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Tuesday, May 19, 2009

Must Read Articles

Hat Tip: anonymous commentor
This NY Times article, My Personal Credit Crisis, written by an economics reporter for the NY Times, is a must read. Ever wonder how it is that finances can get so out of control, so quickly? Check out this profile about an already overextended husband, who took on yet another obligation (a mortgage) and soon found out he was down to $196. Next thing you know, the credit card debt incurred when the cash had run out how balloned out of control. The $3,000 of initial debt was now $50,000. The loan officer that originally helped secure the mortgage made him feel that their situtation was normal, and naturally he suggested a plan that would get their on better footing by borrowing their way out of debt (huh?). Things were going a bit more smoothly, until his wife, who was now back in the job force and making a respectable sum of $60,000, lost her job. Now they are awaiting foreclosure.

Hat tip: Jeremy
What about those credit card users who always pay off their balance in full and enjoy getting some cash back? Well, times are a changin' and while members of Congress keep themselves busy trying to make sure irresponsible credit card users don't get hit with the type of fees that can make their debt spiral out of control in the blink of an eye, there is speculation that borrowers who have been taking a "free ride" are going to suffer the collateral damage as a result. Someone has been paying for the gravy, and when the plug gets pulled. . . . . .well, it is probably time to start thinking about maintaining a check register again (I can't even tell you what a terrible mode a small discrepancy send me into. Going back to check writing hardly seems appealing to me). Perhaps I can make it more fun by ordering some cute checks! It is very possible that the clock is going to be turned back.

21 comments:

Anonymous said...

You don't have to go back to check writing. You can use debit cards. However, it is a good idea to keep a log of those debit card swipes to make sure you aren't going into your line of credit or overdraft protection with all the fees involved.

Ariella said...

You touch on an interesting question here: What is a "normal" financial situation? The truth is that a very large number of Americans carry credit card debt. And then there are people who have been advised and cajoled into buying the most house they can get a mortgage for because "now is a good time to buy" and "the market just keeps going up, so there is no risk." Now, the norm used to be defined by stricter lending practices by banks that looked for particular ratios of income to mortgage expense, but when they wanted to make the deal, they would overlook those details or offer a "no income verification" loan. So biting off more debt than one could reasonably be expected to chew became fairly normative.

Ariella said...

BTW: While I do often pay with a credit card (which I pay off each month) I don't use debit cards at all. I do pay some of my bills with my checking account online, so there are fewer checks to mail and less worry about the mail losing my checks as the postal service has done more than once in the past. The schools take tuition payment in credit cards. This way they do not have to collect post dated checks and would not get hit with bounce fees if there is not enough money in a checkin account to cover.

SephardiLady said...

I only picked up a credit card once I had established firm spending habits. I was prompted to pick up the card because I travelled for work.

I did have a debit card before then, but when it came to debit card vs. checks, my own preference was actually checks. Because I was taking the time to write and record the check, it wasn't too hard to calculate my balance. And if I needed to transfer money, I could pick up a phone and do that.

Recording debit card transactions didn't work as well for me.

But you are correct, the other solution is debit. Personally, I wish the administration would stay out of this one and let the private sector deal.

SephardiLady said...

Ariella-Do you think that the rise tremendous rise in tuition in this decade is related to the proliferation? It is a theory I'm developing in my head. Many people have asked why tuition has increased so much in this decade.

lrg said...

I have free bill paying through my bank and it is the greatest thing since sliced bread. You can enter the payments amounts and dates in few minutes and print the results for entry in your check register. My bank's system has auto-complete so the whole exercise is painless.

If you take the next step, you can keep your register electronically using third party software and download the monthly statement information into the software. I don't do this because the exercise of looking at everything once a month is useful for me.

Keeping track of debits is more of a problem for me when it comes to balancing the statement. So, I like the electronic bill paying better than debit or auto-debit.

ProfK said...

Just a note: don't assume that when the credit card issuers put up new charges that those aren't negotiable, particularly if you don't carry a balance. A bank where we have accounts and from which we have two credit cards, one in hubby's name and one in mine (two separate accounts), notified us of some new charges that were going to go into affect. One was a yearly user's fee, another was charging for having printed deposit tickets with your name on them. I walked into the bank and ripped up the charges letter and told them to cancel the credit cards--wasn't going to pay $150 a year for the two cards. After a few minutes of discussion, in which the officer checked our banking records, the fee was dropped. So was the deposit ticket charge. Face to face can get you things that you might not get otherwise, particularly if you are an actual customer of the bank that issues a credit card.

Anonymous said...

Ariella: I'm not so sure it is "normal" to have credit card debt. The credit card companies have fostered that myth (it's normal, it's ok to have debt, everyone does, etc.) to keep people borrowing at high interest rates. The data is also skewed by not taking into account the people who pay off their balance or most of it each month. SL may know more about this, I believe the data about average balances, etc. includes people who pay it off each month. Even if debt were "normal" that shouldn't make it acceptable. Soon it will be "normal" to be obese. That still doesn't make it healthy.

Anonymous said...

For those concerned about keeping track of debit card payments, my bank has real-time on-line statements showing every transaction in my accounts including the debit card. I can swipe my debit card at the grocery store at 10:00 a.m. and when I look at my account on line at 11:00 the debit shows up.

Ariella said...

Anonymous; that is the point of the question to define "normal" in this case. If normal means many people do it, then it is normal. For example, teens tend to ignore their parents. Is this a good thing to do? No, but it is fairly common. If fairly common = normal, then credit card debt is, unfortunately, normal.
I hasten to add that this not to say I endorse it. I think credit card debt is a pit that one must avoid falling into, as it is very difficult to come out of it. When a relative casually mentioned that she has credit card debt, I stress to her that her first priority should be to pay that off. But I don't think she worries about it; in fact, she wasn't even aware of the figure for the debt. She seems to leave that to her husband. In my home, I pay just about all the bills, so I would not be able to just shrug off the accumulation of credit card interest.

Ariella said...

As to tuition payment made with a credit card, it is difficult to say whether or not this is a factor in increased tuition rates. Credit cards just have become much more a fact of daily life. When I was first married, I paid for all my groceries in cash; now I pay for most of them with a credit card. I prefer it because I earn points for gas, and I don't have to carry around a lot of cash or take the time to write checks and then record it in the register. I think from the school's perspective, it makes collections easier, and so it is worth it for them to sacrifice the 2% or so that they have to pay the credit card companies.
Now, what causes the cost of schooling to go up so much? I really don't know the answer to that. However, I do know that the public schools in the area claim that each students costs them upwards of $20,000 -- and that is without the dual curriculum but with a lot of other frills yeshivas usually don't offer. So the questions is, can one find the gap between what schools charge and what they actually cost?

Anonymous said...

Ariella: I understood what you were saying. I was trying to suggest that the view that credit card debt may be the norm, may not be accurate. It may be part of the marketing ploys used by the credit card companies that supply most of the statistics used to report credit card debt.

With respect to one spouse not knowing what the family debt is, that's a huge recipe for disaster. There should be clases for young couples on how to work together as a financial unit.
I too pay all the bills, but my husband sees all the bills (he gets home earlier and opens the mail). We also both look at the credit card bills to make sure there are no mistakes since I won't remember whether he went to home depot a month ago or what he bought and he might not know what I ordered from zappos.

SephardiLady said...

I do believe average debt includes ALL revolving balances. Nevertheless, too many Americans carry too much credit card debt. But I do believe the "average" number might be overinflated.

Agreed that not knowing is a financial disaster waiting to happen. How families deal with finances depends a lot on skill sets and inclinations. In our home, the management, research, etc, falls on my shoulders because I'm good at it (sorry if that sounds immodest). Nonetheless, my husband knows where we stand because we discuss it as things come up.

JS said...

I never use my debit card (other than to take money out of the ATM). I only use a credit card, which I pay off in full every month. We have the Chase Freedom cards (and not other credit cards) - it pays 3% cash back on your most common purchases, 1% on everything else. Once you have $200 in accrued cash back rewards, you can "buy" a $250 check, which further increases your rewards (we hardly drive or fly anywhere so this rewards card works best for us).

I use Quicken and download transactions at least every 2-3 days. This gives me a sense of the total revolving balance, as well as what's left in the bank account. On top of that it lets you schedule paychecks and bills so you can see on the calendar in the program what your balance will likely be each day. I love it.

I also don't carry around more than $40-$60 at any time since I hate not having a record of what I spent for something and I don't have time to enter in every cash receipt (I also quickly found out when I first got married my wife did NOT appreciate my asking her to give me all her receipts, which I totally understood and it wasn't an issue as both of us have similar financial attitudes).

I also pay all my bills online. I have automatic payments for small bills that are regular such as our phone or loans. And I pay other bills manually online like our credit cards so I can review it.

JS said...

SL,

In light of the first article on debt and the article below on the Jewish couple in debt, I'd like to suggest a post:

How about a post on what you feel the average person should be doing financially as they grow up, get married, have kids, and buy a house?

I know this is a huge hot button topic, but it would be interesting to see your ideas on this and let other people debate it. The idea is to write about an "ideal" yet "normal" person.

Thank God, my wife and I are doing very well. I was 24 when I was married and my wife was 22. I had been working for about 2 years before we were married, my wife was in graduate school. We started dating in college and I lived at home after college till we were married to save money (we dated for over 3 years as we wanted to be able to support ourselves). We've been married now about 3.5 years and put off having kids until we were more established - saved enough to start looking for a house, have a "cushion" for emergencies, start saving for retirement, my wife getting work experience, etc - and as we've basically reached these goals hopefully we'll have kids soon.

Quite frankly, I don't see many (if any) people around me doing the same thing (maybe we just plan too much and are too careful, I don't know). I think it would be interesting to hear your (and the commenters) opinions on how one should ideally proceed through these major issues.

Anonymous said...

I recently paid down $10,000 on a credit card, that I had been on time with all the payments and they cut my limmit to $500.

Critically Observant Jew said...

JS - I also have a Chase Freedom card and I'm scarred because people over the Internet are reporting that Chase is downgrading this card and removing the $250 check option - http://bankdeals.blogspot.com/2009/05/future-of-credit-card-rewards.html.

But in general, if credit card companies will remove grace periods even when balances are paid in full and/or start charging annual fees for all cards, that will be the end of credit card usage for me.

Anon426 said...

I read that article in the NYT last week and found it very stressful just to read it. We also ran up a LOT of debt and were somewhat cavalier about doing so at the time, but we never got into a situation where we would might lose our house!

Speaking to the guy's state of mind -- I think there are 2 mindsets in play here. 1) this idea that using a credit card is normal. We, too, had this state of mind. I had my first credit card in college and racked them up (usually without using them) as the offers came in the mail. "You need to build up your credit" was the mantra in my head. 2) The idea that financial ruin cannot happen to you. My husband and I are probably headed for bankruptcy due to high credit card debt combined with IRS debt (ie can't fund both so we have to get rid the one we can get rid of so we don't go to jail). We NEVER EVER EVER thought we would get ourselves into this situation. It just "couldn't happen to us". Even while I was warning my husband I feared we were heading for a major fall, he brushed my apprehension aside.

While using the credit card gives the illusion of staving off financial disaster -- you can pay your bills, after all, and your house is not being foreclosed on -- the irony is that it could very well cause your ultimate financial demise.

It wouldn't surprise me a bit if the existance of easy cash was one factor in the running up of school tuition just as the easy availability of credit resulted in the housing boom. Some people actually pay their tuition using their credit cards. The schools don't feel the pinch in people's pockets UNTIL the credit card house comes crashing down ( or gets dismantled as is more our case ). Only at that point do the schools start getting phone calls from people who do not have money to pay the bill, which must be what is going on now. But in the previous years, the schools did not reign in their spending because they didn't have to. Hence they added amenities which resulted in higher tuition, etc.

I use a bank card to pay for everything. Just as easy as a credit card, but it's linked directly to my bank account. I follow my bank account obsessively, have to at this point, and I download transactions to Quicken almost every day. I definitely agree with one poster that online bill paying is THE BEST THING SINCE SLICED BREAD. Wow, hours of bill-paying reduced, literally, to MINUTES. I also use the online bill-paying to pay for some things I used to write checks for, mikvah or babysitting for example. I even paid the sheitl macher once via online bill pay since she didn't accept cards. The plumber or electrician. Aside from saving time, money paid out through online bill pay comes out of your bank account right away. It only takes paying >$50 for mikvah once or twice to convince you to pay directly from your bank account rather than write a check that will inevitably be cashed 6 months from now when you only have $5 in your bank account!

Ezzie said...

That NYTimes piece is scary, because it's so easy to understand.

As for credit debt - SL, email me. I'll give you some numbers from the survey so far.

rejewvenator said...

If banks need new revenue streams, it's likely that they will institute fees on debit cards as well as credit cards, and on any other value-added service that banks provide, like online bill pay.

My feeling is that these services are valuable, and are worth paying something for. Using a debit card and being able to download and evaluate my spending on the computer is a great benefit that saves me a lot of money, insures me against loss in case of a robbery or lost wallet, and keeps me in control of my finances. That's worth some fees.

tesyaa said...

I got a kick out of this Times article:

http://www.nytimes.com/2009/05/17/us/17blunders.html?_r=1&scp=1&sq=don't%20try%20this%20yourself&st=cse

Except fot the fact that people suffered horrible consequences (food poisoning, ruined plumbing), this article was humorous. I often try to make a cheshbon over whether I should do something myself or get a handyman. Some things are easier than they look, and some things are definitely harder. And some things should be left to the professionals, especially when you factor in the cost of fixing what you tried to do to save money.