Monthly Archives: February 2015

Borrowers Continue To Struggle With Debts As Income Increases Don’t Keep Up

Debt! Whose Fault Is It Anyway?
So how much debt are you carrying? If you’re like the majority of Americans then you probably should have answered “too much.” When we are overwhelmed with debts, we turn toward loans more times than not, instead of addressing the issue head on and cutting our spending.

The United States has the most advanced credit “system” on the planet. Our closest rivals are Canada and the U.K.
And, our culture tells us that it’s ok to buy now and pay later. For those of us with even a decent credit history we’re able to borrow almost as much as we want with very little problem. I’d even go so far as to say that most people (especially the younger generation) have lost some perspective of money and debt.

Think about how you use money these days. Unless you’re like my parents (who still drive to the local grocery store to cash a check for their greenbacks) you probably use money in a mostly “virtual” way.

Direct deposit, credit cards, debit cards, stored value cards, gift cards, e-bill pay, auto debiting…does anyone use cash anymore? Can you even identify the new $50 bill? I saw one the other day and thought it was from a board game like Monopoly. It’s almost like we’re playing one big financial video game. I’d even be so bold and say that some of us don’t even recognize that we’re in debt.

We find a car that we like, make an offer, negotiate the price a bit, apply for a car loan and drive off the lot. Other than the time spent (and frustration dealing with the salesperson) we really didn’t spend a dime to drive away.

Sure, the coupon book shows up a few weeks later and we start writing checks every month but do we really recognize that we’ve just gone tens of thousands of dollars into debt? And if this was a home loan rather than an auto loan…hundreds of thousands of dollars into debt.

Even if we do think about it as debt I don’t believe it concerns us very much.

I believe that’s the primary reason why people fall into massive debt, because they don’t really see it as debt. They see it as a house or a car or a neat little card that lets them buy stuff, anything but debt. And as long as we can make our minimum payments on time each month then we’re in good shape.

Perhaps in as good of shape as Barbara from Roanoke, Virginia. Here’s an email that I got from her last week.
I have credit card balances totaling about $41,000.00. In October
, one of my creditors sent a bill demanding a $4,000.00 minimum payment and added a $557.00 finance charge! This was more than double what I earn each month. I sent them about $300.00, which was already more than I could afford.

Obviously it wasn’t enough because they sent the account to collections. Then their lawyer contacted me and started to pursue “binding arbitration.” All these legal looking documents with legal terms were being sent to my house.
Meanwhile, my other credit card issuers have increased their interest rates to around 31%. On one account the minimum due is $300.00 but the finance charge is about $250.00. So, I sent them a check for $300.00 but from that you can deduct the $250.00 finance charge so really only $50.00 is going towards reducing the balance. At this rate I’ll never get that credit card balance paid off. (she’s right)

This is not what I had in mind when I started using credit cards.

How can that happen? Didn’t she realize that she was getting deeper and deeper into debt while she was doing it? Was she depending on winning the lottery to pay this stuff off?

Certainly we consumers have to bear the majority of responsibility in these cases? Nobody forces us into debt. Nobody forces us to apply for credit. Do they? Can you give me an example where someone was forced to apply for credit? I can’t think of an example other than maybe when you are dividing debt in a divorce (which is almost always done improperly by the way).

Maybe it’s an addiction for some people. Sure, it feels good to drop a couple grand on new clothes but is there something that “clicks” that forces us to buy buy buy? I’m not convinced there is.
But, I do think the financial services family has to shoulder some of the blame too. How easy do they make it for us to borrow money? Do they entice us to take on more and more debt? Even more than we can handle?

A resounding “YES” please.

Go check your mailbox and I bet that (unless you’ve Opted Out) you received several credit card solicitations today. And, I bet some of them came from the same issuer that sent you an offer last month.
We’re inundated with credit offers on a daily basis. Think about your shopping trips to the malls. Do the cashiers tempt you with the “save 10% on today’s purchases by applying for a credit card” offers? If you really wanted to, you could bury yourself in crushing debt in less than 24 hours.

The fact that more people aren’t in the same dilemma as Barbara surprises me. What do you tell someone like that? Get a better job, click your heals, win the lottery, borrow money from friends, file for bankruptcy, you shouldn’t have done it in the first place…there’s no easy way to solve this debt problem.

It’s like being obese. You have to commit to a major lifestyle change for many years before you’re fit and trim…financially speaking of course. And most people simply aren’t willing or able to do it. Is there a gastric bypass equivalent that will trim off a hundred pounds of debt? It’s not as easy to file for Chapter 7 bankruptcy any longer so that might not be a viable option for Barbara.

Our appetite for nice things is our problem. The easy access to the debt is their reaction to our problem.

Sometimes What Is Not Reported Is What Impacts Your Credit Most

Invisible credit records: What happens when good credit exists but is not reported to the credit bureaus?
Credit reports and credit scores can work in mysterious ways. A move that you think will help increase your credit score can actually decrease it. A janitor may have a better credit score than a billionaire. A person who thinks that they have great credit may have no credit at all. Last week, we received an email from someone with a credit mystery:

I am having a problem getting a new credit card. They say that I don’t have enough credit. I own my home and I have had my vehicle for over a year. I also have one credit card issued by my personal bank but I can’t seem to get another line of credit. Why? What can I do about this?

To solve this mystery, we first need to look for some clues. Channel Inspector Clouseau! The author reports that she owns her own home and only has one credit card from a local bank. There is a good chance that she does not currently have any loans or credit card reporting to the three credit bureaus (Equifax, Experian and TransUnion). Small banks often do not report credit card accounts to the credit bureaus and it sounds like there may not be active loan records either.

With no credit information being reported, a borrower is viewed as a higher risk to potential lenders. Lenders and creditors use credit records to predict how potential borrowers will act. With no records, they assume that the applicant will be a risky borrower and will therefore charge a higher rate or turn them down for new accounts. The author should check her credit reports to see if she has a “thin file” (aka: no records). If this is the case, mystery solved!

Luckily, this is an easy problem to fix. Simply opening a new credit card and using it responsible every month can help boost the borrower’s credit scores significantly. A secured credit card or a card that accepts borrowers with no credit are good choices when trouble being accepted for other accounts.