Tight Credit Market

The tight credit market and business losses are making card issuers reduce credit lines, much to the distress of those who got in over their heads.

I thought that going to law school would benefit me economically; turns out, not so much, but I'm not doing as bad as this guy! Who knew that a little thing like crazy student loans could keep you out of the bar? I wonder if part of it is the change in the economy and the fact that unless he got a highly-paid job, he would have real trouble repaying the loan. Then again, not allowing him in sortof makes that all too likely.

In a Federal case, a guy who made it into the bar in Minnesota attempted to discharge his $350k in student loans through bankruptcy; my understanding is that ship sailed in the early 80's, courtesy of people like a colleagues sister, who attempted to discharge a month or so after the rules changed, moved out of state and didn't pay for years. Until a friend was over, answered the phone and gave the caller her employment information. That's an awkward friendship moment!

It seems that many things seem like a good idea at the time, but turn out later not to have been. We're conditioned, in American society, for immediate gratification, unlike a few generations ago where cash was king and you just plain didn't get something if you didn't have money.

People did crazy things, too, like save.

More on Student Loans

We all went to school optimistically and I graduated, from high school, college and law school during times of great economic distress so have a history of trying to find a job when the market sucks. Now that all I have are student loans, it's not so bad; it was horrid a few years ago, when I had consumer debt as well.

I feel bad for the recent graduates, who grew up in better economic times and are part of the spoiled generation. There's a whole generation out there unaccustomed to adversity in any form and now they're learning that mommy and daddy can't fix everything.

The so-called helicopter parents who intervened in every part of their children's lives, provided them with every possible consumer good and gave them the expectation that they could have whatever they wanted immediately, no question, did them a huge disservice; these same parents aren't necessarily in a position to follow through on tuition payments, new cars, condos and unlimited use of credit cards due to the current economy. Their kids just don't have the tools to cope with that.

Paying Down Credit Card Debt

Your Credit Card Company is here to help. Of course, with default rates escalating, it's in their best interest to help you. In fact, they're eager to do so because they have evaluated all your expenditures and calculated the likelihood that you'll default within six months.

Rep. Maloney is helping too.

Finances and Conventional Wisdom

Conventional wisdom used to indicate that the way to reduce debt and plan to be more secure in the future was to pay off any serial debt such as credit cards by first paying off the smallest balance or the highest interest. You would at least pay minimum + monthly interest so the balance would actually decrease. The smallest balance is easiest to pay off, so you feel a sense of accomplishment. Then, you were supposed to add the amount you paid on that bill to the next smallest/highest and so on, until you had eliminated your serial debt. That's the method I used a few years ago when I had way too much debt. It took awhile, but was effective.

Today's conventional wisdom is different. Because the world's economy has imploded and even in the world of document review there isn't too much work lately, the new plan is to pay minimum balances on everything and stash a little more into savings. Or stash something into savings. While I'm paying extra on two of my student loans, I don't have too much extra being paid out so I don't know how much sense that makes for me; it's about $80/mo so not a whole lot.

One of my colleagues plans to make minimum payments because we work for the state and it's a contract negotiation year so who knows what's going to happen. She plans to change her habits for the next 2-3 months, but has more room for changes than I do. She has a bill with Dell and a credit card balance, in addition to having wireless internet for which she pays $60/mo but doesn't use even monthly. She likes the convenience of it. Me? I'd like the convenience of having $60 more to pay to Dell or to pay on my credit card! She also pays $90/mo for a cellphone package, which includes a family plan for a husband who uses 3-min/mo. That would be an incentive to me to change my package; I did at one point pay for extra cellphone services and not use them much so got rid of that option.

My priorities are somewhat different and I have a greater need to have less debt than to pay for services I don't use. While I would like to put more money in savings, I'm not sure it makes more sense than attempting to reduce my student loans. I really want them to go away though that's going to take some time. My smallest loan used to be the highest rate of interest but has reduced itself over time and is now lowest. Meaning that with previous conventional wisdom, this is not the loan to target. Then again, the lower interest rate means more money goes on principal and I have a better chance of paying if off sooner.

Oversaving

I somehow don't think oversaving is a real issue in the US right now. While I should have enough money, right now it doesn't feel that way.

I want to save more money but each paycheck it seems harder to keep my savings balance. I'm not going out and living the high life; last week I had food, $30 and half a tank of gas so knew I'd be fine until payday, so no extra spending for me! I needed to make sure I had money to fill my gas tank being that I needed to go to work every day and all.

While I agree, I like to look back on my life and be happy, I don't think that happiness is necessarily caused by material possessions. In fact, the quest for that may be what brought down our economy; between the bankers looting the companies and buying crazy expensive things, and those who overextended themselves, either on credit cards or with HELOCs, it was people wanting stuff who created a lot of problems, both for themselves and others.

Me? I just want a nice, stable job so I can pay off my loans and buy a condo.

Even Death Doesn't Stop Debt Collectors

I used to work with a woman whose first job out of law school was with a debt-collection outfit; you call the bank holding the deceased's credit card to let them know? Next thing you know, someone is calling you, asking for payment. Legally, the person's estate is responsible for payment, not any other individual who would not otherwise be liable. I know from experience, having been interrupted in the middle of the shower when an attorney/collector called my mom's house a few days after my dad died, that people can get scared when attorneys call.

Not all posthumous-debt collectors are attorneys, but a bank in my area has hired a law firm, which has a collections branch. My sister freaked out, thus the interrupted shower. Her take on the situation is that a phone call from an attorney is an emergency. Mine? Unless the house is burning down, don't bother me in the shower. An attorney is not an emergency.

While I believe in paying debt, many people are without insurance or any other asset, so the debt collector is taking advantage of the fact that people just don't know they're not responsible for another person's debt when that person dies. You also don't know that person's situation and it's entirely possible that they're committing to payments but can't really afford it. I'd have trouble making those calls because it's just unseemly.

I'm glad that my federally backed loans die with me; as it is, every month, the debt that doesn't die with me is reduced a little. Right now I'm insured for enough money that my co-signer will not be left holding the bag if anything happens to me.

Debt Collectors

Right now, I know two people who have been having trouble with debt and debt collectors. What's interesting to me is that people don't cut out the unnecessary in order to take care of these things. I'm happy that I'm currently able to make payments on all my bills, even though it doesn't feel like I'm reducing anything. I won't feel like debt has been reduced until I manage to pay off another student loan, even though it'll be awhile before that happens.

I know, unnecessary is in the eye of the beholder, and the last thing I'd pay for is a gaming subscription or satellite tv. My quasi-useless items are internet access and my cellphone. I use the internet a lot more than my cellphone and sometimes think I should switch to a pay-to-play phone. Except I don't have long-distance on my land line and have several contacts on the same cell carrier so have free calling for those people. I do a lot online, including communicate with friends, blog, shop and look for jobs. I also read the paper. Which is likely why my local paper has filed for bankruptcy. I don't know whether I'd pay for a subscription to the paper online when there's so much free content out there.

I think I have eliminated most of my unnecessary expenditures and I know I'm more thoughtful when making purchases, whether groceries or anything else. I'm bad for the economy, but have been bad for it for several years now.

Saving Money

Last year I bucked the trend and spent my government stimulus check, albeit to pay off an existing debt. But that's one less monthly payment I have to make so it was well worth it.

This year, in addition to having to pay for glasses, contacts and a contact lens fitting, I have other medical bills to pay. I do have a healthcare savings plan, but underestimated the amount of money I would use; it's a use or lose benefit which I've never used when offered previously. I put what seemed like enough money to pay for glasses in the account and it isn't enough. Which is fine; this is just another way of using pre-tax dollars. I'm waiting for my debit card, which will have $250 free dollars from my employer on it in addition to my payroll deductions. The additional money would carry over, but there's no reason for me not to spend it on medical expenses since I have plenty of them.

While I'm saving for retirement through paycheck deductions, I need to increase my savings which is difficult. Right now I'm so focused on getting rid of the random bills that I've incurred recently that I'm not nearly as concerned as I should be about saving money. They say you should have the equivalent of 4-6 months expenses in savings. At the rate I'm going, that'll take me forever to achieve. Especially since I want to reduce my debt.

What I need to do is sit down and create a budget for myself and figure out if there's a way for me to achieve my goals of a) cleaning up my new, annoying medical debt; b) not carrying a balance on a credit card in order to do so; c) reducing my overall debt and d) increasing my savings.

My federal student loans are at a fixed rate and are unfortunately are the highest interest rate I have; however, the rate is much lower than the one I had for my undergrad loans. When I consolidated it seemed better to get a fixed rate loan because the rate I got was the lowest ever at that time. Now it isn't.

My other loans are really at a negligible rate of interest, differing by about .25 from one another; they both just recalibrated and got lower. I could decide that with such a low rate of interest I'd be better off not worrrying about paying extra on either of these loans and merely pay off my other debt as quickly of possible and put more in savings until the interest rates on these loans goes up again. That might be the most practical thing to do instead of worrying about getting the smaller one paid off sooner; the same payment at a lower interest rate will reduce principal by a slightly higher amount each month.

Thrift as a Way of Life

For those like me, whose grandparents lived through the Depression, stories of deprivation and thrift were part of our upbringing. As if the Depression wasn't enough, the economy was then fueled by war, which begat The War Effort, rationing and deprivation for another reason; helping the boys at war.

During the Depression, people just plain didn't have money and couldn't buy things. Not that there was the wide array of consumer goods that we have, I mean people put newspaper in the bottom of their shoes because they could neither afford new shoes nor repair the old shoes. Soup Kitchens and bread lines proliferated, feeding many who had no other source of sustenance.

With the tumbling stock market, credit crunch and daily announcements of layoffs, we'll be lucky not to need assistance from tax deductible charity organizations. In my area, there are several downtown agencies that assist; the House of Charity which provides a noon meal to anyone who shows up at the appropriate time, no questions asked, Sharing and Caring Hands and Dorothy Day. There are food shelves associated with Dorothy Day, as well as with many other organizations. In addition, a church near my home provides free food once a month. Many years ago, my grandma was in a USDA program for those with low incomes; they came to her building and handed out butter, cheese and honey.

I'm not suggesting that contract attorneys are in a position to need these services; however, at one point in my life I worked on a temporary project with a woman who had lived for a time at the Dorothy Day center when she first moved here. Her church subsequently assisted her in finding a roommate situation.

Because of the rampant spending the formerly credit-worthy countries of the world have engaged in, it's entirely possible that we might know someone who could benefit from a reminder that these sorts of services are out there. When I was in law school, someone told me to apply for government benefits, such as food stamps; while I was poor, I chose not to take advantage of the programs because it was my choice to go to school. It seemed silly as a single person to do so, though one of my college classmates used food stamps; she had a child, so under her circumstances it would have been foolish not to do so.

I'm fortunate in not being in a situation in which I need services, but due to the masses of debt that people have, I also believe that it's important not to be too proud to take services if you need them. Especially if you have a family.

Falling off the Wagon

As you may have guessed, based on my previous post, I'm not making as much progress as I'd like on my smallest student loan. It's still my target to eliminate first; however, I really did need tires.

One of the other purchases was an external hard drive as my itunes library has taken over the computer, which sounds like a 747 ready for take off. I have to figure out how to migrate the music to the hard drive but have insufficient hard drive myself lately. Hopefully I'll be able to do that this weekend.

I'm a little concerned that I'm buying things, but fortunately am able to rely on a consultant for my electronics purchases so am confident that I got a good deal. In addition, whether I pay extra or not, my debt decreases every month and that's a good feeling.

I am paying extra, just not as much as I'd like to. Which isn't the end of the world but I need to get myself back on track so I can achieve my goals.

Interchange Fees and the Export of Credit Card Debt

If you're unaware of Interchange Fees, they're the fee charged to the retailer by the credit card system, such as Visa or Mastercard and are mostly based on a percentage. I read somewhere that for gas, they increase up to $50 in gas and don't increase for higher amounts. These fees increase prices at the stores and reduce profits significantly as the retailer loses for every purchase.

A few years ago there was a lawsuit between the above and retailers; when you enter a pin# the charge to the retailer is reduced because that system charges far less than the others. Visa and Mastercard wanted retailers to continue with their old, more expensive, offline system with signatures. It costs more and doesn't happen in real time.

Now, in addition to exporting trans-fats, the US has successfully exported credit card debt to consumers the world over; granted, in part it's due to the embracing of credit cards by less sophisticated banking systems that didn't take into account minor details like income and credit rating...not all countries have historically embraced debt so their infrastructure hasn't included credit ratings.

Debt Reduction

When attempting to pay down debt, it's important to make payments that are higher than the minimum. Generally, a debt will not be reduced unless you pay at least the minimum payment + interest assessed for that period. That formula ensures that a) the debt will be reduced by the amount of the minimum payment and b) the overall interest will be reduced. They say people pay on credit card balances for 20 years, ultimately paying a lot more for whatever they did to rack up the bill.

A good rule of thumb is to take the above amount and round it up to an even dollar amount. Continue paying that amount every month, and every month you will be paying a slightly higher amount on principal than the month before. It helps to look at your bill every month and compare it to the bill for the previous month. If you're ambitious you can make a spreadsheet; over time you'll see the increase in principal paid each month. It's important to target only one debt for this type of activity, and yes, I know it's difficult. I did this in turn with each portion of my consumer debt, starting with the debt that was largest and had the highest interest rate, my credit card.

Once the first debt is taken care of, add that monthly payment to the next targeted debt so you will progress even faster. In my case, I had overwhelming amounts of debt; due to my naivete in believing that law school would help my bottom line I ended up consolidating credit cards, buying a car and ended up with a bank loan and shiny new credit card debt right before the economy imploded. In addition to my student loans. I had a dentist bill looming over my head. I was paying a certain amount on my credit card each month and once I paid off the dentist, I paid off my car, one month early. It isn't much but that was another chunk of money to send to the credit card and I did. And kept sending them that amount of money in addition to my previously normal payment.

Six months later, my bank loan was paid off and I was able to put that amount of money toward my credit card in addition. It still took another year to pay off. I'd be embarrassed to say the dollar amount but let's just say that I saw the money profile on CNN last year when it featured a social worker who wanted to go to law school. He had approx. $100k on credit cards. I felt downright fiscally responsible.

Incidentally, CNN gave him the same advice I've just given; pay the smallest one first (dentist bill, followed by car loan) and add those amounts to the next targeted debt. I didn't add my bank loan to my calculation for faster payoff as a) it was deducted automatically; b) ended in 6 mos; and c) had a lower rate of interest than the credit card. It made more sense to me to work on the credit card; each month would add more interest to that balance, which wasn't true of my bank loan.

New Project

Last Monday I started a new project which is only supposed to go about a month or so. They weeded out anyone who wanted time off during that block of time, though they say it may go for two months; I have a CLE planned the second month and let them know. Apparently they were okay with that because I'm on the project.

I crunched numbers and will be able to pay about a third of the next targeted loan. I have private loans which are fragmented due to summer school. I've mailed in the check each month for the regular payment but have only been able to pay a little extra.

Because I enjoyed the hotel beds when I was on the project for which I traveled extensively, I plan to hotelize my bed. Each segment of my private loan that gets paid off entitles me to another item to this end. I need an incentive to keep me focused. Without the incentive it would be much more difficult to force myself to make big payments instead of spending money on other things. I write about my debt a lot because I think about it a lot. Unless you're one of the fortunate ones, whose debt is gone, you should think about yours too.

I'm not always perfect; I gave myself a month off after paying off my credit card and was forced not to pay extra on my loan when I wasn't working. I hope the project is extended, or better yet, gets put on overtime. If that's an option, I'll be there. I don't know if I could hit it hard for the long-term, but I know that if it's a matter of weeks I can work a lot of OT.

Learning From Your Mistakes

Many people learn from their mistakes, but some people repeat the same mistakes multiple times. Reading about compulsive spending made me wonder about an acquaintance of the sort who shares more information than I need. She worked two jobs and had taken out a loan to pay off her credit card. Racked it up again, lather, rinse, repeat.

At one point she took out a quite hefty loan from a sibling who was single and had extra cash and was put on a payment plan. Her lender's idea was that all the credit cards needed to be paid off and canceled. The deal was brokered by another sibling who thought that was absurd and this poor girl needed a major credit card and a popular store card to get by. She had been advised to declare bankruptcy as an alternative to taking out yet another loan, but chose not to.

Keeping the cards was a huge mistake because she added to the stash. The last update I had was several years ago, at a time she had opened several more major credit cards, some of which had variable interest rates; she had also added to her store cards, including a gas card and two or three more store cards, which always have high interest rates.

I'm no longer in contact with this woman, but I wonder how her debt is doing; with her track record I would be quite surprised if she had cleaned up her debt. Her house of cards was quite shaky, last I knew, and that was when the economy was better. I hope for her sake that she was able to give up the cards, one by one. Starting with those variable rate cards. Those things are frightening!

Compulsive Spending

I'm glad that compulsive spending isn't one of my problems. While racking up credit card balances may make it more difficult for your lender to lower your credit line, it isn't a good habit. In my credit card days, I noticed that if I got close to the limit, kept making payments and stopped using the card, the lender would increase my credit line. Every time.



That's one reason there's so much credit card debt in this country; instead of waiting for the borrower to request a higher limit, there was an automatic increase. And people don't think of a credit card company as a lender. They're a service-provider, enabling us to shop our little hearts out! I know several people who seem to do nothing but spend money or use plastic; in one case, it's always prefaced with the statement "I'm so broke." If you're really that broke, how can you spend money as freely as you are? Hmmm. Others buy things online, which I guess makes it less obvious, in that you're not actually going to a store. But how do you conceal receipt of packages? Yet another shopper was online and in the mall. All the time. Buying everything.



I've never had difficulty getting credit; I had a couple of store cards when I was younger. At a time stores wanted to increase the number of consumers with their cards, I had written checks and they called to offer me credit cards. I knew that obtaining credit wasn't always easy to do, so took the cards, one of which I rarely used. The other got more of a workout because it was from a store at which I shopped more. I closed my store cards several years ago and am unlikely to replace them.