Sunday, January 10, 2010

New Year, Same Old Debt

Someone I know is in credit card debt again. The person was in a similar situation several years ago. At the time, I was able to help the person get out of it. I also tried to model the habit of making the regular, on-time payments that creditors like. I stressed this as the number one rule. But it did not stick. My friend’s credit score (FICO) is very low, so a car loan has been denied—which is bad, considering those are secured loans and they could just come get the car, so what’s the risk? My friend is flummoxed. But unrepentant, I suspect.

I wonder how many of us really change our disastrous financial habits for better ones? Or, after we recover from a dangerous low period, do we limp along, much in the same manner as before, slowly but surely ramping up our mistakes? Worst of all, paying little or no attention to what others want from us? The friend is indignant about the car loan, citing having paid off a car loan from that very bank a few years ago. But that was then, and this is now. Missing scheduled payments is one of the classic signs of shaky financial stability. The bank fears that the car loan will not be paid back, and the bank does not need a car; my friend does. The bank is understandably wary of lending in this scenario.

Of course this situation would be different if my friend had a good, steady job. (Pause to laugh hysterically.) Right. Like that’s happening anytime soon. So what can be done? Does my friend even have enough money to make regular minimum payments? And assuming so, how quickly can my friend’s credit score be rebuilt—again!—in this rocky economy? Would six months of perfect, on-time payments make a difference? Or will it take a year or more to climb out of this pit? And to what lengths must my friend go to fix things? Sell something major that would be painful to part with? Live without a car for a year? Or two?

Or is this simply an organizational issue? Some adults have serious attention deficit issues. Serious. They collect too much paper and they can’t seem to open their bills promptly (or even their bank statements) and they never are able to put everything in one place neatly so they can find it again. My friend is but one of thousands, if not millions, of these people. They’re more likely to buy a new set of storage containers or get a new checking account than to put all documents in one place or balance their existing checking account. And these people, these thousands if not millions, are walking around as supposed functioning adults. They’re being allowed, even encouraged, to sink deeply into debt through systems that work for people like me (Little Miss Organized), but never work for them. Unless they are very lucky, their chronic inability to cope makes them the financial dupes of the banks and every other financial transaction.

Some of these people are married to spouses who can handle money sensibly. Or even to spouses who can’t, but who earn enough to keep everything covered. But some people are alone and trying to deal with words on papers from financial institutions that they simply do not understand. They don’t understand the words. Or the banks. Banks don’t really care about your payment record of ten years ago. They care about your recent payment record. They’d also prefer that you have substantial income and assets—and that you do not need the loan you want. That’s right: banks prefer to lend to people who don’t actually need their money. If Warren Buffet asks for a loan, he’s going to get it. Or Bill Gates. You and me? Not so much.

The bottom line with financial hassles always comes back to paying attention. My friend will now have to enter into a penitent period of being very careful to make all scheduled payments on time. I’m sure my friend will do it, too, because the danger and excitement of this situation will be a constant reminder. For a while. And then, the ennui with paying attention to numbers will rise again. And the trouble will start all over.

I don’t know the answer to this one. Spend less money than you earn? Sure, but if you don’t pay your bills on time, that’s irrelevant. Pay cash for everything? That plan does not get the electric bill paid on time. Go off the grid? Okay, now you’re just being silly. The buy-in for going off the grid is very steep. Who has that kind of money—without getting a bank loan?

1 comment: said...

From one who has been there, and you're not allowed to leave, the only real answer is an extreme form of the KISS rule. If you can't write down your financial history for the month,excluding detailed purchase receipts, but including an accurate currant balance, on a 3X5 index card it is too complicated. No credit cards, maybe a debit card. A checking account and a savings account and a jar of pennies (I have all sorts of change, but I'm advanced). That's it! Nothing else. How much money you have is on the bottom of every ATM receipt. You take all of your fixed regular expenses and add them up, always round up to the next whole dollar, cut that number by the number of paychecks or whatever a month and leave it in your checking account. Everything else goes into the savings account. That is what you have to live on until you are paid again.

This makes getting a car hard, but not impossible. It just joins the fixed payments. If that number increases what you leave in the checking account to so much you don't have anything to put in your savings account then you can't afford a car.

Or you have someone give you a car. That is always the best way.