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Color of Money Book Club
Thursday, March 29, 2007; 12:00 PM
Michelle Singletary hosted author and director James Scurlock for a discussion on Thursday, March 29 at noon ET about March's Color of Money Book Club selection, "Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders" (Scribner, $24)and the feature-length documentary "Maxed Out."
Michelle writes in her column that "both the book and film examine the proliferation of debt in America. Among others, Scurlock interviews debt collectors, a Harvard professor, pawnbrokers, people in debt and the people who have watched loved ones struggle with debt." Read more in the column: A Horror Movie For Our Times (March 4).
Read Michelle's past Color of Money columns.
A transcript follows.
Michelle Singletary: Welcome all. I think this is going to be a great chat given all the news of late about foreclosures and possibly an end to easy credit.
So let's get started.
Boston: Hi Michelle! I know this is off-topic, but I'm hoping you'll answer anyway: I'm early 20s, in my first job after graduation, which pays better than I have any right to expect. (Thus, I'm maxing out my 401k contributions for as long as I can--my company doesn't match right now, but I can easily live without touching $15,000 of my salary a year.) I have two credit cards that I pay off in full every month.
Unfortunately, I missed paying the bill on one of them last month, for the first time. I realized this a week after the due date and immediately paid it, but what is this going to do to my credit rating? Is there anything I can do to fix it?
Michelle Singletary: Hi. Call the credit card company. If you've been a good customer the truth is they may not have reported you late.
If they did, not to worry too much. Your credit score may take a little hit going forward if you pay your bills on time you should be fine.
Central Virginia: Hey, Michelle! I'm not maxed out on my cards; I can't stand being in debt - but my ex-husband loves it. Makes damned good money, and spends all of it and then some. Cannot stop buying stuff. Will not stop. For him, to see is to want, to want is to "need," and to need is to get. We were always in debt, always fighting over money, I was always paying the bills and he was always running them right back up.
Ladies, if you're wondering about how you're going to make ends meet if you leave your no-good spendthrift husband, let me tell you that his trifling ways with the cash flow are what's causing a lot more misery than you may realize right now.
You may be eating your heart out over some little honey you saw, but ladies, it's his financial finagling that eats holes in your stomach. Now that I'm not spending every available penny on paying off his entertainments, I have a surprising amount left over at the end of the month to do what I want. It's for MY fun! It was totally unexpected. I'm so much happier in so many ways, and one of those ways is FINANCIAL. And even when money is tight, at least I know that no one is out there flinging money around with a right royal hand and draining the account for "necessities" like a portable GPS for when he goes running (on the same trail he always ran).
How bad is his spending? He makes about eighty thousand a year. I put him out, he took all the furniture and housewares he wanted, and in less than a year he had $10,000 on his credit card and a $7,500 loan.
Thank God Almighty, I'm free at last!
James Scurlock: Congratulations!
Help!: I apologize, this question is not related to the book, but I need some guidance. I just received the following notice from my mortgage company: "Each year the company reviews your escrow account to determine if the current monthly payment amounts are sufficient to cover your projected property taxes and or insurance premiums. Our calculations indicate the projected escrow balance will be less than the allowable low point."
The statement then gives me the option of paying the balance of the resulting shortage in full, or having my mortgage payments increase by about $40 per month. Which should I do?
Michelle Singletary: Well, unless you are disciplined to save the extra $40 a month yourself, let them increase the payment.
Either way what the mortgage company is saying is that they aren't collecting enough to cover your property taxes. And you have to pay your property taxes thru your escrow or on your own. But it's got to be paid.
Washington, DC: I've been deluged by credit card applications for years, and I wanted to let you know what a friend of mine does to combat this plague: he takes the 'no postage necessary' return envelope and stuffs it with shredded paper, trash, anything that will fit, even taping it shut, so that it's at least a $1 to $2 worth of weight, and mails it back.
He does this relentlessly and I admire him for it although I haven't started this myself. What do you think about this to send a message to the banks and predatory lenders?
Have you ever heard of anyone else doing this or something similar?
James Scurlock: I've heard from a lot of people who do this, in the hope that maybe everyone will, and the 8 billion pieces of mail they're sending a year will go right back to them. I'm considering it myself, having cancelled my United Mileage Plus Card (because JPMorgan Chase, the issuer, wouldn't stop sending me those annoying checks in the mail) I now receive three offers for the same card every week.
Reston, Va.: I've often seen advice, including yours, saying to pay off your lowest credit card balance first, so you get a sense of accomplishment and then move on to the next, etc. all my balances are within $50 of each other. All my minimum payments are with $5 of each other. All my rates are 6%. So which of five cards should I be focused on paying off? I do not add any charges to the existing balances, all of which were achieved paying enormous medical bills.
James Scurlock: I would just make sure that you pay each of them on time, unless any of them are medical-only credit cards, which can automatically triple (interest rate) after one year if they haven't been paid. But short of a time bomb like that in any of your cards, it probably doesn't matter. Citigroup has promised to end its "anytime, any reason" policy, so you probably have more breathing room with them now, if that's one of your card issuers.
Howard County, Md.: Hi Michelle. Thanks for the chats! You always talk about having an emergency fund in case of job loss, but what about a fund for other emergencies like a new roof for the house? Should that be a separate fund and what amount should we aim for?
Michelle Singletary: Great questions. I think you need need rainy day funds.
The first I call your emergency--if you lose your job or experience a disability fund. That should at a minimum be three months of all the expenses it takes to run your household (mortgage/rent, utilities, food, cable, cell phone, etc.).
Then I suggest you have a "life happens fund" separate from the emergency fund. That would cover major car repairs, roof, triflin relatives that need money, etc.
How much you put in the life happens fund depends on your income, lifestyle, etc. Aim for about $1,000. But it could be more or less depending on how well you budget.
Here, Now: My marriage is going down the tubes. And no matter what I try, we're probably headed for divorce.
When I refinanced my house, I put my house in both my wife & my names on the mortgage, as well as the title. If we get divorced, I'm going to lose my house, aren't I?
James Scurlock: That depends on whether or not your wife wants the house also; and whether or not you can make the payments without her income.
Alexandria, Va.: Hi Michelle,
My husband and I are looking for a financial planner, but have no idea where to start!!! People we have met with in the past seem only to want to sell us insurance or high-priced mutual funds.
I think we have the basics down: some cash savings, 401(k), IRAs, and our first house. But we really need someone to help us create a comprehensive financial plan going forward. This would include developing strategies for paying down our student loan debt as well as the basics on how to start investing.
Any leads would be greatly appreciated!!! Thank you!!!
James Scurlock: I think that Elizabeth Warren's book, All Your Worth, is a great place to start. One of the most insidious things about the way the financial industry has changed is that's it has gone from teaching people to save to encouraging them to spend--because they make a lot more money when people refinance, borrow, use credit cards, etc., etc.. So it's very hard to get objective advice as opposed to a sales pitch. So I'd start with that book and then ask friends and peers for a referral. A local bank or credit union might be a good place to start. Also, your accountant probably has a lot more advice to give than you might imagine and is far more objective.
Prince George's County: My wife and I were good savers until we bought our house last year.....then I'm not entirely sure what happened. We had a zero balance on our credit card for years, but got carried away with some renovations and decorating. I thought we had the spending under control, and we're on pace to have the credit card paid off by the end of the summer, but now my wife wants to take out a home equity loan to do some pretty major renovations. I would prefer to save up and do the work as we can pay for it in cash. My wife says "But we'll never save that much money!" To which I reply: "Then, I guess we can't afford to spend it." We've been fighting about this for months, and I'm almost ready to give in, but I know I shouldn't, especially with home prices on the decline. Do you have any advice?
James Scurlock: Be steadfast. You're correct.
Upper Marlboro, Md.: What is the new magic fico score that is considered not "subprime"? What score should I be shooting for?
Michelle Singletary: Shoot for a score above 700 at all three bureaus. That should get you the best loan deals.
Northern Virginia: About the two college students. It seems to me most likely that depression was really what led them to their very sad endings. Some people with depression cope by surrounding themselves with things. I know a lot of kids I went to college with were depressed and tried to do anything to get out of it - except actually get help. I would say the spending/debt was a symptom of the underlying cause, not the cause itself.
James Scurlock: I have had experience with depression myself. Both my mother and best friend were hospitalized with that disease. For some, depression leads to irresponsible decisions and manic behavior. But I have to say that desperate situations lead to desperate acts. When you literally feel trapped, especially before your life has begun, your dreams are crushed, and you have a dozen strangers calling you multiple times a day threatening and insulting you, those are good reasons for wanting to disappear.
Washington, D.C.: Good Afternoon Ms. Singletary and Mr. Scurlock,
What suggestion would you make if a person has an very high increase rate credit card and the credit card company is not willing to make some type of program to pay off the high debt. For example, to offer a lower interest rate or enroll you in some type of hardship program for a year that other major credit companies will offer so you can pay a more affordable payment and avoid the late fees too. Thank you!
James Scurlock: If you can transfer that balance to a lower interest rate card, or fold it into a lower-interest rate loan and then cancel the existing card, that would be my advice. Unfortunately, I'm hearing that banks have become much less flexible since bankruptcy reform passed a year and a half ago, so best to look for help (and understanding) elsewhere.
Arlington, Va.: Is that "Maxed Out" documentary on DVD? And if so, where can I get it?
James Scurlock: The DVD will be released on June 5th. If you have a Netflix account, you can add it to your queue now.
Rockville, Md.: Shredded paper? When I was in college it was someone who stapled a post card to return a railroad tie to Playboy - such an "evil magazine."
There is a way to stop credit card offers. You can stop credit card offers by logging onto www.optoutprescreen.com or by calling 1-888-567-8688.
Michelle Singletary: I like this idea better than the shredded paper. It's not fair to the paper. Recycle it instead :)
San Diego: I read in a recent Post Article that Senator Dodd was considering legislation to provide billions of dollars in mortgage relief to prevent Americans from losing their homes to foreclosure. As an active duty military member and former Tennessee homeowner who recently moved to the Wash DC area and found the market too expensive for me to buy a home using something other than an ARM or interest-only mortgage, I'm more than a little offended by this idea. Homebuyers who over-extended themselves in the real estate market should be held responsible for the mortgages they signed, not those of us who looked at the numbers and did the responsible thing and stayed out of an over-heated housing market. Message to Senator Dodd: don't use my tax money to bail out irresponsible real estate investors.
James Scurlock: I agree. Unfortunately, Congress is looking for a solution to a problem that was created by not just irresponsible borrowing, but irresponsible lending and, in many cases, predatory lending. A couple of weeks ago, the FDIC and the Federal Reserve had to issue new guidelines reminding mortgage providers to verify the incomes of their customers--and to make sure that they would be able to make their mortgage payments! The banks need to address this issue with their customers--and they need to become responsible lenders again.
New York, N.Y.: Hello and thanks for taking my question. In light of the foreclosures already happening at the prediction for more (ex. The Center for Responsible Lending predicts a 22% foreclosure rate in the NY area over the next few years) would my husband and I be making a big mistake to buy a co-op in a not-so wealthy and economically diverse area (meaning there could be a lot of foreclosures coming)? Our mortgage would be less than the rent prices in the area, but there's still the monthly maintenance, and if home values drop by 20%, we'd come out behind where we would have by renting.
The real question then is how much do you think poor lending practices and resultant foreclosures will affect real estate prices for those that can pay their mortgages?
James Scurlock: I think that the worst is yet to come. Remember that all of the stated income loans (aka "liar loans") are not considered subprime. And a lot of the subprime loans either have not ballooned yet, or the banks are holding off on foreclosure for now. So you are speculating in a very dangerous environment.
Why we need savings: Every adult working American needs at least 6 months of savings. There is such a feeling of safety when you know that you have 20, 60 or 100K just sitting there in a bank or money market account waiting for you if you need it.
Yes--it is very tough to save that kind of money. My husband and I did not touch our bonuses to get there and focused on being frugal. Even now we don't have cable or home phone service, rarely eat out, have a low house payment and don't buy expensive clothes. My family probably think we act like this because we are broke. I don't talk about my financial business with anyone besides my husband. I am getting the last laugh because we don't like to worry about money.
People need to realize that it is not what you make--it is what you SAVE that determines your financial future.
Michelle Singletary: I agree, but to start save what you can.
And you are absolutely right. It's not how much you make but how you make do with what you have.
Pasadina, Md.: I have what you call a predatory mortgage on an old property but with terms I can bear with but with a 3 yr arm and 1 late payment during the year.
With all my friends around me that bought new homes with the "Easy Loan Products" all going into bankruptcy now. How do I look forward to turning this into a rental and getting a loan with such strict regulations in the lending industry now?
James Scurlock: That's the cruelty of the situation--after making encouraging people like you to take on these terrible loans (and promising that you could right them by refinancing later) the banks are now tightening standards just when people like you need to refinance to save your homes. Depending on where you live, you might be able to rent your property at or above your mortgage payment. As far as refinancing, that's going to be very tough, but Congress may provide some relief.
Rockville, Md.:"Shoot for a score above 700 at all three bureaus. That should get you the best loan deals."
I can not find a single place that will give my score unless I give them a credit card number. Even my credit union (NFCU) has a subscription plan and you have to hit the sign up button before they tell you the cost. Is it possible to get a score without giving away too much information or cash?
Michelle Singletary: You have to buy your score. But unless you are in the market for credit I wouldn't worry about it right now.
For me, I often get my score for free if I'm shopping for credit. For example, my husband and I were considering refinancing several months back. At that time the lender needed to pull all six of our credit scores. I just asked him what they were. Then I make a note of them. Some lenders when you are shopping are nice enough to give you the scores.
You also need to be mindful that the score you buy could be very different from the score the lender pulls. That's because they may use a different scoring system and your score is constantly being updated.
Portland, Ore.: Michelle,
We've been hearing they are considering some sort of bail-out for sub-prime borrowers. Is this fair to the folks that bought affordable housing, made down payments and stayed current on their obligations?
James Scurlock: As I said to the other guest, I think that this is something that needs to be worked out between borrowers and lenders. If borrowers were the victims of predatory lending, I think that this should be addressed in the courts and ultimately with better regulation rather than with a bailout of the loans.
Reston, Va.: Help!! I'm trying to pay down my debt, and recently applied for a card with a low balance transfer rate. However, I got turned down by them. How long should I wait until I re-apply for another card with a lower rate? I have high interest rates on my cards, and if I can get the interest down, I can pay more on the balances.
Michelle Singletary: Don't wait for more credit. Look list all your bills smallest to the largest. Then tackle the card with the lowest balance. Pay the minimum on all the other cards and dump as much cash onto the card with the lowest balance. Once that's paid off move to the next card.
And keep in mind every time you apply for a card you credit score gets a ding. That ding makes your score go down and may result in your being turned down. Plus as your score goes down the other credit card lenders may raise your interest rates while you are tying to pay down the debt.
I suspect you didn't get into debt overnight and so it's going to take time to get out of debt. Spend our energies now cutting your expenses and trying to pay off your debts rather that shuffling the debt around.
College Station, Tex.: Do you think flippers in hot markets that did huge HELOCs will be the next shoe to drop? I have seen examples where millions were taken out through HELOCs and they are now defaulting. I am not sure how to quantity this, but it seems HUGE.
James Scurlock: I agree. The trouble is, no one knows exactly how big any of these schemes have become. There's a ton of exotic mortgage products out there, and I think that most of them were devised to get around responsible underwriting standards, so there you go...
Rockville, Md.: One more thing...
"and they need to become responsible lenders again."
If every bank knew the identity of everyone who gets their money, there would be no such thing as "identity theft." Never. Nada.
The whole concept comes from sloppy banks.
James Scurlock: I don't disagree. There's a lot of winking and nodding going on, and as the mortgage crisis shakes out, I guarantee you that the banks will blame the brokers. It's funny, the only guy I found who was tending to his store, asking his customers questions and worrying about his neighborhood was a pawn broker in Seattle!
Alexandria, Va.: I realize this book puts debt as something to be avoided, but the sad irony is that "life" happens to people who have had the least amount of time to sock away emergency savings: younger families and workers. Our situation: We are tackling saving for retirement (401K to get full match, 457, and Roth IRA on the side), paying off my fiance's credit card debt (almost 7K) and a car loan, and socking away money from each paycheck for emergency savings. However, our progress on the debt and savings is going to be stalled or even wiped out soon because a baby is on the way, a modest wedding is in the works, and our cat recently got sick from the Menu Foods tainted food. Vet bills are wiping out a lot of our savings cushion and I worry we will have other emergencies like a car break down or illness before we are able to build our savings back up. Even people like us, who are trying to do it right at a young age, still get stuck behind the 8 ball. What process do you use to make the decisions on what to tackle first when so many pressures confront you for your money? We have a modest income, about 70K between the two of us and in a high price area like this, every dollar is stretched.
James Scurlock: The conventional wisdom is that people fall behind because they are irresponsible, but you (and most others) debunk this notion. It is the everyday issues that you're talking about that cause debt, and once you're in debt, as you know, it can be very hard to get out. In your case, I think it's a matter of priorities now, i.e. whether a wedding is worth more than accumulating savings, etc..
Michelle Singletary: If I might add. Some of the expenses you are talking about can be eliminated as James pointed out. "A modest wedding." Nix the wedding or should I say reception. Apply that money to the credit card debt to free up that money.
And you may need to dial back your retirement savings a bit -- for a short time -- to get a handle on your expenses.
Also be careful about baby expenses. Don't buy a lot. A lot of new parents feel the need to buy all those cute baby things. Resist it.
The two of you really need to sit down and look at your budget and cut wherever you can.
Fico, S.C.: Hi Michelle,
After years of following your columns and chats, my wife and I find ourselves in a familiar Color of Money conundrum. My sister-in-law and her husband need to find a new place to live because the owner would like to sell the rental, and they cannot afford to buy it (are also behind on the rent). Rentals on the market in their area are just out of financial reach for their family size (4 kids).
To put it bluntly, they are poor and live in a depressed economic area. They have "run the numbers" and decided buying would be more affordable overall, but their credit hovers somewhere between 'Bad' and 'Are You Kidding Me'? They are asking for us to co-sign for a loan on mortgage, 'out of desperation'-which is always the situation when they borrow money, with every good intention of paying us back, but never do.
My wife and I see these types of scenarios frequently on your chats, and we usually have a good answer when it's other people's family. But this scenario belongs to us and we are having a hard time doing the right thing: not co-signing; not throwing 'emergency' money their way; etc.
We have discussed our concerns with them, not only the financial responsibility part, but how it will change our relationship, and they understand. Their response is that our relationship is 'so important' therefore, this would translate to the importance of paying the mortgage on time. We know better, but want to help in some way as they will be homeless by the end of spring.
We also don't feel they are doing all they can to tighten their belts. They own 6 animals, have high speed Internet, and have 3 teen sons who are able to get part time jobs-but haven't. And Hubby's employment is sporadic. I don't want to sound like a cold-hearted miser, but it seems like there could be more done on their end.
Do you have any suggestions, not only for how my wife and I can live with our decision, but options for good folks like my in-laws? This has become a true test for us followers of Michelle's Financial House of Worship (all welcome). One really begins to question themselves ("Is money really more important to me than family?"). Please help.
James Scurlock: This is a heart-wrenching one, though not unfamiliar. If you're going to be in business with someone, I think you have to be able to separate your personal relationship from the contractual relationship, but this is much easier said than done.
Michelle Singletary: DO NOT CO-SIGN. DO NOT CO-SIGN. DO NOT CO-SIGN. DO NOT CO-SIGN.
I just wanted to be completely clear on this. If you don't co-sign that does not mean you don't love and care for them. But you know the answer to this question even before you asked it. You see how they handle or mishandle their money. They haven't changed and if you co-sign you will be dragged down with them. co-signing means you will be liable for the ENTIRE loan. So unless you can pay two mortgages say NO.
And don't bail them out. Saying no may force them to cut cable, get rid of the cell phones and make those boys go to work.
Give them lot of information about resources. Maybe they need to move. Find information about giving some of the animals to families that can afford them.
Be there for mental support but not financial support. Because they can't live off your financial help on an ongoing basis.
I know this hard. You care. They are decent people albeit misguided about their finances. Been there. Gave and watch my money get wasted. I've learned to give a hand up not a hand out.
New York, N.Y.: Would you agree that a significant cause of the sub prime crisis is the federal preemption that prevents individual states from effectively regulating Federally chartered mortgage lenders? If so, should mortgage lending be regulated at the federal level but have the enforcement powers delegated to the state level?
At the Federal level, the OCC has seemed to be more interested in protecting their turf than protecting the consumer. Complaints in respect of mortgage lender practices do not seem to receive appropriate attention. While these lenders may also be registered at the State level, Departments of Banking, Consumer Protection and the State Attorneys General appear powerless to intervene.
What are your thoughts?
James Scurlock: I think that the OCC has done a great deal of harm by pre-empting the efforts of states to regulate credit, particularly predatory loans and subprime mortgages. A year and a half ago, acting comptroller Julie Williams launched into a convoluted defense of why it's fine for credit card companies to market to college students who have no income--a practice where many universities now sell their students private information for millions of dollars. I'd say that the state attorneys general could do a much better job protecting their consumers.
Baltimore: I just wanted to put a word out in defense of some of the people who are losing their homes. I believe that many lenders take advantage of people who are not savvy about financial matters. While I do believe in personal responsibility and buyer beware, many people accept what the lenders tell them because the lenders are the 'experts'. If someone is told that the payment only seems high because "your tax savings will offset it", then I can understand why some people made some bad choices.
How many people believe that they wouldn't "qualify" or be "approved" if they really couldn't afford it?
Also, mortgages aren't the only cost that has risen in the past few years. The cost of gasoline and home heating and cooling in addition to higher mortgage payments have taken many people who were just hanging on over the edge into foreclosure.
James Scurlock: My point is that the lenders need to work this out with their customers in a regulated environment, rather than being bailed out for making terrible loans. It's unfortunate that you can buy a toaster and know that it won't blow up in your hands a month later--but you can't sign a mortgage with a major bank with the same confidence. The biggest risk to our economy, as I see it, is that Americans will stop trusting their banks because they have been selling unsafe products.
To PG County: Do NOT give in to your wife!! We just did a remodel, and we now owe probably $100K more than we could sell the house for. We went into it with our eyes open, and chose projects based on our plan to stay here for the next 30 yrs, but it's still a big risk, and it's still a "luxury" and not an "investment."
But cold, hard facts will likely help more than nagging and arguing. Why not have a real estate agent come over and give you an approximate value on your house, including how much more it might sell for if you did what your wife wanted? And then sit down with Quicken and figure out (1) how much that line of credit is going to cost you per month, and so (b) where you're going to take that money from?
Michelle Singletary: Great advice. And I agree fight hard to avoid spending that money you don't have.
I love the idea of looking at the current market.
Folks, you have got to stop spending what you don't have. Read the Post. People are having to sell and bring money to the table. Some sellers who have to sell can't sell.
Be conservative. Pay as you go.
Rent the home or sell it: Michelle,
Husband and I bought a home and need to move to another state. We WILL lose money if we sell--there is so much new construction--alot of competition.
We can stand to lose 15K. We wont like it but we can do it. OR should we try to rent and sell in a few years when the nationwide situation is under control and the area we are in has less competition.
James Scurlock: You're assuming that the situation will be better in a few years, but what if it is worse? I remember during the tech stock boom, a lot of people were holding out to sell until their beloved stocks broke even again. Of course, that never happened.
Michelle Singletary: In this type of situation I always ask the person, could they carry two mortgages for a couple of months.
If you couldn't, sell.
Reston, VA: Hi, Michelle:
I am submitting early, a great big thank you for your columns/chats and advice to live credit and debt free. About four years ago, when I filed for divorce, I found out that my now ex-husband had amassed many tens of thousands of dollars in credit card debt, on accounts he opened "jointly"--as in w/o my permission.
That, plus the fact that both of our cars were in my name (his terrible credit should have been a clue to me about a few other things), left me in a position where I filed for Chapter 7 bankruptcy. I don't say I "had" to--I elected to.
It was a hard decision, and one I really struggled with after more than a year of struggling to pay those debts and support our child financially, alone.
Last year, when my daughter started kindergarten, I decided to buy a home for us. Though I now earn about $95K, I bought a condo and fought long and hard to get a decent rate 30-yr fixed mortgage (hard after a bankruptcy, but no way was I going to trade in my daughter's and my financial future just to own a home, at any cost).
I have no credit card debt, I buy only what I can pay for with cash, have retirement and 529 savings--and each month, I give money to local charities and our church, as a way of karmically making up for filing bankruptcy. I feel so much better, and being debt free on my OWN terms in the last 3 years feels better than I can ever say.
The other day, I saw two women power shopping all while talking about how their credit cards were maxed out. That made me put back the $19 sweater in my hand, realizing I didn't really need it!
James Scurlock: Good for you! A lot of people, and not just married couples, get caught in this trap where they are simply not aware of debt that's been taken out in their name. MBNA changed their terms and conditions a while back to make any member of a household liable for the credit card debt--whether they were a signer on the card or not. Again, these are really dangerous products and I doubt that you found any understanding when you explained your situation to the companies that gladly gave your husband the credit...
Michelle Singletary: A good cautionary tale.
Anonymous: Which would you pay off first... $10K @, 8.25%, or $50K @ 4%... Some say pay the first, since it's the smallest. But it would seem to me, that you would be paying more interest on the second...
James Scurlock: Mathematically speaking, there's no question. Pay off the higher interest rate debt first.
Michelle Singletary: True, the math may come out that you pay more on the $50,000. But I recommend going after the $10,000 like crazy. Pay the minimum on the $50,000. And when you are done with the $10,000 attack the $50,000.
You see the problem is people pay a little more on both and never see any progress. They get discouraged. Paying off the lower balance gives you hope that the debt sink hole will end soon.
Santa Clarity, Calif.: Hi, I have just payed off my car loan, combined several credit card balances to 2 cards that I am paying off and my credit score dropped by 80 points! How is that possible? One of the 2 cards is a zero interest until may of 2008 so I thought it would be better to combine than leave those small balances with high interest rates?
James Scurlock: Ah, the convolutions of the credit scoring system! A lot of people have told me that they have no credit cards and save to buy everything in cash--and then they find out they have terrible credit! On the flip side, I hear from people who have fantastic FICO scores but they're going broke. Your credit score is an algorithm that (from what they'll tell us) is primarily based on how well you've floated debt in the past and how much available credit you've got, where more equals better. All I can tell you is that this makes no sense. Enron did a great job of floating its debt and had a lot of credit until it went bust.
Michelle Singletary: Well, when you consolidated the balances from the several cards to two you changed your credit profile. You probably maxed out or came close to maxing out the limit on the two cards. That makes you look like you're overextended. Generally you have to keep your available balances below 50 percent on each card and all the cards collectively.
The interest has nothing to do with your credit score.
But more importantly unless you are in the market for more debt, which clearly you shouldn't be, don't worry about your score. Just pay off those credit cards and pay them on time.
When you do, over time, your scores will rise again.
Seattle: Given the fall-out from the subprime lenders, why are some mortgage brokers pushing the combination of "interest only plus a fixed mortgage?
James Scurlock: I was talking to a reporter the other day who went to close on her 30-year fixed mortgage with a major lender only to discover that they'd changed it to an interest-only loan. The hard sell followed. Why do they do this? Because they make more on interest-only loans that have to be refinanced down the road. Remember, the bank is not interested in you paying down your debt and living happily ever after. They're interested in you buying their products forever. Your equity is not something to accumulate but to use, use, use!
People who are depressed have a medical illness which is usually quite curable and the person can find their way back to a happy life. Call your doctor. It's a first step. If you are both high feeling and spending excessively sometimes and sometimes depressed- you MAY be manic depressive. This is also a medical illness which is easily treated with medicine. Call. Don't wait.
James Scurlock: I agree, though as my mother found out, that treatment can be very, very expensive! One of the ironies of depression/money problems is that curing the depression can land you in financial distress.
Jefferson City, Mo.: I have not read the book or seen the documentary. However, after reading Michelle's article about the documentary, I'm curious of the reasons that you are critical of anyone who poses to the public that they should do everything within their power to get out of debt and to avoid debt altogether, such as Dave Ramsey? Thanks.
James Scurlock: I'm a fan of Dave's. He has an important message and he's very consistent, unlike many other money gurus. The criticism is that sometimes that advice can be myopic. For example, most people wait far too long to file for bankruptcy, so if you are encouraging people not to file, you are doing them a disservice. Dave is a generalist and he's very good at what he does. But he simply cannot address the complex situations of many of his listeners.
Rockville, MD: Not on the book club topic, but timely as we approach April 17th...
Please remind your readers that when they save up emergency fund money, it has to be "real" money, not the effective cost after taxes. You can take into account the tax benefits of deducting mortgage interest and real estate taxes when you are figuring out your withholding levels, but emergency fund money is for times when you may not be working at all and withholding levels are irrelevant.
Some of the tax advantages might come back when you file your taxes for that year, but that won't help with your cash flow while your earnings are lower or non-existent. And if some time without earnings knocks you into a lower marginal tax bracket, the tax advantage of the deductions is reduced.
Just something I was thinking about as I contemplate looking for a condo.
Future first time home buyer who knows what it is like to be out of work for a while - also a tax lawyer.
James Scurlock: One of the people we talked to was a mortgage broker whose mantra was, "the more money you borrow, the less taxes you pay." I thought he was kind of a snake oil salesman. The truth is, you should only borrow what you can afford to pay back, and a safety fund is available cash.
Silver Spring, Md. : Greetings! I would just like to comment that there is a high correlation between predatory mortgage loans and inflated appraisals. The reasons for this are both simple and complex and would require extensive explanation. In any event, if a loan officer begins hinting that maybe you house is worth more than you think (and more than you know its worth), be very careful.
Secondly, I would like to point at that in a historical sense, there was a time that if you had bad credit and little or no money for a down payment, you absolutely could not buy a home in this country. The FHA program was created as a sort of "sub-prime" system to increase home ownership. Later programs expanded this further and home ownership has steadily increased on a national level. At this point in time, things have gotten out of hand far beyond any reasonable lending standard and were are paying the price.
James Scurlock: Isn't it time we started measuring "home losership?" When we only look at one side of the equation, we don't get an accurate picture. Yes, appraisers have been complicit, because this phantom equity is what allows the whole cycle to keep going. Interesting that UBS presented a series of "doomsday" scenarios for the mortgage industry recently--and NOT ONE showed home values decreasing. We're living in denial.
Centreville, Va.: Help. My wife and I have excellent credit. We own our home and co-own a vacation home. My wife's income has dropped by over 50% with the real estate slowdown. We've increased our credit card debt. We've listed the vacation home for sale, but it may not sell before we're out of cash, which will threaten the loans on both our primary home and vacation home.
What should we do first?
James Scurlock: You're facing a liquidity crisis, which will only be made worse by borrowing more. It's probably time to sell the assets you can and hunker down, though you would need to meet with your accountant and attorney to be apprised of the ramifications of any action.
Department Store Cards: Hello! I have several department store charge cards lying around. Can I just cancel them, or will that have a bad effect on my credit score. Am I better spacing them out when I cancel them?
James Scurlock: I would cancel them. Of course, Suze Orman has gotten us all paranoid about our credit scores going down, but perhaps we shouldn't be relying on them so much in the first place, no?
Manassas, Va: My husband and I are currently working on selling our house, and qualifying for a new mortgage, so we can move into a new house (still in the No Va area). We have $6000 on a high interest credit card that we want to move to a 0% professional card ( we have already been approved for this). Knowing that closing old, established accounts can hurt your credit score, and that changing the ratio of outstanding debt to available credit can hurt your score also, we are trying to decide if closing the account after it is paid off is a good idea. We both have good credit scores, but I am wondering how the lender will view having so much open credit (it will be about $12,000 in available credit on that card once we pay it off). I have heard that this has a negative effect on how buyers are qualified for loans, plus the fact that we would have opened up new credit. (We have read the Bankrate article regarding cancelling credit cards).
Also, we plan to pay off most of our debt that we still have with the proceeds of the sale of our current house. Will this help to increase our chances of getting a better mortgage? We have already pre-qualified with a lender, but because of our debt, we do not qualify for as much house as we would like. We are also looking at the possibility of renting for a year after we sell, since the prospect of selling a house and buying a new one in this market is a little scary. (The reason we are selling is that our jobs are now closer to town, and in Md, and the commute is just too much.) To be honest, after owning for 16 years, having to rent is a little depressing.
I know you'll wag your finger at us for accumulating all the debt, but we are truly trying to handle it as best we can. What do you think?
I keep up with your column, and appreciate all your advice.
James Scurlock: I promise not to wag my finger at you. I'm not Suze Orman! However, I will tell you that taking a year off from "ownership" may be a good idea. The truth is that no one knows exactly how your credit score will be affected by all of this maneuvering. Best to be responsible and see where it lands, in my humble opinion. I know that Ms. Orman will tell you not to lower those limits, but to me that's like telling you to stock your refrigerator full of junk food if you're trying to lose weight.
Seattle: I used to have all recurring bills on an auto payment schedule through my bill paying service, but found that I consistently overpaid. Nevertheless, it was better than falling behind. I am having more trouble setting up this type of auto pay with my credit cards. Do you think that auto payments are a good idea?
James Scurlock: I do. One thing that Elizabeth Warren taught me is that these companies will keep your payment date consistent for six months or so--then change it without telling you! So there are a lot of people who get tricked into paying late. If the auto payment prevents this from happening, I'm all for it, but it's hard to stay one step ahead of these guys.
Michelle Singletary: I'm so sorry if we didn't' get to your questions. But great questions nonetheless.
Thanks for joining me today.
Anonymous: I am planning to renovate a house and must choose between my equity loan or refinancing my mortgage- a 5 yr ARM due 8/09- and taking cash out. The numbers indicate use of the equity loan would be less expensive-no commission to a broker, no settlement costs. I fear hidden ramifications. Can you advise me? I have excellent equity and other financial backup.
James Scurlock: My advice is to do whatever carries less risk. Three years ago, Alan Greenspan advised Americans to take on the interest rate risk themselves, and we've seen the results. I would suggest it's time for you (and others) to give this risk back to the bank--which is what they are structured to handle.
Iron, Neb.: Here we are talking about aggressive credit card marketing practices and every time I refresh the Washington Post discussion page I get hit with another popup ad for American Express...
James Scurlock: Ironic, isn't it? I get refinance offers multiple times a day (e-mail and phone) and I don't own a house!
Laurel: Favorite credit card scare fact:
Warren Buffett became the wealthiest investor in stock market history by earning an average 24% return on his investments over a 50-year career.
People who pay that much on credit cards are losing their money as fast as Warren Buffett made his.
James Scurlock: Exactly!!! The law of compounding does in fact work in reverse, which is why the rich (like Buffett) become richer and the poor poorer over time. With high interest rates, that process accelerates. Ergo the "sharecropper economy" as Buffett calls it, where so many are indentured servants to their credit card and mortgage company.
James Scurlock: Thanks for joining me! Sorry if I didn't' answer your question, but feel free to e-mail me at firstname.lastname@example.org and I'll get back to you later. Best, James
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