Get Out of Debt in 2012

I know far too many folks who are suffering from a debilitating amount of debt.

A year ago, I did a survey of my MH4C readers and found out that 25% of you have debts (excluding your home) between $10,000-$25,000, and 25% of you have debt over $50,000.

That means half of the people who read this blog have over $10,000 worth of debt.

That debt has brought with it pressure, burden, worry, and anxiety.

But you don’t need me to tell you, because if you’re in debt, you already feel it.

Anyway, in that same survey, the topic you most requested me to address more frequently was debt.

And I haven’t.  MH4C focuses more on giving and other general personal finance topics.  I just haven’t found a good way to work a strong debt theme into this blog.  I address it, but I don’t focus on it.

However, today I’m excited to announce a brand new resource to help you get out of debt in 2012.

I’m excited to announce that I’ve just started a new blog called Christian Debt Coach.

Why should you be excited about it?

1.  It’s a blog specifically dedicated to Christians in debt.  That’s the only topic we’ll deal with.  If you’re not in debt, you won’t like the blog.  If you are in debt, you will (at least until you get out of debt!).

2.  With a focus on helping real people with real debt problems, you’ll be able to get personalized help with blog posts devoted to answering reader questions.

Another survey result was that 70% of you liked the idea of a question and answer format on the blog.  Interestingly, I don’t get too many questions at MH4C.  However, if you have a debt related question, I’d like to answer it.

My plan is to highlight and address a reader question once a week.

Best of all, it won’t cost you a penny.

Why am I doing this?

In April 2012, I’ll be transitioning to a fulltime ‘missional entrepreneur’ (more on that in a future post), so I’m going to have some extra time available.  This project excites me as a way to glorify God by serving others.  I love the idea of helping people change their financial future in such a practical and specific way.

I want to help people get out of debt, and I feel like this is a good way to give back to the community.

If the new blog focus is of interest to you, then you might head over to the Christian Debt Coach subscribe page to be sure you don’t miss any of the valuable content.

To leave a comment or easily share the article with your Facebook or Twitter friends click here -> Getting Out of Debt in 2012? Announcing the Christian Debt Coach Blog | Get Rid of Debt Once and for All

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1. My 3 BIG 2011 Blog Goals: Manage the Boss, Full-time Blog Salary, and Another eBook
2. My 3 BIG 2011 Blog Goals: Manage the Boss, Full-time Blog Salary, and Another eBook
3. December Christian Blog Roundup

On a few different occasions, I’ve tried to explain my views about the Bible in debt (debt in the Bible, is the borrower slave to the lender part one and part two).  I think my view has largely been misunderstood.  Today, I’ll try and address the topic again, and I’ll either make things more clear, or dig a hole even deeper.

One of my ministry responsibilities is to help the men at our church learn how to teach the Word of God.  That may seem like a simple task, but it is not.  It is not simple because teaching from the Bible brings a heavy responsibility.

I know this guy who loves to prepare his messages by first coming up with a compelling story.

After he’s found a story that strikes the funny bone or is deeply emotional, he’ll come to me and ask, “What Bible verses should I use?”

Here’s the problem: he’s got the theme, the lesson, the moral, the focus, the function - before he’s even opened the Bible.

Because I’ve followed the sermon construction process, I often wonder if the sermon is biblical even when it agrees with the Bible.  I wonder this because I know the seeds of the sermon grew out of common sense or human understanding.  The message did not germinate through study.  It was not conceived out of the pages of Scripture.

It was a message that evolved completely outside of the Bible, and it was pinned up using a few Scripture verses.

So what does this have to do with the current Christian view of debt?

I’m just being honest here.  I hated debt long before I knew that the Bible had anything to say about debt.

I distinctly remember having a discussion about banks and interest in either the seventh or eight grade.  I couldn’t get my mind around the fact that people would borrow money and then be required to pay back even more after a certain amount of time elapsed.

I thought it was a dumb thing to do.

(And now a little background on the life and times of Craig Ford.)

Because of that early mathematical disconnect, I didn’t borrow money to buy my first car – a Honda CRX.  I paid cash.  I didn’t borrow money to pay for my first or second year of college.  I paid cash.

By the time my third year of college rolled around, my part-time jobs and savings were no longer able to cash flow my education.

There in York, Nebraska, I borrowed my first dollar.  A student loan debt.  I finished school with $5,000 in student loan debt.  I was 21 at the time.

Now in case you’re wondering why I’m taking this trip down memory lane, at that point in my life I didn’t even know that the Bible directly had anything to say about debt.

So, what?

So by the time I started studying what the Bible had to say about debt, I had already decided what made sense to me.  I had my common sense understanding of debt. That means I was very susceptible to try and latch onto Bible verses about debt.  Without planning to, I could overstep and claim Biblical authority where it does not exist.  So I tread lightly when studying what the Bible says about debt.

As a result, at the very least I have to openly admit that when I read the Bible, I’m heavily influenced by my intellectual inability to understand why anyone would want to borrow money.

That’s why I’m uncomfortable with the idea of taking the word debt in the Bible and bringing it forward to our current economic situation and say that debt teaching applies to our current economic debt situation.

I’m not sure the writers of Scripture (yes, inspired by the Holy Spirit) envisioned a time when people would borrow money just because they want to.

People weren’t that silly.  They borrowed when they had to.  In desperate situations.

If you did borrowed and not repay, you could easily be sold into slavery.

Matthew 18:28 seems to present a historically plausible situation where a guy can get thrown in jail for not repaying a day’s wages worth of debt.

Basically, I’m not willing to take the word debt in the Bible and bring it into our contemporary situation without that word going through some type of a filter that asks – does the word debt carry the same connotation today as it did yesterday?

Thus, I feel more comfortable building a Biblical case against debt, not just (or primarily) on verses that talk about debt. Instead, I’d rather discuss the spiritual condition that is feeding the debt. 

Here’s just one example:

Gal. 5:22 reminds us that one of the fruits of the Spirit is self-control.  This, I don’t believe, refers only to our sexual passions.  It refers to our natural tendency to feed the desires of the flesh.  Getting what we want when we want it.  It is the inability to say no to one’s own self.  It is destructive. I think today we can make a case against debt from the self-control perspective.  Many times (please don’t hear my saying always, because I know there are indeed exceptions) debt mounts because of a lack of self-control.

That’s how I can distinguish between different types of debt with different levels of risk.  Because I don’t transfer the word debt from the Bible directly into our modern context.

Why does it matter?

Here’s a reason. In my opinion, house debt is different than credit card debt, and I believe the Bible allows for these differences.

If Proverbs 22:7 was the definitive text on debt and we could just snatch up the word debt without any critical thinking, then we would need to conclude that a person who takes a house loan is a slave.  Yet, we rarely hear people include the house loan when we talk about the tragedy of debt.

In my case, I have a home worth 400% less than my mortgage.  I have five times the outstanding amount of my mortgage in the bank.

There is not a single thing anyone could do to use that debt to hold it over me, dictate my future, or control me.  I don’t believe the presence of such a minimal debt is an indication of selfishness.  The worst that could happen is someone could say, “Craig, you need to pay off your mortgage because we’re calling the loan.”  Yes, it would be an inconvenience because I’d need to take five minutes to write a check, but that’s the end of story.

Thus, the debt is not slavery.  The debt does not dictate my future.  The debt, I pray, is not an indicator of a self absorbed soul.

If Prov. 22:7 is our definitive debt text, then I’m in slavery.  But, if we allow ourselves to say that our use of debt is different than their use of debt, we have the flexibility to determine what type of debt that the Bible opposes (rather than just using blanket statements).

Our focus should not be on the word debt when we’re studying what the Bible has to say about debt.  Our focus needs to be on:

1. What debt reveals about our loves, passions, desires, and spiritual hunger.
2. The obligations we’re taking on.

Romans 13:8 talks about debt as an obligation (much broader than just money).  We, as Christians, are all in debt. We’re indebted to Christ.  As a result, we are all now indebted to love.  If we replace that obligation with other obligations, we may find ourselves quickly serving two masters – or at least trying to.

I think we put ourselves, Biblically and theologically, in an awkward place when we start spouting off Bible verses about debt, assuming that their debt terminology equals our debt usage.  Instead, I think we’re better off understanding their debt situation and applying it to parallel situations today.

If a person quotes Proverbs 22:7 to say that every borrowed dime equals slavery, I think we tragically misinterpret Scripture.  The Biblical concern is not debt, but too much debt or ill-motivated debt.  As such, it would be hard to apply Proverbs 22:7 to the case of a conservative or moderate house loan.

The Bible, I believe, is against debt that is incurred as the result of impure motives and a spoiled heart.  The Bible, I believe, is against debt that obligates the borrower to act in line with the wishes of that lender over and above the wishes of their true lender, Jesus Christ.

No, that doesn’t include every debt under the blue moon.

I think a person can borrow money for a car and not be a slave to that debt.  Look, I think the idea of borrowing money for a car doesn’t make any sense.  I’ve proved how expensive it is here.  I teach people how to buy cars with cash.

I also think a person can borrow money for a car and be a slave to that debt.  If you have too much debt, refuse to live with what you have, and get a loan, you are signing ownership of your freedom to others.  That’s when it approaches slavery and even, I might add, sin.

I am an anti-debt guy.  I avoid debt.  Debt-free living has been a tremendous blessing in my life.  Still, I think we need to be sure we have a solid Biblical understanding on the topic before we start saying, ‘God says’.

Thoughts?

To leave a comment or easily share the article with your Facebook or Twitter friends click here -> The Christian Anti-Debt Sentiment | Born Out of Common Sense or Biblical Obedience?

Other Great Articles:

1. Debt Snowball Explained | How To Pay Off Debt Using the Debt Snowball
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Debt.

It’s a huge issue facing North American Christians and churches.  It is debt that is choking.  Straining.  And burdening so many people.

Debt is consuming resources like money, time, mental energy, and focus.  Those resources ought to be devoted to other more important things.  But they can’t because future funds have already been committed to pay for things people couldn’t afford yesterday.

Those in debt are feeling overwhelmed.  Directionless.  Burdened.  Stressed.  Frustrated.

None of this, not one part of it, is what God wants for us to be experiencing in our lives on earth.  This is the tragedy of debt, so we need to deal with this debt problem.  Now!   Debt is not a sin, but we can certainly see why the Bible doesn’t have positive things to say about debt.

If you’re in debt, I don’t say this to make you feel guilty or to make matters worse.  However, I do want to remind you how few positive things debt contributes to our lives.  When we recognize that, perhaps we’ll be motivated to change.

The Simplicity of the Debt Situation

On one level, the solution to debt is so simple.  It’s simple to say.  It’s simple to explain what needs to be done.  Here are some of those simple facts:

• You must stop buying things on credit.
• You must develop a financial purpose so that you don’t overspend.
• You must spend less than you earn.
• You must decrease expenses or increase income.
• You must get out of credit card debt.

The Complexity of the Debt Situation

The complexity is that debt is a symptom of deeper underlying issues (as commonly pointed out by the late Larry Burkett).  It is hard to get out of debt because to deal with debt is to deal with habits.  You cannot change your debt situation if you don’t change your actions and habits.

I have a fitness book called Fit and Well.  The very first time I opened up that book I was frustrated by the first chapter that discussed topics related to changing habits.  I didn’t want a personal development book.  I didn’t need a motivation coach.  I wanted exercise and regiments that would help me get into shape.

But unless you can actually find away to motivate yourself to implement the teachings, you’ll fail. Thus, habit changes are an important part of getting in shape.

The best teachings in the world are useless until implemented.  No matter how simple it is to say how to get of of debt, it is hard to do because it involves changing how you spend your money, what you do with friends, and how you live your life.

The Cost Benefit Analysis

Jesus taught us the importance of counting the cost.  Lord willing, we’ve done that in our lives as we’ve accepted the cost of Christian discipleship.

I think if we considered what it will take to get out of debt, we’ll be more prepared for the struggles that come as we change what is necessary to shed our debt pounds.

You cannot get out of debt without paying a price.

• The price may be saying no to something you’ve been wanting to buy for a long time.
• The price might be saying no to certain activities that you currently love doing.
• The price might mean putting in extra hours at work.
• The price might be telling your kids that you’re struggling financially and so there will be changes in the home.
• The price might be spending more time doing your budget.

The fact remains, in my opinion, that you cannot get out of debt without changing. It’s easy to say and hard to do.

To leave a comment or easily share the article with your Facebook or Twitter friends click here -> The Simplicity and Complexity of Debt

Other Great Articles:

1. The Tragedy of Debt
2. Debt Snowball Explained | How To Pay Off Debt Using the Debt Snowball
3. Credit Card Debt Problem? Essential Resources to Beat Credit Card Debt

One of the most effective methods that we decided upon when figuring out how to get out of debt, was to channel our impulse spending. This has helped us to both get out of debt faster and to develop discipline with our finances.

How to Get Out of Debt by Evaluating Expenses

In talking with people about their finances, I’ve found that one of the problems that many people face when trying to figure out how to get out of debt is that they can’t find any additional ways to reduce expenses. Once they remove or cut back on their discretionary expenses as far as they can, they then have little else that they can do.

However, in most of these cases I still find plenty of impulse spending happening throughout the month! That means that there is extra money “somewhere” in the budget that they are not considering.

When you begin to think about making a purchase – no matter how large or small – you always have the option to change your mind. My wife and I go through this as well. I may get frustrated by my 6-year old bluetooth headset and desire to buy a new one. I’ll even begin researching models and looking up prices to get a great deal.

Then I remember our mountain of debt and decide to make due with my old headset for a little while longer. If you are trying to figure out how to get out of debt, then you probably go through this dance often. However, you must decide to take this one step further in order to accelerate your debt repayment efforts.

You must take that money that you would have spent on the desired item, and use it for debt repayment. Since you somehow found an extra $30 to go to the movies (or $50 for my headset ), then channel that extra money toward the largest priority in your debt repayment plan.

By channeling all of your impulse buying you are now able to accelerate your debt repayment plans, and you now have another tool in your financial toolbox. If you are wondering how to get out of debt, then you need to begin channeling your impulse buying immediately. In fact, when we find extra money for unimportant things and decide to pay off debt with it instead, we immediately log into our bank account and send of an electronic payment to the credit card company!

There is another added benefit to this method…

How to Get Out of Debt by Developing Discipline

Remember that many people will set up a budget and claim that they have no room to develop a plan of how to get out of debt. However, if you make impulse purchases then that proves that you aren’t being as careful with your evaluation as you may think. Once you decide to channel your impulse buying dollars toward debt repayment, then you will likely be more disciplined and careful when it comes to allocating your income.

Also, this will cause you to become more disciplined in regards to your debt repayment plan. With us, we now find pleasure in finding any small amount of extra money to pay down our debt! If you are like us, you will try to find bargains on items and put the savings toward debt. When considering how to get out of debt, it pays to be disciplined in your approach and to look for multiple ways to attack your debt!

A Few Things To Consider

• When writing about impulse spending, my assumption is that you are not putting these purchases on your credit card. Since how to get out of debt is one of your main financial concerns, abstaining from credit card use should have been your first step.
• You need to have other strategies in place in order to tackle your debt. Applying an extra $100 here and $50 there, will not help you pay down $30,000 in debt fast enough. Here are some tips to pay off your debt!
• You may want to keep track of these extra payments and make a game of trying to find more places from which to squeeze from in order to meet your goal.

photo by Minimalist Photography

To leave a comment or easily share the article with your Facebook or Twitter friends click here -> How To Get Out Of Debt: Channel Your Impulse Buying

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Have you heard someone say, “debt is fine as long as it’s ‘good’ debt?”  The idea of good debt is defined as using debt to purchase something that will appreciate in value.  Some view it as a tool that helps you meet your goals faster and more easily.  Here are four common sources of ‘good’ debt and how these debts can actually turn bad.

Home Mortgages

Paying cash for a home is very difficult, so the majority of homeowners have used mortgages to help them fulfill their dreams of owning a home.  Responsible borrowing can be a great tool, but these foolish uses of debt can turn that home loan into a nightmare.

• Buying a home that’s beyond your budget. This is known as becoming ‘house poor.’  Struggling just to make a house payment can be dangerous and put you into a tight financial situation.
• Borrowing extra to upgrade your home or remodel rooms. Yes, remodeling your home can increase the value, but you never want to get upside down because of ‘extra features’ you thought would increase the value.
• Taking a second mortgage or refinancing to pay down credit card debt. This doesn’t solve the root of the problem – which is the inability to properly manage credit cards.  This move can often put you further behind as the credit cards start to build again and the extra mortgage payment restricts monthly cash flow.

School Debt

Using school loans is oftentimes necessary for students to obtain a college degree.  Being conservative with these loans will help with managing the payments.  Beware of foolish practices like these:

• Using extra loans to eat out and live beyond your means. You can live like a student now, or live like a student later as you struggle to repay the extra loans you took to eat out every weekend.
• Purchasing vehicles with student loans. Transportation may be a necessity, but buying a car with student loans isn’t the most prudent thing to do.  Instead, save up for an affordable used car or use public transit to commute for a few years.
• Not planning for repayment. If you are studying to work in the nonprofit sector, racking up $80,000 in debt will put you in a world of hurt.  Project the payments for your school loans and don’t overvalue your hopeful industry’s salary range.

Business Loans

Small business loans can be a great jumpstart for your business, but these factors may have you thinking twice before getting into ‘good’ debt for your business.

• Research thoroughly before borrowing. Before you begin any business, make sure you’ve done your research to see if your venture will thrive.  Failing to do careful research can result in a failed business and financial troubles if you borrowed to start the business.
• Restricting terms can be challenging. Business loans are often locked into a term and many don’t allow for restructuring.  If you are struggling as a business, the lack of flexibility may have negative consequences.
• Increased interest rates. The interest rates on small business loans can be higher than home and auto loans, so weigh this carefully before you commit to this kind of debt.

Real Estate Loans

Investing in real estate beyond your primary residency can be a risky, yet rewarding business.  The following risks can turn this good debt into a bad investment, so proceed with caution when considering a loan for real estate investments.

• Uncertain market conditions make investing in this industry even riskier. Not understanding the economic factors involved with real estate could make your investment a poor choice and turn that good debt into a big regret.
• Repairs can be costly.  Maintenance on real estate properties can get expensive, especially if you’re not a handy-person.  Small repairs can add up and using a line of credit or more loans can make the situation even worse.

Yes, debt can be a good tool to help you succeed in business and to grow your investments.  However, calling these four types of debt ‘good’ all the time isn’t smart.  Every debt situation should be approached with caution, because ‘good’ debt can turn bad quickly if it’s used improperly.

image credit: respres

To leave a comment or easily share the article with your Facebook or Twitter friends click here -> How Good Debt Can Go Bad

Other Great Articles:

1. Debt Snowball Explained | How To Pay Off Debt Using the Debt Snowball
2. What To Do When God Gives Bad Financial Advice
3. Dave Ramsey Debt Snowball: Paying Off Debt Spreadsheet

Over the last few weeks, I’ve been convinced that I need to take a stronger stance against debt and offer more resources for people who are in debt.  I feel like I need to point out both the seriousness and ludicrosity (yes, I made up that word) of debt.

As I’ve been working on my call for simple living and generous giving (in the form of a book called Transforming Your Financial Diet: 7 Steps to Simple Living & Generous Giving), I’ve found that time and time again debt frustrated the system I’m suggesting.  (The eBook will be released on February 21st, 2011 and it will only be on sale for 10 days.)

I know there are folks who have so many positive things to say about debt and what it can offer you and extend to you.  However, debt is a robber.  It robs your freedom.  It dictates too many decisions for too many people.

Yes, of course there are reasons to take on debt.  However, sometimes we make excuses into reasons.

No, I didn’t put together this post to make those of you with debt feel bad, but to make you take a long, hard look and ask yourself some serious questions:

• Does it ever inhibit me from doing things I feel called to do?
• Would I be able to give more if I did not have debt?
• Was it taken to do things for the glory of the kingdom of God?

If you are in debt, I want to encourage you to make debt repayment an important focus.

Here are a few suggested articles for those of you who are interested:

Why Getting Out of Debt is Like Running a Marathon

Debt and the Opportunity Costs of Not Paying it Off

4 Debts You Should Try to Avoid

Debt in the Bible | Is Borrowing Money a Sin?

Credit Card Debt Problem? Essential Resources to Beat Credit Card Debt

A Guide For Getting Out Of Credit Card Debt

Do those of you with debt agree or disagree with me?  Has debt brought more joy or more hardship to your life?

To leave a comment or easily share the article with your Facebook or Twitter friends click here -> The Tragedy of Debt

Other Great Articles:

1. 4 Tips to Pay Off Your Debt ASAP
2. Debt Snowball Explained | How To Pay Off Debt Using the Debt Snowball
3. Credit Card Debt Problem? Essential Resources to Beat Credit Card Debt

If you are a mean, hard, and calloused individual, you need not read this post about cosigning a loan.  However, if you have a tendency toward niceness and kindness flows within you, then you need to read this post line by line.

MSN Money says you should never cosign a loan.  I’m not sure if never is the right word, but it would need to be a really unique situation.

The nicer you are, the more likely it is that someone is going to try and take advantage of you.

Consider the following two characters:

Uncle Ulcer – Uncle Ulcer is one big fat pain in the neck.  This guy has skin as rough as an alligator, and he’s got one mean scar across his cheek.  His language is hard, and he doesn’t think about anyone else for more than five seconds.

Aunt Angel – Aunt Angel is the sweetest old lady you ever met.  She smells like chocolate chips, and her rosy cheeks are always crunched into a smiling position.  She always asks about your hobbies and interests.

Who do you think you would be more likely to ask to cosign a loan? You bet – Aunt Angle.

Things You Must Know Before Cosigning a Loan

The Dangers of Cosigning a Loan

You risk a lot more than money.

If money was the only thing at stake then this might be a different discussion.  However, when someone owes you money (especially when they don’t pay), it makes a relationship awkward at best.

One time I lent money to someone to help them stay out of jail.  His story sounded legit, and I was glad to lend him money.  He never paid me back.  The worst part is that he stopped coming to church.  I’m guessing it was because of the awkwardness of our relationship.  To be honest, every time I see him, my first thought is “that’s the guy who borrowed money and didn’t pay me back.”

What does that have to do with cosigning a loan?  When you cosign, if the person doesn’t pay the loan back, you become responsible to pay it back.  That can quickly damage a relationship.

When you consign a loan you accept personal responsibility for the repayments.

If Little Johnny wants a car loan and you cosign for the loan, those payments are as good as yours.  The bank will come after you for the payments if Little Johnny decides not to pay up.

The bank isn’t lending that person money for a reason.

Please don’t deceive yourself.  Banks love to lend money.  It’s how they pay the bills.  But if a bank doesn’t think someone will pay up then you’d better think long and hard before you trump their professional evaluation.

You may not have deciding rights over the item in question.

Let’s say Little Johnny gets a car loan (which you cosign for) and the car is titled in his name.  Johnny isn’t making his payments and the bank starts to come after you.  You decide that the car should be resold, but lo and behold, the car is only titled to the little brat who is not respecting your wishes.

The Proverbs advise against it.

A man lacking in judgment strikes hands in pledge and puts up security for his neighbor. (Proverbs 17:18 NIV)

Your own ability to borrow and your credit score is impacted by that loan.

If you cosign for a loan, expect that to impact your ability to get a credit card, buy a house, or anything related to credit.  Think about cosigning this way – it is just like you were getting the loan on your own.

The Benefits of Cosigning a Loan

To be frank, I don’t think there are a lot of benefits.

However, by cosigning a loan it is possible that in the long term you are helping someone get up on their feet.  Just know that for every one person that is helped by the loan there are 100 who did not responsibly handle the loan.

Parents may need to cosign for certain items for responsible kids who have not yet built up credit, and that may be an appropriate action.

I think in the end I’d say this – if the need is legitimate, try to work out another arrangement to help that person instead of cosigning.  You could help them find an alternative option (someone who is willing to lend them a car), help them find an alternative way to fund the loan (like p2p lending through something like Lending Club), or require them to take some financial classes, and then buy the item for them.

Have any of you had positive or negative cosigning experiences?  Would you recommend cosigning a loan?

To leave a comment or easily share the article with your Facebook or Twitter friends click here -> Cosigning a Loan | A Chronicle of the Many Dangers

Other Great Articles:

1. Three Destructive Dangers of the 10% Only Doctrine
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This guest post is by Tim Chen the founder and CEO of NerdWallet.com, a website that helps consumers to compare low apr credit card offers. Tim also educates consumers about credit cards and personal finance at the Christian Science Monitor, Forbes Moneybuilder Blog, and the Huffington Post.  If you would like to write you own guest post click here.

Have you ever wondered why most of us have a propensity to “buy now and pay later?” After all, somewhere in the deep recesses of our minds, we know that we can’t really afford to charge that shopping trip to Paris; not when the economy is going bust and they’re handing out pink slips at work. But we do it anyway, thinking that may, just maybe, things will be different in the future.

It’s kind of like going to the gym, isn’t it? When you signed up for that membership, you might have known that there was no way you were going to go there every day for the next two years and spend an hour sweating. But you did it anyway, didn’t you?

Welcome to the world of hyperbolic discounting – the foundation on which credit card companies, and yes, the originators of gym memberships, have built their businesses. What is it exactly? To break it down into its most basic form, it’s the idea that humans (and some animals) will always take what they want now rather than wait for a better payoff in the future.

How does this tie into credit card spending?

In a 1994 study made famous by Green et al, it was shown that people who were given the choice of $50 that day, or $100 a year from then overwhelmingly chose the $50. Why? Because our brains are hardwired to want satisfaction in the immediate future, and we mentally discount the latter consequences. This falls into the realm of what’s called “behavioral economics” because it strays from economists’ standard view that we are all robots trying to rationally maximize our personal wealth.

Credit card interest and fees are perfect examples. Most people understand intuitively that if they spend $1,000 on their credit card, and then make the minimum money payments on that balance, it will take 106 months to pay off at 15% interest. And they know in the back of their minds that they will end paying so much more than they initially bargained ($1,700 according to the debt calculator at bankrate.com). But hyperbolic discounting is like short-term tunnel vision. It kicks in and all they can see is the immediate payoff – like that European vacation they can’t afford.

This is also why people sign up for rewards credit cards that charge higher interest rates and exorbitant annual fees. All they see upfront is the promise of 1% cash back, and they will end up spending more than usual, with their eyes on that monthly bonus. But what they conveniently ignore is the mounting interest bill and the $100 fee at year end that more than wipe out any rewards they earned over the last 12 months.

Don’t be that guy (or gal)

When you’re tempted to let your right brain prevail while ogling that prized possession, remember this: your credit card company knows you better than you do. They realize that you are likely to discount the consequences of your desire, in exchange for immediate gratification. It’s how they can afford to fly around in private jets and dine out in exclusive restaurants, while you chip away at mountains of debt.

In fact, your inclination to use hyperbolic discounting will very likely be the most spirited topic of conversation at that very dinner. In other words, they’re playing you. Are you going to let them win?

To leave a comment or easily share the article with your Facebook or Twitter friends click here -> Hyperbolic Discounting: Why Paying Your Credit Cards Off Is Like Going To The Gym

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Understanding your credit report

Understanding what’s in your credit report can help you improve your credit rating, lower the costs of borrowing, and fix any mistakes on your report. This post will help you understand the very basics of credit reports: what’s in your credit report, who can look at it, how often you should look at it, and how it’s created. Once you know these basics, you’ll be ready to start improving your credit score and repairing any problems you have.

Understanding Your Credit Report: What Is It and What’s In It?

A credit report is a file that credit reporting agencies (like Equifax, Experian, and TransUnion) create, maintain, and distribute containing information on your personal credit worthiness and repayment history. Credit reports contain five types of information:

1. Identification

Your true credit report will have your name, current and past addresses, your spouse’s name (if you’re married), your date of birth, your Social Security Number, your telephone number, your employer (and previous employers), and your mother’s maiden name.

2. Credit Inquiries

Every time a lender or other credit provider runs a credit report on you, a record is made showing who ran the report and when they asked for it. In most states, these inquiries remain on your report for one or two years. Lenders consider this relevant information because it shows your recent credit activity and how desperately you might be trying to get credit, which can be a sign that you are a higher-risk borrower.

There are two types of inquiries: hard and soft. A hard credit inquiry is one where you personally and voluntarily applied for credit and authorized a lender to pull your credit report. These are the only inquiries that affect your credit score.

Soft credit inquiries are the ones made by businesses that want to offer you goods and services. “Pre-approved” offers are often the result of soft inquiries. Because you didn’t request credit from these businesses, these inquiries won’t hurt your credit score.

3. Information in Public Records

Publicly available records like courthouse records, bankruptcies, judgments, lawsuits, and sometimes criminal records are included on your credit report. Credit reporting agencies will also include any records of collection accounts (when the original creditor hands your account over to a debt collector).

4. Understanding Credit History

This section includes a list of every creditor you’ve had an account with along with your repayment history. Each entry will also include information on when the account was opened, the credit limit, your current balance, the monthly payment, and your payment frequency for the last 12 to 24 months. These listings may also include consumer disputes, whether the credit is individual or joint liability, the cosigner or guarantor, secured accounts, and any charge-offs (when the creditor writes off your account as a loss).

It’s very important to make sure there are absolutely no errors in this section because the information here holds a very high weight in figuring your credit score and worthiness.

5. Consumer Statements

Finally, your credit report can include a statement of less than 100 words that allows you to more fully explain an account on your credit report. Some lenders look at this and some don’t, but it doesn’t hurt to use this option to elaborate on any extenuating circumstances in your credit situation – especially where you’ve had problems working with a particular creditor.

Who Can Legally Look at My Credit Report?

Any business can legally do a soft credit inquiry on you. As I mentioned before, these inquiries don’t affect your credit score. You can opt out of pre-screened (or pre-approved) offers from credit and insurance companies through optoutprescreen.com. That’ll stop those types of offers and soft credit inquiries, but employers, landlords, and businesses wanting to verify your personal information will still be able to do a soft credit inquiry on you.

However, only businesses that you have authorized can do a hard credit inquiry on you. This authorization is standard when you’re filling out a credit card or loan application and many other situations where credit is being extended. This probably happens more than you think, since banks often do a hard credit inquiry when you open a bank account and cell phone companies often do the same when you sign up.

How Often Should I Look at My Own Credit Report?

If you’ve got a credit card, installment loans, a vehicle lease, or any other form of credit you’re actively using, you should be reviewing your credit report at least every six to twelve months. I prefer to do a four month rotation between the big three credit reporting agencies (Equifax, Experian, and TransUnion) using annualcreditreport.com‘s free service. I pull my credit report and my wife’s credit report from one of these agencies every four months. That makes it easy to review the reports regularly.

Craig here – you can also get a general idea of your credit score by using a free service called Credit Sesame.

If you’re not really using credit, you can probably stick to just once a year or year and a half.

When Is a Credit Report Created?

Your credit report is created as soon as you apply for your first loan or credit card or when a business reports information on credit they’ve extended to you. Once your report has been created, it continues to get updated as more information becomes available.

Have Credit Problems? Want to Know How to Fix Your Credit Report?

Stay tuned for more information on do-it-yourself credit repair. I’ll show you how you can improve your credit score, make changes and corrections to errors on your credit report, and how to deal with problem accounts and unauthorized access.

(photo credit: Andres Rueda on Flickr)

To leave a comment or easily share the article with your Facebook or Twitter friends click here -> The Basics of a Credit Report

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When you make a decision to get into debt, you’re also making a decision not to do many other things. Here are the three biggest opportunity costs of not paying it off.

Opportunity Cost #1 – Your Future Retirement

This cost will affect the day-to-day existence of possibly a third of your whole life. Some people may think that since retirement is so far away, they don’t have to be concerned about it yet.

But retirement planning is a lot less difficult the earlier you do it. If you wait until 15 to 20 years before you retire, you’ll have a more challenging time saving for a successful retirement. And to save adequately, you’ll need to eliminate your debts ASAP.

Why? People are living longer and longer, yet our employers and Social Security are providing less and less. As you decide what to do with the dollars that come into your hands, keep an eye out on your retirement.

Because if you’re 25 years old and want $600,000 by the time you’re age 65, you’ll need to save about $175 every month with an 8% annual return.

But if you wait until you’re age 35, you’ll need to save about $410 a month (more than double) to accumulate the same $600,000 at retirement.

Opportunity Cost #2 – Paying Less Interest

Debt forces you to give your money to someone else, for something you bought in the past. Ideally, we should spend it on things we need now or will want in the future, such as a nice retirement or college education for our kids.

It’s helpful to shift your mindset from not wanting to miss out on the fun today, to ensuring that you’ll have even more fun tomorrow.

Paying off your debts sooner means that interest won’t accumulate as quickly, which leads to your debts getting paid off even faster. Then the money that you waste on debt will be freed up for more beneficial uses.

Let’s take a look at a specific example. Suppose you owe $25,000 at an interest rate of 20 percent. If you made just $500 in monthly payments, not only would it take you over 9 years to pay off, but you’d also be paying a total of over $29,000 in interest over the life of the debt. That’s more than the debt itself!

But what if you doubled your monthly payment to $1,000? If you did this, you’d get rid of your debt 3 times as fast (less than 3 years), and pay over a third less interest (about $7,600). With the money you saved from interest, you could do something nice like purchase a car with cash! I hope this inspires you to look for ways to pay down debts faster.

Opportunity Cost #3 – Your Own Well-Being

I think it’s pretty obvious that financial pressure affects our overall life, leading to stress, anxiety, unhappiness, and even relational challenges.

And this financial pressure probably doesn’t come from having too much money. Rather, it’s likely to come from owing a lot of money to others.

As you improve your financial situation, my guess is that you’ll also improve other areas of your life, such as your emotions and even your physical health. I hope this is enough inspire you to get out and stay out of debt.

Can you think of other opportunity costs of not paying off debt?

Photo by fussy onion

To leave a comment or easily share the article with your Facebook or Twitter friends click here -> Debt and the Opportunity Costs of Not Paying it Off

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