Scaring people away from debt

JWR ^ | 4-8-05 | Froma Harrop

[FlyLow]

The era of happy borrowing is over. Americans might as well know it.

The death bell now tolls for low interest rates. And he, who doesn't hear that chime, can't miss the siren of bankruptcy reform. The federal bankruptcy bill, sure to become law, will turn many exuberant borrowers into lunch for debt collectors.

Fear does have its uses. If the sight of a tighter noose warns people away from piling up debt, all to the good. Americans will understand that credit cards are a potential enemy — and that even the friendly home mortgage can come back to haunt them.

The bankruptcy bill in a nutshell: If you get in over your head in debt, and still have a decent income, you can't wipe the slate clean with a Chapter 7 bankruptcy. Instead, you will be shunted into what's called Chapter 13. There, lawyers will find a way for you to pay back what you owe. That means you will write your creditors checks month after month and, if necessary, year after year.

To be honest, the bankruptcy bill leaves me with mixed emotions. The Puritan in me likes the part about personal responsibility. People who borrow have a moral duty to pay back their debt. And there are bad people who work the system. They do a Chapter 7 on Monday, then drive off in a new BMW Tuesday.

The liberal in me, however, thinks that the weak deserve protection. Many people fall into bankruptcy owing to medical bills or other bad luck. And the legislation does nothing to stop credit-card pushers from luring the innocent into obligations they barely understand.

[JCEccles]

the idea of lending money was never conceived, it would be a much happier world.

The Muslim world has strict prohibitions against usury. Medieval Europe similarly shunned it.

The abuse of credit leads to great evils. But the wise management of credit yields enormous benefits and fuels prosperity for everyone.

[Sarajevo]

Of course the borrower only wants to be told yes and if a no is the answer, then it must be our fault, not theirs, that their credit sucks beyond repair or you can't buy a $300,000 house on a $30,000 income.

This argument totally sucks wind! In 1992, I was denied a mortgage of 50% of the price of my house on a 15 year mortgage, (primarily because I was in the military). The mortgage companies almost "demanded" a 30 year mortgage with no points and no down payment.

I ended up paying 50% down and a 15 year mortgage after going though 4 different motgage companies, due to my stubborness not to part with my hard earned dollars.

I would have loved to present my wife with a domicile that costed $300,000 or more on my military income.

[HamiltonJay]

Applpie,

I'm not sure why you are addressing this to me, I know exactly where you are coming from and agree with you! I was calling the credit card companies a bunch of lying thieves (which they are) and that they bought congress for 25 Million and that republicans should be tarred and feathered for this bill.. its an abomination.

I agree with you, banks have created their own messes, and now want government to bail them out of taking responsibility for them.

DEBT IS DUMB!!!! LIVE ON LESS THAN YOU MAKE!!

When you are praying to Jesus to help you improve your financial predicament, and a credit card comes in the mail.... I AM TELLING YOU.. JESUS DID NOT SEND THE CREDIT CARD! RIP IT UP AND THROW IT AWAY!

If you have credit cards, pay them off and cancel them.. tehre is absolutely no reason to have them anymore. The argument they are more convient than Cash died the day the debit card came about.

PAY THEM OFF, RIP THEM UP, AND FLUSH THEM DOWN THE TOILET!

(Yes I know some folks will argue they use credit/credit cards to make money... and yes a small percentage of folks do..... a VERY SMALL percentage. Most use them to create consumer debt on things they don't need!.. Save your money and pay cash for the toys and things you want in your life... don't borrow money for it.

[MikeReedKS]

There are two kinds of credit... secured and unsecured. If someone, like the credit card companies, are willing to give out unsecured credit, then it is they who take on the risk and it is they that should take the hit if a person decides not to pay. The choice of the individual to replay based on the agreed payment plan should determine the individuals credit rating and that can be used to define the level of risk for any future lender. But to say that a borrower MUST repay unsecured credit is absurd... it's unsecured! Meaning there is no security that the loan will be paid back beyond the word of the borrower. Lender beware, if you want a secured loan, get collateral, else don't whine when the borrower goes belly up.

[dead]

It is odd that legislators who supposedly ask themselves WWJD vote for a bill HE would have detested.

It is odd that I’ve stumbled across some guy on the internet who can read the mind of God and devine his thoughts on debt legislation.

[Protagoras]

Thanks for the course in credit.

Just curious, did I say something that moved you to write that?

[HamiltonJay]

Credit Cards don't help you get mortgages, in fact they can hurt you! If you have a credit card with open credit on it, the bank assumes that you will charge it up to the max (because guess what, MOST FOLKS DO.. they get a house and then go buy drapes, furniture etc etc etc to fill that new house and they do it on credit!) So large open balances on unsecured lines of credit can be a hinderence to finding a mortgage.

If you are currently living your life with no debt, I definately would like to A) give you Kudos, you are living on less than you make which is better than most of the american public! If you are doing this and saving for your retirement you are doing better than 95% of the american public... if you are doing this and you have a retirement savings of over 100k currently you are doing better than 99% of the american public!

Stay away from debt as much as you can... Yes I understand a mortgage may be needed to get a home, and that's fine... but please don't fall into the trap of consumer credit, or that you need credit cards etc to get a mortgage.

You should avoid debt as much as possible in your life.

(Yes some will make arguments about using debt to build wealth... that's an ENTIRELY different situation that 99.99% of people use debt for.. so please don't fall into the trap... you are not creating wealth buying big screen tv's on credit cards... unless you have a plan to sell them immediately for more than you paid for them).

[MikeReedKS]

No, you were just the last poster when I hit reply :-)

[Protagoras]

But to say that a borrower MUST repay unsecured credit is absurd... it's unsecured.

So if you promise to pay, you don't have to?

[Skinn_dogg]

I had a 740 credit score when we bought our house 7 years ago, and I had no outstanding debt and a fairly large savings account. It's easy to pay off your monthly credit card debts when you have an extra $500 a month to pay them off. Instead, that $500 goes to Mortgage companies interest, taxes, and PMI.

I love living in a home, but don't let anyone tell you it isn't more expensive. My credit is still good since I still pay my debts on time, but my savings is nil because every time an unexpected expense comes up (brakes need fixing, plumber needs to be called, kid needs shoes) it came out of my savings and the credit card eventually was used for these things. Luckily it's not bad right now, but if there was and unexpected expense of $1000 or more, I would be screwed. I can see how people get into trouble and that's without being shop-a-holics.

[rmmcdaniell]

When I was in college I was getting applications by the dozens. Never applied as I had no job or only worked during the summer. However, when I graduated and got a job with a very respectable salary, no one wanted to give me a credit card because I had no credit history.

Same here! I graduated two years ago, even worse is that when I changed states and had to find a new auto insurance policy I had to pay through the nose because I had been responsible and never taken on any debt (thus not generating a credit history).

[Protagoras]

had to find a new auto insurance policy I had to pay through the nose because I had been responsible and never taken on any debt (thus not generating a credit history).

Let me get this straight. You had to pay a higher auto insurance premium because you didn't have a credit history?

[joesbucks]

I should have included with 100% or greater financing.

[MikeReedKS]

You SHOULD repay, if you value your ability to get further credit in the future, but you are not OBLIGATED to pay beyond the value of your word. A good man values his word and WILL REPLAY! But no lender should ASSUME they will get repaid unless they get collateral.

This is why it takes time to build credit based on your word, unsecured credit is something that you can ease into, not something that is a right or free privilege. Credit card companies charge huge interest rates to offset bad loans, it's how they turn a profit in a forfeiture laden environment but that doesn't mean they don't have responsibility to carefully dole out the credit, something they seem to have forgotten and our law makers seem to be following right behind them in this idiocy.

Prove a man is worthy of unsecured credit before you extend it using secured credit and small unsecured loans. Then extend more and more as the person proves themselves over time. But never forget that loaning in an unsecured way means that you do not have security that the loan will be repaid.

Should the loan be repaid, absolutely, but is there any obligation if the borrower is willing to loose credibility or simply falls on hard times and cannot pay? No way!

Again I say, lender beware!!! If they are careful, we all win as fewer and fewer folks fall into the trap of credit.

[John Robertson]

"William S.: "Neither a borrower nor a lender be"."

First of all, that was Poor Richard (Ben Franklin).

Secondly, without debt, there would be vastly fewer homeowners, millions fewer vehicles, far, far fewer businesses, etc. By the way, what pays the interest on savings investments--that's right, debt. Without debt, TRILLIONS of interest-bearing products would simply not exist.

You say debt is bad. I say bad debt is bad, and that, without any debt, you would not recognize our world at all.

[John Robertson]

What the heck's a corporate spy do? And yeah, a private reply is just fine.

[Kretek]

You had to pay a higher auto insurance premium because you didn't have a credit history?

Many insurers are tying their rates to credit "scores;" have a low score and a perfect driving record, and you're still going to pay a high premium.

[apillar]

Thought I'd throw this out here for discussion...

There is this consumer advocate on the radio by the name of Bud Hibbs. He is basically waging war against the credit/collections industry.

He was talking about how people in bad financial shape are stupid to file bankruptcy under the old or the new system. That provisions of various federal laws make it possible to simply stop paying most unsecured debt such as credit cards with very little that the companies can do in return. According to him this was prefferable to bankrucptcy because bankrucptcy was a public record that would haunt you for the rest of your life, while credit card "charge offs" will drop off your credit report in 7 years.

I've always paid my bills on time and am certainly not advocating this approach. But, I was wondering if anyone knew if it was true or not? I went to Mr. Hibbs website and he doesn't seem to be a con-artist (I.E. all his information is free).

http://www.budhibbs.com/

[Protagoras]

Many insurers are tying their rates to credit "scores;" have a low score and a perfect driving record, and you're still going to pay a high premium.

I just learned something, I guess.

Do you have any web based source for this practice? I'm not saying you are wrong, but I'm facinated by this claim and I'd love to look at it more closely.

[Protagoras]

You SHOULD repay, if you value your ability to get further credit in the future, but you are not OBLIGATED to pay beyond the value of your word.

With all due respect, I think you should read the LEGAL agreement which OBLIGATES each side to do certain things. It's a legal contract with obligations.