Managing Credit and Crisis
Indentured servitude—the real toll of being a member of a consumer
society
Best practices for managing credit
Considering bankruptcy, and if need be—recovering afterward
Crisis management for times of trouble
Working for a Dying
As Vicki Robin and Joe Dominguez so
sagely stated in their revolutionary book, Your Money or Your Life,
most people are not working for a living—they are “working for a
dying.”
Despite the fact that present-day North America is the richest society
in the history of humankind, we suffer from collective money anxiety,
and have enslaved ourselves to creditors. ‘Pay day” has become “payment
day,” and we work at jobs we hate to pay off cars, houses, and do-dads
that we have long since fallen out of love with. Credit can be a
convenience, and it certainly seems necessary to make us “legitimate”
citizens in this day and age—but as a society, our inability to handle
credit well is profoundly destructive to our quality of life.
Consider this fact from the Complete Idiot’s Guide® to Personal
Finance in Your 20s, 30s, and 40s: “In 1996, the average total debt
for people in their 20s, excluding mortgage debt, was nearly $17 000.”1
Hitching Your Wagon to a Star
Credit card rates range from 8.9% to 18.9%. Particularly if your credit is good, shop around. Begin by asking your bank for their best rate.
Unless you’re in the same boat, you might be tempted to ask how that is possible. When you look at the spanking new cars clogging our roadways, flip through the “no money down, no interest” furniture and electronics advertisements in the weekend paper, and then add student loans into the picture, it becomes a lot easier to understand.
There are billions of advertising dollars spent every year to program us into the kind of buy-happy consumers we have become. Somehow, an invisible credit card debt of $17 000 (and that’s the average) is not damaging to our self-esteem but driving a 10-year-old car is. I think not. Say it with me, people—break free!
The First
Law of Financial Well-Being
The First Law of Financial
Well-Being is this: “Never borrow money for anything that is
not going to increase in value.”
That immediately cuts out cars, furniture, computers (except for
business), vacations, restaurant meals, clothing, alcohol, entertaining,
sports, and electronic equipment— you’re getting my drift, I’m sure. If
you tend to put stuff like this on your credit card believing that you
will pay it off when the bill comes, only to find yourself carrying the
balance for three months—wake up, dude.
If you’re carrying a balance, you don’t need to pay it off before moving to another credit card company—most credit companies are happy to do what’s called a “balance” transfer, and you may get low interest (or even no interest) for the first six months. But don’t be so dazzled that you forget to ask what the usual rate is.
No Credit Problems? Here’s How to Ensure It Stays That Way
First of all, let’s assume that you don’t
currently have a credit problem. You haven’t had
any problems paying your bills, you haven’t bounced a cheque in the last
year, and
things generally seem to be going okay. Here a few helpful hints to keep
you striding in the right direction.
Reduce Your Number of
Credit Cards to One, or at the Most, Two
The Strategis Canada site provides a
fabulous calculator to help you determine which
credit card is best for you based on your spending (and paying) habits.
If you have
Internet access, check it out at <
strategis >. If your credit
rating is good, financial institutions love to grant you credit, so take
advantage of the goodwill to get the best deal possible. If you pay off
your balance each month, for instance, look for a card with no annual
fee. If you tend to carry a balance from month to month, the interest
rate also becomes important and you may save money by paying a small fee
for lower interest. The rates shown in the Strategis Web site on May 8,
2000, ranged from 8.9% for a Low Rate MasterCard to 18.9% for a Canadian
Tire MasterCard.
Are You at Rich?
Answer these four
questions:
1. When you get approved for a credit card, do you feel as if you’ve
just received a gift?
2. When you are deciding if you “can afford something,” do you tend to
think about how much room you have left on your credit card rather than
if you earn enough discretionary spending money?
3. Do you make only your minimum payments more than three months out of
the year?
4. When considering a major purchase, like a car, a boat, or a new
stereo system, do you simply figure out if you could manage the minimum
monthly payments?
A “yes” response to any one
of these questions means that
you ‘are at risk.
Your Credit Card Is Not a Paycheque Extension
The most common beginning
of credit card problems is viewing them as income—sort of a paycheque
extension. If you are someone who tends to see it that way, you’ll want
to keep one credit card with a very low minimum, or none at all.
Hitching Your Wagon to a Star
If you carry a debt balance of
just $3000 ($14 000 less than the Canadian average) at 18 percent, you
will pay over $550 in interest in one year. Imagine all the perfectly
nice things you could spend that $550 on! And if you need further
encouragement, remember that if you are in a 50 percent tax bracket, you
had to earn more than $1100 before tax to get that $550. For most of us,
that is a week’s work or more—for Mr. Visa or Ms. MasterCard, and the
privilege of buying stuff sooner so we can tire of it faster.
Avoiding the Emergency Spending
Trap
Another source of credit
card problems is emergency spending. Have you ever noticed that your
washing machine will inevitably break down as soon as you pay off your
line of credit? Or that your car will need new brakes as soon as you get
a raise?
Get in the habit of putting $50 or $100 into a mutual fund money market
account each month. I don’t know about you, but savings accounts
never
worked for me—it was just one more place
to transfer money from when I ran out. A money market fund is kind of
magic—you can set up a pre-authorized plan that comes out of your
account every payday. Unless you are already struggling to get by, you
won’t even notice the missing money, I promise. Your savings will earn
in the range of 4 percent, and you can generally access the money by
calling for a redemption within two or three days of the time you need
it. Not only are you going to feel like a paragon of virtue watching
that balance go up every month, but you will have a supply of emergency
money when your car breaks down. No more rainy day blues for you!
Save for Annual Purchases, Don’t Charge Them
It is so easy to put your
car insurance, house insurance, and property tax on your credit card
when they come due, isn’t it? Of course, once your credit card bill is
that high, any income not used for necessities goes to make your minimum
credit card balance and pay the interest. Use the money market solution
mentioned above instead. Many insurance companies now provide the option
of monthly payment, too, and the interest charged can be as low as 2 or
3 percent, rather than 18 percent. Check it out.
No Interest, No Down Payment? Clutch Your Wallet!
Never fall for those “no
interest for six months” advertisements. Things rarely change for us
over a six-month period, and if you read the fine print, you’ll probably
find that if you don’t pay your purchase off within the six-month period
(or whatever the time frame) the interest clock started ticking the
moment you made the purchase. When that happens, as it too often does,
the interest rate is usually the department store rate of 28.8 percent.
I Work So I Can Drive: The Car Trap
Buying a new car? Oh,
please don’t buy a new car. Okay, if you must buy a new car, at least do
not fall for the 1 percent financing deal. Remember that other rule of
personal financial planning—nothing is free, and consumer credit does
not come in a 1 percent interest version. Instead, the car dealer “buys
down” the true interest rate, and adds it to the purchase price of the
car. If you can afford to buy a new car, you can afford to pay cash. And
while you’re at it, ask the dealership to discount the car’s price by
the amount that you would save between the car loan rate and 1 percent
if you had financed it.
If you can’t afford to pay cash, give some thought to getting a good
second-hand cat
Anything you’ve heard about a new car saving you money is
myth—just
be sure to have
any used car thoroughly inspected and buy from a reputable dealer. (Call
the Better
Business Bureau for a record of complaints against any dealership you’re
considering.)
Financial Crisis Management—Is Bankruptcy in
Your Future?
You’re in trouble. You’ve
flipped through some of the other sections and you feel more discouraged
after each page. None of this stuff applies to you. You can’t “pay
yourself first.” You can’t even pay your creditors.
I’ve been there, and I’m going to let you in on a few little-known facts
about the dark
side of the consumer society.
Credit cards are a huge source of profit for financial
institutions. That’s why it’s so easy to get credit.
Most Canadians do not
pay off their monthly
balances—we have become a nation of debtors -
We have sold ourselves into a life of indentured
servitude. The majority of us still manage to get
by. We may end up spending any discretionary
income on interest payments, but we at least make
all of our minimum payments and we’ve learned
our lesson—we’re not still buying on credit.
We’re among the lucky ones, and with discipline
and hard work, we’ll get back in the black and
start moving in the other direction as our
income increases.
Some of us will not be so lucky. The worst thing that can happen to us
is to have lots of credit when trouble strikes. So many really sad
stories begin with “We were doing okay until I lost my job,” or “I was
just trying to get by until the child support started coming in.”
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