WHAT’S YOUR CREDIT score? That’s hard to answer because none of us has just one. You likely have a dozen or more. So how did consumers come to think that one credit score—the FICO score—is the sole reflection of their ability to repay a loan?
Following decades of growing consumer spending, and associated data collection, the Fair Credit Reporting Act of 1970 required credit bureaus to open their files. The intent was to protect consumers from lenders who were relying on incorrect information.
QUITTING CREDIT CARDS might be more difficult than quitting cigarettes. I’ve done both. I’ve not smoked in 36 years. But it wasn’t until 11 months ago that I stopped charging on my credit cards.
I got my first card at age 15 from the biggest department store in my hometown. It was 1971, and my card’s limit was $50. The store was locally owned, so perhaps it was easier to obtain credit as a minor without steady income.
IT’S BEEN MORE than three years since my wife and I paid off the last of our consumer debt. Since then, we’ve enjoyed the benefits of a debt-free life: less stress, no interest payments and a lower cost of living.
While these reasons alone make a strong case for paying off credit card balances, car loans and other consumer debt, the true cost of borrowing goes beyond the obvious. Here are five drawbacks that I wish I’d considered before taking on debt:
MY WIFE AND I bought our first home in the mid-1980s. We were thrilled to get an 8% mortgage, though we had to pay three points—an upfront fee equal to 3% of the loan amount—to get that rate. Many of our friends had bought a few years earlier and were paying 14%, a common occurrence back then, according to Freddie Mac data.
We kept our eyes open for opportunities to refinance our high rate.
DECIDING WHETHER to buy bonds or pay down the mortgage used to be a tricky decision. Not anymore: Paying extra on your home loan will almost always be the right choice.
This takes some explaining—because it involves wrapping your head around the standard vs. itemized deduction, investment taxes, and a mortgage’s shifting mix of principal and interest.
First, let’s dispense with the obvious objection: Yes, if you’re inclined to buy stocks rather than pay down the mortgage,
THE GREAT RECESSION highlighted the frightening amount of debt—especially mortgage debt—that had been taken on by many American families.
A decade later, the picture is far brighter, with one exception: student loans. Since 2008’s third quarter, education debt has ballooned 144%, according to data just released by the Federal Reserve Bank of New York. But the total of all other debt—mortgages, car loans and credit card balances—is up less than 1% over the same period.
THE ABOVE HEADLINE overpromises, I readily admit. Still, three considerations—taxes, risk and the economic cycle—point to one conclusion: Paying down debt in 2018 looks like an awfully smart move.
Debtors’ prison. Ridding yourself of debt, even mortgage debt, has long been a savvy alternative to buying bonds and certificates of deposit. But thanks to the new tax law, it looks especially savvy right now—and especially if you’re married.
How come? The new tax law took away personal exemptions but compensated by roughly doubling the size of the standard deduction.
THE YEAR 2011 was horrifying. I learned my Mom had a life-threatening disease. She passed away six months later.
That forced me to confront the $88,000 of debt I had accumulated during college, including $51,000 in credit card debt. I was in grief, I had no idea what to do about the debt and my Mom wasn’t there to advise me.
My friend John told me to seek professional help. A debt settlement company helped me get rid of $16,000 of higher-interest credit card debt,
A FRIEND RECENTLY asked me the interest rate on my credit card. I admitted I had no idea. I pay off the balance in full every month and therefore don’t know, or care about, the interest rate.
I’m a minority in this regard. Only 35% of us pay off our credit card balance each month. We’re dismissed as “deadbeats” by profit-hungry credit card companies, perhaps with some justification: We reap the benefits of credit card rewards programs designed to lure the other 65% of the population into using their cards on a regular basis—and then foolishly carrying a balance.
PEOPLE OFTEN ACT foolishly and then desperately try to justify their financial sins. A case in point: Those who take on too much debt, can’t get it paid off by retirement—and end up servicing huge mortgages and other loans long after their paychecks have come to an end.
Cue the tap dancing. The indebted start waxing eloquent about the virtues of the mortgage-interest tax deduction and how it’s smart to pay the bank 4% while they invest the borrowed money at 10%.
GOT DEBT? TO GET a handle on the situation and figure out whether you’re handling your loans and credit cards properly, here are 10 questions to ask:
What’s your net worth? You might have a home and sizable financial accounts. But what are you worth once you subtract all your debts?
Are you taking the necessary steps to stop thieves from borrowing money using your identity? To protect yourself, regularly check your credit reports for errors and accounts you don’t recognize,
SETTING OUT INTO the business world, I was age 27 with a negative net worth. Among life lessons, there are many strong contenders, but nothing introduced me to “adulting” like debt. For that, I had undergraduate and graduate school expenses to thank.
Having secured a good job out of business school, I started to rebuild my finances. My grad loans had a relatively high principal amount and an interest rate of 6.8%, so I prioritized that debt over my undergrad loans,
YOU’VE PROBABLY already asked yourself this question: Is it better for my credit score to have just one credit card—or many?
There’s no magic number, because it isn’t really about how many credit cards you have. Rather, what matters is your financial situation and how you handle your cards. For example, if you are just beginning to build a credit history, it’s best to have a single card. Try to follow three rules:
Pay your bills on time—and avoid late payments at all costs.
“ONLY BORROW TO BUY things that’ll appreciate in value.” This was a popular piece of financial wisdom in the 1980s, when I started writing about personal finance. But I can’t recall anyone saying it in recent years. Does that mean this wisdom is no longer wise?
Financial habits have obviously changed. I might make just a single cash machine withdrawal each month, because I put almost every expenditure on my two credit cards, which I use to buy groceries,
SOARING STUDENT debt is putting the kibosh on another major financial goal: buying a home. According to a study by researchers at the Federal Reserve Bank of Cleveland, 40% of those age 18 to 30 have student debt, up from 27% in 2005. For these borrowers, the debt burden is staggering, with student loan payments estimated to devour more than 20% of their income in 2015.
With so much of their income devoted to servicing student loans,