The Debt Trap

[gcal]

It is also unfortunate that credit scores are used for both employment and for rentals.  My younger daughter wanted to rent a hinformationut five years ago and didn't have a credit score.  I suggested she offer them a year's rent in advance, which she did.  They accepted it.  But not everyone has the money set aside to do that.  Having to go into debt to establish credibility is absurd, IMO.  The system is rigged, pure and simple.

When  I  worked in the financial industry credit rating and personal investing habits were closely scrutinized. We had access to a lot of personal information and company investment strategies. The company wanted to know how vulnerable we were to bribery or other exploitation.

 

[Patd4u2]

I personally don't see it as being rigged. Stupid? Definitely. But so is a bunch of other stuff in society. I feel really dumb waiting at a red light at 2am when no one else is around and it takes literally 5 minutes for the light to change. But, it's part of driving the roads--sometimes the structure put in place for safety and fairness ends up being pointless and unfair, but I do it anyway because on the whole it's what helps make everything run smoothly.

I view credit scores the same way. Like it or not, they've become a standardized measure in society of how competent you are at life, e.g. their use regarding employment, rentals, and car insurance. Because this is a fact of our society, I consider credit score literacy to be a basic essential skill for successfully navigating westernized civilization. It can be annoying and stupid, but once you understand how it all works it's not actually that difficult to set up and the benefits can be substantial.

I understand the sentiment of "this doesn't make sense therefore I'll have nothing to do with it", but I've come to realize that approach works against my best interests.

"Because this is a fact of our society, I consider credit score literacy to be a basic essential skill for successfully navigating westernized civilization. It can be annoying and stupid, but once you understand how it all works it's not actually that difficult to set up and the benefits can be substantial."

That is a very good statement Bitty. You might not like it but if you play the game by their rules it can be very beneficial. My youngest daughter finally got it through to me.
So, I only have one credit card that she suggested to me that gives awards points, I use for every purchase I make except the mortgage payment. On the first of the month I pay it off. It never goes above the magic 30% of the credit card limit. I can buy things with the points I make on Amazon which is nice.
I just bought a new jeep last month and I got a decent interest rate of 2.1%, and I wasn't to happy about that I thought I could get a lower rate. My FICO score averaged 803, and if my score had been in the lower 700's or upper 600's I would not have received the interest rate I got, it would have been much higher, which equals higher payments.
My score also benefited me in my insurance for it. The caveman at GEICO quoted me a $47 a month full coverage on it, I was expecting around $80-$95 a month so I was pleasantly surprised.
There is nothing I can do about our banking system but play by their rules. I don't like it one bit but If you don't abide by them you are on the outside of the fence looking in, and they can make your life very difficult.
Like some other people have posted on this thread, if your score is anything but good you will have a lot of problems in anything you want to do.

 

[buckwilk]

Let me see if I've got this right. Someone makes a six figure investment in an apartment building and they want to know if you have the ability to pay the rent prior to letting you in. Lenders want to know if you can pay for a vehicle you want but can't pay cash for. They are the bad guys?

 

[BadSaver]

The FED pours money in at the top, those closest to it prosper. Those farthest away become wage slaves. When that doesn't work well enough, they drop interest rates to zero. Not only does debt look like a liability but so does money. If the definition of an asset is something that produces income.

If you manage to save $100,000 with interest rates at zero and inflation at 2%. Your purchasing power decreases by $2,000 a year. It costs you $166 dollars a month to have that $100,000. They don't really want you to have any money.

Most Americans have their wealth wrapped up in their homes. The reason this usually (2008 housing crisis not counted), is that house values go up. Historically housing has risen at about 2% with inflation. Therefore, the creation of wealth is not due to housing values growing faster than other values in the economy. The reason mortgage debt was considered good is due to the Internal Rate of Return. For example:

If you bought a $100,000 home with $10,000 down and the house value rose at 2%. After a year the house is worth $102,000. Because you invested $10,000 and the asset value increased by $2,000 your internal rate of return (IRR) is 20%. The same applies to those who buy a business and sell it after 10 years. Debt can be okay, under the right conditions. Leverage... But then again, many of us got crushed in the 2008 housing crash.

PS. Not advocating home ownership. I want to sell my house and go RV full time - I think the IRR thing will go kaput again. Just pointing out that in this economy, virtue is vice and prudence is folly.

 

[jimindenver]

Credit scores are like respect. You work your butt off trying to get it and it takes nothing to lose it. Once you have it, you find out it's not worth what you thought it was.

We carry no debt besides the house and that's 50% paid off. We both have credit scores over 800 but that just means they will look for some other reason to screw you. In our case it's the fact that we have been successfully self employed for 3 decades. I guess a nice job that I could be laid off in would make them feel better.

 

[BadSaver]

My parents had passed away by the time I was 17 years old. I was left with a 1974 Chevy Van. In the 1970s, it was all about custom vans. I found work at Redi-Kamp, on an assembly line customizing Vans. Frankly, being alone scared the heck of out me. I went a year in shock. Couldn't cry, but didn't know why I didn't die. I was in so much pain.

I joined the Army. Went through two wars. Put in 20-years. Scrimped and saved the whole way. At 42 I bought a $175K house with $100K down. Then put a bunch into the house. The house went to $380,000 and then crashed to $110,000. What I sold it for.  It wasn't my ability to pay my mortgage that took me out. It was my neighbors! I was pretty much at ground zero for the housing apocalypse. I had lost most of everything I had saved in 20-years. Almost back to where I had started financially less the Army retirement.

I don't trust debt or assets. They seem pretty linked. Yet, necessary... Coins have three sides. I like the edge...avoid predictive decisions. Always keep your options open. Don't trap yourself.

 

[USExplorer]

My younger brother turned 18 four months ago and bought a car and house trailer to try and be independent. The good-paying job he was promised never came to be, and now he's thousands on debt, stuck working a part-time minimum wage job and other odd gigs, falling behind on payments. Fortunately it was a good friend who loaned the money and not a banker, but still that friend is getting tired of his lack of payment.

When I came back from Wyoming this fall he poked (good-hearted) fun at me, four years older than him, living out of my truck and still using my parents' address. He doesn't boast anymore.

I tried to convince him before his birthday to work a seasonal job and save up a few grand before buying but he was at that age where he didn't want to listen to anyone. Now though he might be a little more willing to consider an alternative.

Debt sucks. That's all I can say.

 

[Goshawk]

The FED pours money in at the top, those closest to it prosper. Those farthest away become wage slaves. When that doesn't work well enough, they drop interest rates to zero. Not only does debt look like a liability but so does money. If the definition of an asset is something that produces income.

If you manage to save $100,000 with interest rates at zero and  inflation at 2%. Your purchasing power decreases by $2,000 a year. It costs you $166 dollars a month to have that $100,000. They don't really want you to have any money.

Most Americans have their wealth wrapped up in their homes. The reason this usually (2008 housing crisis not counted), is that house values go up. Historically housing has risen at about 2% with inflation. Therefore, the creation of wealth is not due to housing values growing faster than other values in the economy. The reason mortgage debt was considered good is due to the Internal Rate of Return. For example:

If you bought a $100,000 home with $10,000 down and the house value rose at 2%. After a year the house is worth $102,000. Because you invested $10,000 and the asset value increased by $2,000 your internal rate of return (IRR) is 20%. The same applies to those who buy a business and sell it after 10 years. Debt can be okay, under the right conditions. Leverage... But then again, many of us got crushed in the 2008 housing crash.

PS. Not advocating home ownership. I want to sell my house and go RV full time - I think the IRR thing will go kaput again. Just pointing out that in this economy, virtue is vice and prudence is folly.

$100k loss of buying power at 2% inflation is true.  But you put it in a market linked ETF that follows the stock market pretty well, and you are getting 10% a year.  So you end up with $108k after a year.  Assuming you study and understand where to put your money.  we are not talking putting it in one stock (that's is financial suicide).  You want it in the right kind of investment. (like good old Warren Buffet and his Berkshire hatheway accounts).

or you could speculate on a house, which again is only one market, with one asset, and is a really risky situation.  Repairs on a house, plus taxes, plus interest on the borrowed money all cost more than what the house is worth in gains.  sometimes, most times. 

Choose wisely, and know when to walk away, know when to run.

 

[Queen]

We just bought a new truck, we have money in the bank to make up the difference between it and our trade in, but decided to finance about $9000, why? Because our credit scores started dropping since we had no recorded debt for over five years. All the people we know who understand finance told us to take out a loan and pay on it for six months, then pay it off. So we did, and the finance guy showed us our scores... Transunion has me at 840 and my wife at 820?? We kept seeing Experion drop and drop, down to 770 the last time I checked less than a month ago.

I don't understand any of this, the disparity between the reporting agencies is nuts. They tie everything to those scores now, and they are far enough apart to not allow us to qualify for lower interest rates.

I'm going to let it go a couple of months then pay it off (no interest for the first 60 days), go back to zero debt. Cannot wait until the condo sells and we get to also go back to not owning anything except our paid off truck.

 

[GotSmart]

Buying Tuna at 50 cents a can is the best investment you can make. 

I invest in my kids.  They will be there when needed.  I lost over $100K on each ex wife.

 

[ArtW]

I know folks who invested in their kids, only to have their kids give them the finger when they were needed
I invest in myself
and a 401K that my employer overmatches me on (I pay 2.5% my income, they pay 4% of same)
my travel trailer, my scooter, and my land are my debts, and my investments, they won't appreciate, but they add value to my life

 

[Goshawk]

We just bought a new truck, we have money in the bank to make up the difference between it and our trade in, but decided to finance about $9000, why? Because our credit scores started dropping since we had no recorded debt for over five years. All the people we know who understand finance told us to take out a loan and pay on it for six months, then pay it off. So we did, and the finance guy showed us our scores... Transunion has me at 840 and my wife at 820?? We kept seeing Experion drop and drop, down to 770 the last time I checked less than a month ago.

I don't understand any of this, the disparity between the reporting agencies is nuts. They tie everything to those scores now, and they are far enough apart to not allow us to qualify for lower interest rates.

I'm going to let it go a couple of months then pay it off (no interest for the first 60 days), go back to zero debt. Cannot wait until the condo sells and we get to also go back to not owning anything except our paid off truck.

Credit is a trick. You need credit to get the ability to borrow at the cheapest rate? To get in debt more. --- Remember you still need to pay off all principal, at a loss. Then your purchase asset might be loosing value.

Only borrow for limited items, when there is absolutely no alternative.

School alternative is community college or night school class at the cheapest rate. Or free community training or after work apprenticeship.

Vehicle alternative is public transportation, and bicycle, and friends.


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[Mobilesport]

There have been a couple of articles in my local newspaper talking about the local economy. Mind you, these articles are not on the first page and are small articles so my guess is a lot of people didn't even see them.

The first article posted stated that half the people in my county spend over 50% of their monthly income on a house/apartment and utilities.

If that isn't enough to make you wake up and realize there's something wrong, a few weeks later, there was another tiny article that stated that over 50% of the population has less than $1000 in their bank account.

Then a couple of weeks later, there was an article (I think it was on the first page, not sure exactly), but it was about a new program that helps people buy homes. With a 33 year mortgage. With incomes as low as $19,000.
The article started out describing how people in this program were required to take classes on how to do simple repairs because otherwise they would not be able to hire a professional to fix the minor home repair type problem....
So, why in the world would there be a program helping people get 33 year mortgages when they will not be able to afford a service call? In the life of the 33 year mortgage, these people will never have an unexpected bill that will create huge problems? Their transmission will never go out, costing $1500 to fix? Their Central AC will never go out, or require maintenance?

With everything else that has been going on in my life, these things make me really look around and wonder what the heck is going on.

I know alot of people that took out 30 year Mortgages and alot of them paid them off early , they all earned around $10 hr --$12 hr   , some paid them off in 15 years .
Alot of overtime but its more common then you think , if somebody doesn't have a work ethic a Mortgage wouldn't be for them . 
Whats wrong with spending 50% of your income on house payments if down the road you own the house outright , but i agree paying 50% of your income on renting would be stupid

 

[Goshawk]

I know alot of people that took out 30 year Mortgages and alot of them paid them off early , they all earned around $10 hr --$12 hr   , some paid them off in 15 years .
Alot of overtime but its more common then you think , if somebody doesn't have a work ethic a Mortgage wouldn't be for them . 
Whats wrong with spending 50% of your income on house payments if down the road you own the house outright , but i agree paying 50% of your income on renting would be stupid

House payment - $1000 principal, $500 interest, $100 insurance, $100 taxes, $200 maintenance. (maybe offset $200 in property value increase)

So you are paying $700 a month that goes away.   Plus your time dealing with all this.

Apartment $700 rent (shared with a room mate).  Wow you are paying the same!!!

Now take any difference like $1000 principal and put that into an indexed fund at 10% yearly interest.

You need to understand the math.  Its not stupid, if you are doing it right.