Why Making Minimum Payments On Credit Card Debt Is Insane

Filed under Credit Card Debt, Inspiration by on December 21, 2009 at 7:13 am {no comments}

If you can’t write a check, you don’t have the resources like a 401k or equity in a home to pay off your debt, what can you do? Most people out there are just making minimum monthly payments, exactly what the banks want them to do.

The average client I deal with these days has around $40,000 in credit card debt. This is a lot of debt, on top of which they’re paying 20% to 30% interest. This large payment is really hurting their debt-to-income ratio.

Most of these folks are over half-way utilized. Many people are already maxed out, hurting their credit again on the third leg, (debt to credit limit ratio) and they’re struggling to achieve the holy grail of credit by making their minimum payments on time. Unfortunately, that’s a trap! There are a lot of false beliefs that keep people in this cycle for a long time. You’re basically trapped if you don’t get off of that treadmill. You will be on it forever, making those minimum payments.

What most don’t realize is even if they have perfect payment histories and a “great” credit score, if they’re over utilizing their available credit or have a high debt to income ratio, they won’t be able to get affordable financing for the things they really want (cars, homes, etc). Those minimum payments aren’t getting them any closer to these goals.

Minimum payments on $40,000 of debt with 20% interest are going to take you 60 to 70 years to pay off. That’s a long time, too close to forever. Even if you owed $20,000 with an 18% interest rate, you’re still looking at 30 years or more to get out of debt. Making minimum payments is only good for you in the very extreme short term to maintain cash flow.

The appeal to buying on credit is overwhelming. You can have a lot of leverage because you can buy a whole bunch of stuff with a small monthly payment. This allure is what has trapped most people in America and is causing the current debt epidemic.

Really, there’s an epidemic out there! There’s over $2.3 trillion of consumer debt.  The credit card companies are raking it in with little to no regulation on how they conduct their business (ie: interest rate hikes, penalties, fees, etc). This is not a small problem, and this is the trap you’re falling into when making minimum payments. There’s got to be a better way; unless you just want to be a slave to debt for the rest of your life.

Was this valuable to you?  Feedback?  Question(s)?

Please share your thoughts and ideas below.  I respond to any questions posted as a comment in detail by email.

Thank you for the opportunity to serve you!

Here To Be An Asset To You,

Jesse Niesen
DebtGoToGuy.com

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Credit “Rating” vs. Credit “Worthiness”

Filed under Credit Help by on February 9, 2009 at 7:12 am {one comment}

What’s the difference between “credit rating” (credit score) and “credit worthiness?”

How do these two different aspects of your credit affect you? How much money is your debt  costing you right now?

Many people are overly concerned with their credit score.  Many don’t really know how credit works.  Even fewer really understand “credit worthiness.”

To most it’s a mystery…

Now that you know “How Credit Works,” let’s go to up to 30,000 feet for just a moment and look down at this situation to get a clear perspective…

We have to realize what’s actually going on here, because most people think making payments on time is all there is to having “good credit,”  so they make their payments on time month after month, year after year, paying insane amounts of interest along the way…

Most mistakenly think their credit score is the most important thing.

Why is this happening?

It’s happening because the credit bureaus and the credit card companies are in cahoots. Working together they make billions and billions of dollars a year through this system of credit, designed to prey upon human nature.  The industry capitalizes on financial hardship, something you may have experienced yourself firsthand.

What am I talking about here?

I’m talking about the credit card industry having the deepest pockets and the tallest buildings in the land.  They do lots of advertising and sell their ideals well to the public through mass propaganda. This is what’s caused people to mistakenly think making your payments on time is the holy grail of credit.

Payment history and credit score are important, but they are not everything, or even the ultimate thing…

Remember “the big idea” is to earn interest, not pay interest.  The credit card companies know this.  They’ve built their business around this idea, but here’s the catch: “they” depend ON YOU to pay them interest!

The reason your payment history has been made to seem like it’s the most important aspect of your credit is because the credit card companies want you to simply make your minimum payments every month, paying the highest interest rate possible, for the rest of your life!

This little secret was exposed in 2004 by the award winning investigative journalism of the PBS Frontline/NY Times Special Report “Secret History of the Credit Card.”  I encourage you to watch this special some time if you haven’t already.  You can watch it all for free online through the link above.

It turns out credit card companies actually label you as a “deadbeat” if you pay your cards off every month. The credit card industries want you to pay the minimum monthly payment every month, so that’s what they promote because it’s how they make their money. That’s okay; you just need to understand the difference between propaganda and reality.

Credit isn’t made up of just your payment history. There are the other two factors, each almost equally as important.  Either can ruin your credit worthiness, even if you have a “perfect payment history”.

Here’s an example:

You may have a credit score greater than 700. If you walk into a mortgage broker they’re going to be happy to see you, rubbing their hands together and smiling, because they can get you any loan you want!  Or so it might appear at first…

However, if they pull your credit report and see you are enrolled in credit counseling (which the credit card companies, the credit bureaus, and the whole credit industry promote), your credit worthiness (your actual ability to get a loan) will be crippled.  You are not likely to get a loan at all these days, and if by chance you do, you will pay higher fees and interest despite your high credit score because your credit worthiness is poor.

Credit counseling, non-profit counseling, debt consolidation, and debt management programs are all different names for the same thing.  These programs are heavily promoted by the credit industry. The credit bureaus themselves, along with most credit counselors will tell you credit counseling does not affect your credit score and that’s true.  “They” have made it this way, and so, if you’re in credit counseling, it’s no longer going to negatively affect your credit “score.” You may be able to keep that 700 credit score.  But it’s only a “half-truth,” or in other words, in light of your credit worthiness, it’s a lie.

It’s a “half-truth” (lie) that credit counseling doesn’t affect your credit score.

(Hint: credit worthiness)

When your mortgage broker pulls your credit report, each account included in a credit counseling program is listed as “THIS ACCOUNT IS INCLUDED IN CONSUMER CREDIT COUNSELING SERVICES” (or similar).  The industry term for what this looks like to a lender is a “walking bankruptcy.”

It’s like having a BIG RED “X” on top of your three-legged stool!

Here’s why credit counseling hurts (even cripples) your credit worthiness:

Statistics came out a few years back showing the average failure rate for credit counseling is around 70%.  Roughly seventy percent of the people that enroll fail to finish the program and will not get out of debt. It’s no secret most of those people who fail end up filing bankruptcy. This makes you a much bigger risk to the lender.  Therefore, lenders see you as mush less credit worthy than your credit score would make you appear.

As you can see, it isn’t just about your credit score; your “credit worthiness” ultimately affects your ability to get a loan.

Someone with the 700 credit score enrolled in credit counseling may not get as good of a loan as someone else who filed bankruptcy two years ago and now has rebuilt a good payment history with zero debt and cash flow freed up to commit towards monthly payments on new debt.

The person who filed bankruptcy may have a lower credit score but may be much more credit-worthy than the person with the good credit score who’s enrolled in credit counseling and strapped for cash every month trying to keep up with payments.  Statistics say the person in credit counseling will fail.  How would you feel about lending money to such a person?

A/B Example:

Problems in either of the second or third legs (too high of a debt-to-income ratio or balances over 50% of your limit, maxed out or over the limit) can also hurt or cripple your credit worthiness, despite having a perfect payment history or a good credit score.

A = Perfect payment history, maxed out utilization, high/maxed out debt-to-income ratio

B = Bad payment history, but NO DEBT = low debt-to-income ratio and low / no utilization

Go ask any mortgage broker…

  • Who are they going to lend to?
  • Which one looks like a bigger risk for Bankruptcy?
  • Which one would YOU lend to?

2009 WAKE UP CALL: “These days”… very few people are left with “perfect credit.”  With the collapse of sub-prime lending, it’s very difficult to get financing today if you have “less-than-perfect” credit.  So if your credit is not stellar, then you may not be able to get financing at all, and it’s time to look at solving the underlying problem of debt now, while your credit takes a back seat.

What’s more important to you, your short term credit rating or long term credit worthiness?

Where is your credit score right now? ___________

How is your credit worthiness?  GOOD?  BAD?  CRIPPLED?

Keep in mind the difference between credit rating (credit score) and credit worthiness as you evaluate your options to be debt free.

Here To Be An Asset To You,

Jesse Niesen
DebtGoToGuy.com

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Debt Relief Options: Bankruptcy

Filed under Bankruptcy by on January 3, 2009 at 8:01 pm {one comment}

Traditionally, if you’re not able to make minimum payments,  you’re in a hardship, or you just find yourself in too much debt, what you do is  file bankruptcy.

You file bankruptcy and you pay zero. The creditors get nothing and it’s the ultimate move, the ultimate trump card that you’ve got as a citizen. Unfortunately, about a year-and-a-half ago Congress passed new laws, which made it  extremely difficult to file for what’s called Chapter 7 bankruptcy.

Let’s talk about the difference real quick.

There are two types of bankruptcy for personal bankruptcy filing. I’m not a bankruptcy attorney, I’m not an attorney at all, so this is purely educational information. This is not any kind of legal advice. (If you want to talk to a bankruptcy attorney, I do have a close network of bankruptcy attorneys nationwide. I would be more than happy to refer you to somebody in your state/area. Just contact me, and I’ll get you in touch with them. They can answer any specific questions.)

As a basic overview, Chapter 7 bankruptcy is called liquidation, where they wipe out the debt completely.  Chapter 7 is the type of bankruptcy  these new laws affected and they have made it much more difficult to qualify. Chapter 13 bankruptcies, on the other hand, are called a repayment plan. This is where you pay back a portion of the debt, usually over about 60 months. During that time, you are making court-ordered payments and you have to go before the judge.

Let me break it down for you this way:  Chapter 7 bankruptcies are a pretty good deal, if you need to do it, it’s a good way to go if you can qualify. I don’t see Chapter 13 bankruptcies really being in the best interests of anyone.

Unfortunately, some people have been tricked or fooled into filing Chapter 13 bankruptcies. So far, I haven’t seen it come out as the best option for most. This is why:

  • the payments are usually as high or higher than other types of programs, and
  • you pay back as much or more than other types of programs,
  • it’s more stressful,
  • it’s more official
  • it’s a court ordered payment.

If you don’t make it, you’re done! There’s no forgiveness, there’s no helping. You go through tough times! If you don’t make that payment, the Chapter 13 bankruptcy is over.

It’s also going to stick on your credit for seven years as a bankruptcy, which is one of the worst things you can possibly have on your credit report. It stays around for seven years after your payment plan is over. If it’s a five year payment plan, you’ve got 12 years of bad credit from that bankruptcy.

A Chapter 7 bankruptcy shows on your credit for ten years, but its usually completed within a few months. You’ve now got ten years that the Chapter 7 is going to be on your report, which is going to hurt your payment history. It will however, improve the other areas of your credit by wiping out your debt and optimizing your debt-to-income ratio and your debt to credit limit ratio. It eliminates those problems, whereas a Chapter 13 bankruptcy really cripples your payment history. Plus, with Chapter 13, you still owe a good portion of your original debt with payments over a long period of time so your debt-to-income ratio is not much better than before the bankruptcy.

You have to make the payment the judge sets, and it’s the maximum amount you can possibly pay, which is usually quite high. You’re not left with much to live on, and you don’t really have any say in the matter. Of course, it’s also not wiping out the utilization fees until it’s all over years and years from now.

If you can qualify for Chapter 7,  it might be a good choice for you if it’s the way you want to go. If you can only qualify for Chapter 13, my advice is to run! Give me a call. We can talk, see if there’s another option. I haven’t seen Chapter 13 work out well for most people. Usually, they make the decision to enter into it out of ignorance or bad advice.

Let’s look at Nicole, a client I worked with in Virginia. She’s in her early thirties and has a 20-month-old daughter. She had $53,000 in credit card debt. She and her husband had some challenges over the past few years with employment and steady income, so they fell behind. She used to have perfect credit. All the debt is in her name and once she fell behind the interest rates jumped up, the payments jumped up.

It started snowballing, she couldn’t keep up and so she went to see a credit counselor. Credit counselors put together a plan and gave her a payment. It was approximately $1,400 dollars a month for five years, and they said with a straight face: “Can you afford to live on negative 87 dollars a month?” And they were serious.

They actually started that program with credit counseling and dropped out after a couple of months because they simply couldn’t afford the payments. If  you can’t afford your current minimum payments, it’s kind of tough to afford something as much or more which is usually the case with credit counseling. But, once she dropped out she went to go see a bankruptcy attorney, and she asked if she would qualify for Chapter 7. The bankruptcy attorney said: “Well, we will get you qualified for bankruptcy, no problem.”

She didn’t qualify for Chapter 7 bankruptcy. So here is a woman who has a job,  makes $27,000 a year income, does not own a home,  has $53,000 in credit card debt, and she still doesn’t qualify for Chapter 7 bankruptcy.

Very few people qualify for Chapter 7 bankruptcy since these new laws were passed. You’ve got to be in a pretty tough situation. The best phrase I’ve heard to describe the new laws are that they are “very creditor friendly.” It’s too bad, because it really hurts the people that need the bankruptcy protection from Chapter 7. Unfortunately, a lot of people are getting dropped into the Chapter 13 category instead. There is usually a better option available.  They just don’t know about it.

Was this valuable to you?  Feedback?  Question(s)?

Please share your thoughts and ideas below.  I respond to any questions posted as a comment in detail by email.

Thank you for the opportunity to serve you!

Here To Be An Asset To You,

Jesse Niesen

DebtGoToGuy.com

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How & Why to Get Out Of Debt

Filed under Credit Card Debt, Inspiration, Money Management by on January 2, 2009 at 11:37 pm {no comments}

The first option you have is to whip out a check and pay it off, but if you’re reading this now that’s probably not an option you can pursue. There are possibilities you may not have thought of. You may be able to borrow against a 401k. You may be able to pull money out of your home through an equity line of credit or by refinancing and pulling cash out. You may have assets you can sell to come up with the lump sum amount to pay the debt off.

Overall, here’s the thing you want, to find a way to stop paying interest and start earning interest. Why is this debt such a bad thing? Debt is a very bad thing if you have to pay the interest.

Debt can be a great thing if somebody else pays the interest for you and you’re financing an asset that’s putting money into your pocket. That’s good debt but bad debt is when you’re paying interest on it, especially on a depreciating asset. Buying a car is a good example of a bad thing to do with money overall. You’re buying something that goes way down in value quickly while you’re paying interest on it. You’re paying for it again and again.

They asked Einstein:

“What’s the most powerful force in the universe?”

Einstein said, “Compound interest.”

Now, when you’re in debt like this, you’re not feeling the full force of compound interest if you’re making some payments. That’s the problem! You’ve got the most powerful force in the universe working against you 24/7. So one way or another when looking at these options to get out of debt or to deal with your debt, you want to find a way to stop paying this interest and start earning interest.

Why?

The basic formula for wealth, no matter who you ask, all boils down to this (if they’re telling the truth); simply spend less than you earn and invest the rest for compounding interest so your money grows. If you do this then eventually you’re going to become wealthy!

Your money will be working for you and you will no longer have to work for it. I imagine the goal for everybody is to one day retire, maybe one day sooner than later. If we ever want to do that we’ve got to get out of this bad debt. If you’re paying interest, to me that sounds like a financial hardship; if you have to work for money so you can pay interest.

I have a client in Oklahoma. A good old boy, a really nice man, in his elderly years and for seven years straight he has been on social security. He has been taking cash advances from his credit cards so that he can make his minimum payments.

Think about that one… He’s taking cash advances from his credit cards, where he has to pay 30% interest to make his minimum payments.

Those minimum payments are 80% interest or more. It’s just a ridiculous cycle! I don’t know if you have ever felt like this; being in debt and making these payments is somewhat like running on a treadmill with a backpack full of bricks. Somebody keeps dropping more bricks into the backpack and turning up the speed and the incline on the treadmill.

Unfortunately, unless you find a way to get out of the trap, that’s your destiny.

So let’s take a look at these options again…

Number one is paying off your debt. Whether through a refinance, a 401k or by pulling money out from under your mattress, if you can write a check somehow you can pay your balances off and stop paying interest.

Always think about the math. For instance, if you’re earning 10% interest from a 401k you have to pay taxes on the capital gain that you get, and it’s also not guaranteed, it’s uncertain. It goes up and down. Let’s say you’re earning 10% or even 20% on some kind of aggressive 401k, you still have to pay taxes on it. Maybe it’s a good rate of return, but think of the credit card debt that you have. Your interest rates are probably between 10% and 34%. The average in America is 18.9% (probably higher these days). Just look at your recent credit card statements and look at the minimum payment, then the finance charges for the month. You shouldn’t be surprised if 70% to 90% of your minimum payment is going towards interest (out of your pocket and into the pocket of the creditor), but you should be very disturbed about it. If your interest rates were 20%, you would be doing better than my average client.

Think about the 20% interest you’re paying on credit card debt. If you were to pay it off by taking money out of your 401k, where it’s earning 10%, to pay off an equal amount of debt you’re paying 20% on, that means a 20% after tax guaranteed rate of return. Paying taxes and still getting 20% on your money, and it’s guaranteed! I don’t know of any other investment out there available to the common public paying this kind of return.

Remember the Big Idea! (See Blog: “The Big Idea- How to Solve Your Financial Problems” if you haven’t!)

We’re going to look at a couple of ways to get some leverage and pay off the debt you have for even less money, an even better return on investment! You want to find a way to stop paying interest and start earning it, allowing yourself a chance at retiring in this lifetime!

10 BIGGEST REASONS TO BE DEBT FREE WITH BETTER CREDIT & CASH FLOW

The resolution I’m going to ask you to make today has the power to change your life in many profound and specific ways.

* People will respect you more.

* You’ll have more power to control your life, your career, and your future.

* You’ll be richer, happier, and more confident.

* You’ll have a much easier time getting people to do what you want them to do … on your timetable and on your terms.

I’m talking about becoming debt free with strong cash flow and credit, even to build wealth and become a cup overflowing.

Whether you’re ___ … or ___… or ___ … you’ll have much more success if you’re debt free with strong cash flow and credit.

YOU HAVE YOUR OWN REASONS

I’m sure you have your own reasons to get out and stay out of debt, manage your spending, save money, and have good credit right?

How do I know?

Because you are here right now.

So WHY do you want to become debt free with better credit & cash flow?

Take a minute right now to think about WHY you want to get out and stay out of the “bad debt” you’re in.

I know you “need to do something” about your debt.

I’m right here with you.

My success in life is directly proportional to how much I help others solve their financial problems.

Only if these words are valuable and useful to you will you recommend this to your friends and family. It might be the biggest gift you ever give them.

PLUS, SOME OTHER THINGS WILL HAPPEN.

Financially healthy people are automatically held in higher regard than those who struggle with debt and bad credit. You’re seen as someone who’s intelligent, successful, and dependable. Your thoughts and ideas carry more clout. People respect your opinions more and give more credence to what you say. They trust you more, because they can “feel” the sincerity and confidence that’s associated with being debt free with good credit and positive cash flow.

As Adam Smith said, “What can be added to the happiness of a man who is in health, out of debt, and has a clear conscience?”

I think you’re getting the idea here. Your financial health can be the difference between getting people to champion your ideas – and having your ideas set aside (or, worse, dismissed altogether).

Was this valuable to you?  Feedback?  Question(s)?

Please share your thoughts and ideas below.  I respond to any questions posted as a comment in detail by email.

Thank you for the opportunity to serve you!

Here To Be An Asset To You,

Jesse Niesen
DebtGoToGuy.com

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