04 - Debt & Credit Cards, Financial Crack

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“You want the truth, you can’t handle the truth.”                                                                        Homer Simpson

All You Need To Know

Credit card companies charge the highest rates this side of pawn shops and loan sharks.  You will not incur credit card debt as this leads to poverty.  If you have some, your immediate goal and most important goal is to pay it off because the real cost of credit card debt is north of 30%.

Carry one card for emergencies (emergencies are defined here as having money to call the hospital when your arm is cut off, not the ability to buy a pair of shoes) and throw the rest in a drawer.  Do not cancel the cards.

The Details

I hate credit cards.  I hate FICO scores.  I have both. 

Credit cards come in handy but only in emergencies but people differ in defining emergencies so let’s go through some basic rules and basic financial theory on debt overall. 

Rule Number 1-There is no good debt.  There is only varying degrees of bad debt; not so bad, bad but could be worse, and worst.  The interest rate varies accordingly.

Not So Bad Debt is made up primarily of mortgages and student loans.  Interestingly enough they carry the lowest interest rate because mortgages are secured by the house and student loans are guaranteed by the Federal government or more correctly, you the taxpayer.  Secured means the lender gets the house and the downpayment if the borrower doesn’t pay.  Guaranteed means that the lender’s credit risk is not the borrower, in this case a new graduate who is a terrible credit risk, but the government because the government, in an attempt to make college affordable, guarantees to pay if the student defaults.  Because the risk to the lender in both cases is low, the interest rate charged is the lowest.  Finance is easy.

Could be worse debt is stuff like car loans and loans made to buy things like washing machines, home entertainment centers, and other stuff.  The loans are secured by the stuff but you might run the car into a lightpole or not change the oil and the thing wears out so the interest rate charged by the lender is higher than the rate charged on houses and student loans.  This leads to Rule Number 2-The higher the risk, the higher the reward required by the lender.

Which segues into the Worse debt which is credit card debt.  Credit card debt is unsecured debt-Citibank cannot repossess your lunch and doesn’t want to.  The only thing backing the card is you and a lot of us are bad credits so Citibank and the thousands of other lenders that send you cards in the mail have to make up the lack of security and bad borrowers through-all together class-higher interest rates.  In fact, the highest outside of a pawn shop or loan shark.  But this is not the place for a tirade against banks for forcing credit cards on us.  A lot of useful things are dangerous if not used wisely---like fire.  If people are stupid enough to pay 15-20% over inflation and pay only the ‘minimal amount’ each month, so be it. 

Which leads to Rule Number 3-You will never pay off the balance paying the minimal amount each month.   Rule number 3 comes into play because most finance books and finance columnists say that it takes 10 years and three months to pay off a $10,000 balance if you make only the minimal, required payment.  Actually the time period is forever because if you get the balance down you will just add to it and the balance goes back up. 

So what’s a girl to do?  Hopefully, nothing because hopefully you have little, if any, credit card debt.  If you have any, pay it off.  Many planners say to pay it off because if you are paying, say, 20% on the card, that is an immediate 20% return when paid off.  I think this is way too low and here is why.  This is Rule Number 4-If you are borrowing, you are not investing.  There are some exceptions but for the time being, buy off on this because of this formula:  Credit Card Interest plus Forgone Investment Return=True Cost of Credit Card Debt.  In this example, you are paying an interest rate of 20% (low by historical standards) and forgoing the seventy-five year average annual return of the stock market of 11% SO the real rate of return that you are NOT getting is 31% (Credit Card Interest Rate of 20% plus Foregone Investment Rate of 11%=31%.) 

The real cost of credit card debt is 31% and we need to get rid of it and the only way to do it is to pay it off.  Quit using it and start paying it off.  That’s it. 

But how?  I hate credit card debt so much I even hate to go here but I will.  Here goes.

Comments

[john bosco]

In the United States, in certain cases, insurance, housing, and employment can also be denied based on a negative credit rating.

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john bosco
Don't be a victim. Stop credit card debt now. We can help.
http://www.stop-credit-card-debt.com

[Sofia Kim]

Credit card debt is on its all time high with today's economy. Hopefully people can obtain the help they need to get out of debt.

[Sofia Kim]

Credit card debt is on its all time high with today's economy. Hopefully people can obtain the help they need to get out of debt.

[tv brackets]

Like what I always say to everyone.. Be a transactor.. Pay your card debt in full each month.. Unless you need some extra support to relief your immediate need, only then you could split and extend to a measureable 2-3 months of payment.

[George Licc]

Debts are not the problem, I think that the problem is that the persons do not think in the future, enjoying the things in the present without thinking that there are things that can change.

[Tiffany]

In my opinion, there is nothing worse that credit card debt. Unfortunately, people who have credit cards don't think that they will get into debt.

[el]

It is the own choice of every man to use credit cards or not. But I believe, if you use your credit cards wisely, you can build strong credit history and use only best credit cards, enjoy their alluring options and, of course, save your money.

[Jason]

I hate my credit card. I've had it for 3 yrs. I had to use it to do some remodeling on my home because I had a baby girl on the way and needed to make room. I barely make enough money to support my family and get my bills paid. I just paid off 1 card and a loan which helped a little. Now my only credit card just jacked my interest from 13% to 21.9% for no reason at all! I pay it every month on time and have never been late.

Please visit my webpage if you want to help me out without giving a single penny!

bankofamericascrewedme.alltheknow.com

[credit card user in a fog]

"Do not cancel the cards." There is no exactly answer to cancel or not to cancel. I know cancelling credit cards is not a good option. But having too many credit cards is bad is not good for your credit history either. It's awlays hard to find the golden mean. It's bad to have no credit limit and it's bad to have low credit limit. You are always on the horns of the dilemma...

[credit card owner]

Most people can not live without credit because there is no way you can enjoy your live when you don't have enough money to pay for everything you want. That's when credit cards come forth. Most people use credit cards to pay their wedding expencies, to travel or simply by Christmas presents.

[credit card oner]

If you think that credit companies are responsible for debt, it means that Absolut Vodka is responsible for alcoholism, and McDonald's is responsible for fatness. I can't consent to it. I can't assert that credit companies, Absolut Vodka, McDonalds are unmitigated evil. The problem is that people don't use these things wisely. If you can't manage your finance, if you can't keep yourself from drinking, it is your own problem. I don't think that other people should abandon convenience or pleasure if somebody can't get himself together.

[credit expert]

But you can get a profit of being consumer. You can ask you credit campany to reduce your high interest rate. Quick call to your credit company will be the first step on the way of paying debt off. If you pay off your balance in any one month, forget interest rate and maximize other benefits. If they say no, apply for credit card with lower interest rate and then transfer your balance on this card.
Try to pay your bills full each month. If you don't carry a balance, who cares what the rate is? Go for the added benefits like frequent flier miles, hotel rewards or gas rewards.

[Alan]

Structured Settlement Forum
www.structuredsettlementforum.com