit college for a semester to work and pay off her debts. She still graduated with honors. What if she was the breadwinner and let her forgetfulness impact her finances? What then?
Many have written about the foolish idea of taking an unsecured debt and attaching it to your house and making it secure. Why give the credit card companies something to grab hold of? Whether you noticed or not, we have a new bankruptcy law in this country which no longer gives you a free pass from your credit card debt. Your thinking was correct then, but not now. One protection available to homeowners and not anyone else is the homestead law, which in some states allows you to protect some of your equity from the credits. If you don't know how it works, check with a real estate attorney or broker in your locale.
Staying the course with your credit cards and not rolling them into your house is really silly. First of all, you don't really reduce your equity because your net worth is your assets less your liabilities -- and the inclusion of the debts in your home mortgage reduces the equity plus reduces the liability of the credit card debt. Net result to your bottom line is zero. Credit card interest isn't tax deductible while mortgage interest is, in most cases. The interest rates on credit cards defy imagination getting as high as 33.3%. Failure to pay more than the minimum will find you either making some serious mistakes by credit card transferring or slowly leading you to the poor house. You can cut your payments by 1/4 and also help yourself by shortening the amortization on your home mortgage by using the 3/4 you saved to pay your mortgage, not your credit card interest.
Last but not least, this country and its economy is built on debt. Take it away and the way we live, work and grow as a society changes. We couldn't expand our super structure, increase our scientific knowledge, or employ the vast number of workers we have without a modicum of debt. Debt isn't bad; how you handle it might not be the best for you, but it probably helped you create your net worth. If you bought your house with a mortgage and it has gone up in value, thank your lucky stars for the leverage that worked so well for you.
That's my thoughts on the matter. What's yours?
Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom. Roger is the President and founder of Manhattan West Mortgage.