Please visit our new site, ModernAlternativeMama.com.
Comments on this post have been locked and updates are no longer being made to this page. Please click here to view this article on the new site.
**This post has been entered in Frugal Fridays at Life as Mom!**
I know some of you have seen all our previous posts on getting out of debt and alternatives to credit and everything else, but are really holding out. "Credit is good!" you say. "I need to have my credit rating! And credit cards don't hurt if I pay them off monthly, plus I get cool rewards!" For all of you, it is time to explore some credit card myths (and by the way, I wrote this intro before I actually posted the other entries. I just knew that somebody would say those things, lol).
Myth #1: The credit card companies wouldn't send me applications in the mail if I couldn't afford it.
Truth: Wrong. The credit card companies are simply making you an offer based on mailing lists or research they have performed. It is your responsibility to determine whether you can afford to accept their offer. From iVillage. Please remember this! It is very important. The credit companies are not your friends. They don't believe in you. They are only trying to make money off you and their formulas have told them that you are likely to use credit and that they will make money. You do not need to accept an offer of credit just because you've been given one.
Myth #2: Everything is okay because I pay the minimum payment due each month.
Truth: By just paying the minimum payment on a debt, you extend your payments for many years. If possible, send more than the minimum payment. If that isn't possible, you are probably living close to the financial edge. What would happen if you were injured or sick or could not work? Simply being able to live from paycheck to paycheck is not a sign of financial well-being. From iVillage. If you are making minimum payments, you are going to pay several times what the items you purchased are actually worth. If you truly cannot afford more than minimum payments, STOP using your credit cards right now, cut them up, and put as much extra money you can to paying them off so you're not caught in case you have an emergency!
Myth #3: If my debts get to be too much, I'll just file for bankruptcy.
Truth: Bankruptcy is a very serious matter and should be a last resort, not an easy out. It is a legal case filed with the bankruptcy court that is a matter of public record, and it can be reported for the rest of your life if you apply for certain loans, life insurance or jobs. Many people who have filed bankruptcy wish they had tried other alternatives before filing. Once you file, you will always be ''a person who filed bankruptcy,'' and you can never take that back. From iVillage. Bankruptcy is not a free "out" or an easy solution. It's a long and humiliating process. Also, most importantly, you can only file for bankruptcy once in your lifetime. If you file once, you are likely to continue the same spending habits and get yourself in financial trouble again. And the second time, there's no way out.
Myth #4: Aren't there positive uses of a credit card? Like rebates and airline miles?
Truth: Responsible use of a credit card does not exist. Credit card debt is a major problem in America. There is no positive side to credit card use. You will spend more if you use credit cards. Even by paying the bills on time, you are not beating the system! But most families don't pay on time. The average family today carries $8,000 in credit card debt according to the American Bankers' Association. Now let's talk about the rebates. If you were using a credit card at 5%, you would have had to have spent $80,000 to get $4,000 rebates on new cars that lost $6,000 of value when you drove them off the lot. That is not a good deal! From Dave Ramsey. It's important to note that since you will spend MORE money when you use a credit card, this extra money spent is greater than or equal to any rewards you may receive from using the credit card. On average, people spend 20% more on credit than with cash. There are no cards that give you the equivalent of 20% back (at least not all the time), so you still lose. In fact, from Dave Ramsey, "A study of credit card use at McDonald’s found that people spent 47% more when using credit instead of cash. This is money you could have saved." So no, you're not winning by getting 5% cash back!
Myth #5: I can wrap up all of my credit card debt into a home equity loan and my interest will be tax deductible.
Truth: You have just placed your home at risk and could lose it if you fail to make your payments. Nobody ever plans not to be able to make her payments. The reason the lender uses your home as collateral is so she can take it from you if you default on the loan. As for the tax deduction, who knows whether the interest will be deductible for the life of the loan? Credit card interest used to be deductible but no longer is. Are you confident that home equity interest will always be deductible? From iVillage. Do not go into MORE debt to pay your debt! You are risking your future by borrowing from one area to pay another. Pay down your debt directly and get rid of it so you don't risk losing your home or anything else.
Myth #6: If I don't use credit, I'll never be able to buy anything.
Truth: If you don't use credit, you won't have debt. Remember when people used to pay for purchases in cash? If you want something bad enough, save for it. It is significantly more rewarding to purchase something and own it outright than to create another liability. From iVillage. Yes, you will be able to buy things!! If you aren't making monthly payments to credit cards, that's money you'll have to spend on other things. Nice things, that are yours to keep. You have to budget well, but you really don't NEED credit!
Myth #7: You NEED credit cards to build your credit score, or else you can't get a mortgage.
Truth: No, you don't need a credit score at all. These days, mortgage companies like you to have one because then their job is easy: if you have a certain number, you get a loan. If not, you don't. But mortgage companies can also choose to underwrite the loans (that is, look at your financial history personally to assess your risk) and you can get it. Or, of course, you can just save up and pay cash. :)
Dave Ramsey has this to say about credit scores:
A credit score is not an indicator of having won financially. It’s an indicator of having borrowed and paid back money. My credit score is zero. Every single bit of your FICO score algorithm is built and calculated on you borrowing money. The breakdown is 35% of it is your payment history, 30% is your debt level, 15% is length of time in debt, 10% is new debt and 10% is type of debt. It’s an I-love-debt score. I would never not hire someone because their beacon score is low due to not borrowing. Anyone who wouldn’t hire you for that reason is too stupid to work for.The thing that can drive your personal credit score down is borrowing and not repaying; that’s called bad credit. If that drives your FICO score down, then it’s a legitimate thing. But not having a credit report score and not being hired by someone because of that doesn’t dry up your job prospects. And as far as the Boy Scouts, they might rule you out based on bad credit, but not no credit. I agree that a low credit score that causes higher insurance rates is stupid, but there’s not much I can do about that. I became wealthy because I don’t borrow money.
Myth #8: I need to have just one credit card, for emergencies.
Truth: This is why you have an emergency fund. You should have a minimum of $1000 saved in a place you can access quickly in case you have the type of emergency you'd typically have put on a credit card, like car repairs, furnace break down, etc. If you have a much larger emergency, credit is an even worse idea. Putting several thousand dollars on a credit card (especially if you have an emergency that requires on-going payments) pretty much guarantees you can't pay it back, and at 18% interest or even higher, you're going to end up paying many times what you originally owed. Find another way to pay, or, better yet, try to negotiate a lower rate.
Did you know that if you can't afford medical bills, you can go in and negotiate with the hospital? One family we knew had someone who required a $30,000 surgery, and they don't have health insurance. This would have destroyed their finances and forced them to declare bankruptcy. They went into the hospital and negotiated and came out with a bill of a manageable $2000. Yes -- really. Another person we know looked into various aid options (he was single and making a bit under $30,000 per year) when he unexpectedly needed surgery, and he ended up not paying at all. So, negotiation is your BEST solution! Much better than using any form of debt to pay! You can also use this when purchasing anything large, in any industry, whether it's an emergency or not.
Any other credit card myths you'd like to share? Did you learn anything new?
Like what you read? Subscribe over on the right and get this delivered to your inbox everyday!
Posts
I think what you say is really valuable for people who are prone to credit card debt. I'm sure there are people who don't think like me, but I've never thoguht of credit cards as "free money." I ALWAYS pay off my credit card each month and have done so for 24 years. I carry $O credit card debt. I know how much I have to spend each month, and I STOP when I reach that amount just as I would if I had run out of cash in a checking account. I prefer to carry a credit card so that I don't have to carry cash and risk losing it or having someone steal it.
ReplyDeleteI know it takes a great deal of self-restraint to use a credit card as one would use cash or checks, but some people can do it. I do think, however, that your statistics prove that most people can't handle delayed gratification when credit and immediate gratification is so easy, and that is why they get into trouble.
I think what you say about saving up for purchases is the right idea. I've always made sure that I have enough money on hand to pay cash for new furniture, airline tickets, clothing, etc. I charge the purchases and then pay them off as soon as the bill arrives.
Your story about someone getting a $30,000 surgery for $2,000 troubles me because that person should have insurance. While the $28,000 reduction may have helped that person, the rest of us with health insurance end up covering the cost through higher premiums. Did you know that payments can be arranged with hospitals and doctors, and, as long as payments are made consistently, the medical expenses are exempt from collection? The people you mentioned would have been much more responsible had they 1. had insurance, or 2. paid back what they owed over a long period of time. No one has to declare bankruptcy because of medical expenses. That is a myth.
Keep up the good advice!
If you pay your credit card off every month then you will never get charged interest. I use a credit card for everything, but pay it off every month. It is easy to abuse credit so you need to be responsible if you are going to use them. People who accumulate a bunch of credit card debt are irresponsible.
ReplyDeleteMost people that bash the credit industry have learned the hard way about not managing their debt. Companies that lend money are in it to make money, so of course if you do not pay on time they will charge you. For example, a store that sells diva cups will not sell it at cost, they are trying to make money too.
Credit can be a good thing. Say you wanted to start a business and needed some start-up cash. Think of all of the good small, medium and large sized businesses in the world today. I am sure most of them have had some sort debt at one time. For example, Microsoft does not have any debt but I guarantee they did when they first started out. It is called risk and in the case of Microsoft they manage their credit risk very well.
Sorry...enough rambling.
wow! that just shows how responsible you are, but like you said not all people think and do what you do. Some carry debts as much as no one expect it is. Others even get credit cards for bad credit for them just to get another option of having a credit card despite having bad credit already.
ReplyDeleteAnonymous,
ReplyDeleteI totally agree that people who don't have insurance and rely on either the government or hospital to pick up the tab is wrong. We weren't suggesting that it was either good or ethical, but rather, if you're already in that position (have medical debt) there are ways out. We are huge advocates of everyone having medical insurance, especially HSAs if you don't have an employer sponsored option, since they are much less expensive.
I agree that people should pay all their bills, but sometimes if you're stuck in a hard place, like a job loss or a very large amount of total debt, it is perfectly legal to reach a settlement with a hospital or debt collector to lower the amount owed.
You are correct that no one HAS to declare bankruptcy over medical debt, over 60% of people filing bankruptcy say that it was one of the primary reasons they filed; which is why we included it on the list.
Anonymous 2,
ReplyDeleteIt is a HUGE myth that you need credit to start a business. Many, many businesses like HP, Apple, Microsoft, etc... started with no debt. In the case of Apple, the two founders sold a car and a calculator (worth a lot in the 70's) for their starting capital. Apple has no debt and is considered one of the strongest companies in the world. Microsoft DOES have some corporate debt, but it is still very low.
The head of Berkshire Hathaway (13th largest company in the US), Warren Buffet, who is also the second richest man in the world, had this to say about business debt:
"We are not interested in incurring any significant debt at Berkshire for acquisitions or operating purposes. Conventional business wisdom, of course, would argue that we are being too conservative and that there are added profits that could be safely earned if we injected moderate leverage into our balance sheet.
Maybe so. But many of Berkshire's hundreds of thousands of investors have a large portion of their net worth in our stock (among them, it should be emphasized, a large number of our board and key managers) and a disaster for the company would be a disaster for them. Moreover, there are people who have been permanently injured to whom we owe insurance payments that stretch out for fifty years or more. To these and other constituencies we have promised total security, whatever comes: financial panics, stock-exchange closures (an extended one occurred in 1914) or even domestic nuclear, chemical or biological attacks.
We are quite willing to accept huge risks. Indeed, more than any other insurer, we write high-limit policies that are tied to single catastrophic events. We also own a large investment portfolio whose market value could fall dramatically and quickly under certain conditions (as happened on October 19, 1987).
Whatever occurs, though, Berkshire will have the net worth, the earnings streams and the liquidity to handle the problem with ease.
Any other approach is dangerous. Over the years, a number of very smart people have learned the hard way that a long string of impressive numbers multiplied by a single zero always equals zero. That is not an equation whose effects I would like to experience personally, and I would like even less to be responsible for imposing its penalties upon others."
I personally believe, as other financial experts do, that while it is hard, but certainly possible to start and run a business debt free. It times of weakness, like the 2008-2009 recession, many large companies declared bankruptcy due to debt issues. Being debt free allows a business many more options for dealing with down turns.
According to the Small Business Administration, 50% of small businesses fail within the first two years. That leaves a lot of individuals stuck with debt they had to sign for personally, once the business is gone. It is a much better idea to have no debt, and hence no reason for a credit card, and grow the business slower as you can afford to pay cash. This may not be the "quick and easy" approach, but succeed or fail, it won't ruin your life.
Ben-
ReplyDeleteYour CNN article is interesting, but even the experts quoted say that medical bills probably added to what was already a precarious financial situation and may not be the main cause of the bankruptcy. Some people may see it as easier to file for bankruptcy and "get rid" of their medical bills than to reach a PAYMENT agreement.
While it may perfectly legal to reach a settlemnt agreement with a hospital or other health care provider, it is unethical. As I stated previously, the unpaid costs are just shifted to those with health insurace or the taxpayer. It's a different form of irresponsibility than bankruptcy, but a form of irresponsibility all the same. Reaching a payment agreement is the responsible, ethical, and legal way to go.
I wasn't disagreeing with you, far from it. Merely I was saying that for some people, that is the only way out. At the end of the day, if I were a hospital, medical professional, debt collector, etc... I would glady take a settlement from a situation that is likely to become a bad debt or bankruptcy situation.
ReplyDeleteI was forunate enough to hear the CEO of Ohio Health, the largest hospital system in the state of Ohio speak. The cost of treating insured and Medicare/Medicaid patients is costing them billions a year. Everyone thinks, "hey, it's a big rich hospital, they can afford to give me a freebie". But it's when 20, 30, or 40% of the people think that way that the system starts breaking down.
For the record, we are anti-debt, anti not paying a bill you owe, and pro health insurance.
I'm not disagreeing with you either. I just think that if you incur a debt, you pay it back - always. If the bill is huge, a person may spend the rest of his or her life making payments, but at least the attempt was made and the intentions were honorable. Settling the bill for less than 10% of what the cost is shifts the burden to people like you and me. The billions in deficit these hospitals incur aren't freebies. We are paying for them.
ReplyDeleteJust so you know, I'm aware that some people with chronic illnesses/severe health problems do need help. My aunt was a juvenile diabetic and never married. Her health severely interfered with her ability to consistently work. She qualified for Medicaid, and her medical bills were a burden to taxpayers. However, throughout her too short life she made payments to doctors, even if it was just a few dollars a month. She lived in a mobile home and sometimes with my grandma, and had no luxuries in her life unless her brothers and sisters gave them to her. I feel it's a responsibility of mine and all of the people in this country to provide finanacial and emotional support to those who CANNOT care for themselves, especially when they are making a valiant effort to be independent and responsible. What I don't like is providing for those who CHOOSE not to care for themselves. My guess is that we probably agree on this philosophy since it is based in Christianity.
At my office, Fox news is on all day. And it sickens me how many commercials there are for "the IRS is evil, they tried to take all my money so I settled with them for some amount WAY less than what I owed" or somesuch thing like that. Highly annoying - the IRS wasn't trying to take all of your money the whole time, just what you owed them and didn't give them even though it was their part of your money. I mean, taxes are kind of something you'll have to deal with forever...ugh. Anyways, I'm glad that this was posted - we hate debt too. Someday (when we aren't moving around every 1-3 years) we'll buy a house with a check.
ReplyDeleteI agree so much with you about credit card companies not being there to serve you. They are all about making money. I think they actually hope consumers are late with payments or exceed credit limits so they can slap extra fees on them. A number of banks now are charging "non-usage" fees. If you don't charge a certain amount of money within a certain time period, you have to pay a fee. And many of them also are going to charge annual fees just for the "privilege" of having a credit card.
ReplyDeleteI worked for a bankruptcy attorney for several years and I'd like to make a correction to your point about bankruptcy. It is not true that once you file bankruptcy you can never file again. States have limits on how many times you can file and how much time must elapse in between each filing. And judges can deny a filing if it's been shown that the system has been abused by a debtor. But no state that I know of has a one-time only law.
I am in no way encouraging bankruptcy filing. I've seen the devastation that financial irresponsibility can cause to families and individuals. It is humiliating beyond belief for most people. There are always a few that are trying totake advantage of the system, of course. But most of the clients I dealt with were honest, hard-working people who lost their jobs or had a catastrophic illness and never thought it could happen to them. The bankruptcy laws are in place to afford them some protection, but most of the laws are creditor-friendly, as they should be.
I think you are beating a dead horse. Really, if credit makes you nervous, then by all means don't use it. I would not demonize it though. Credit touches EVERY aspect of life in world. You may not agree with it, but don't be naive enough to think that it is not a useful tool when used appropriately.
ReplyDeleteWel-said, Theresa!
ReplyDelete