Financial Peace University Lesson 5 – Credit Sharks in Suits
Understanding Credit Bureaus & Collection Practices
Dave starts out this lesson by exposing one more myth, similar to what he did during the previous lesson:
Myth: You need to take out a credit card or car loan to “build up your credit score.”
Truth: the FICO score is an “I love debt” score and is NOT a measure of winning financially. I admit that in the past I’ve taken pride in having a “high” FICO score. It is interesting to really look at how it is calculated, though. According to Ramsey, if you want a higher FICO score, you should go into debt and stay in debt for a long time. The more credit cards you have (assuming you don’t have big balances on all of them) and the longer you have had them will generally translate into a higher FICO score. He also explained that you could inherit a bunch of money tomorrow or get a huge raise and if you don’t change any of your debt, then your score will not change at all. So, I agree, this is not a measure of how well you are doing financially…it is basically worthless for that purpose. (He also mentioned that he currently does not have a FICO score at all…and I’m pretty sure that he is doing ok financially!)
Understanding Credit Bureaus
The first portion of this lesson revolves around your credit report. Some interesting notes from Ramsey:
- Information remains on your credit report for seven years after the last activity, except for a Chapter 7 bankruptcy, which remains on there for 10 years.
- Beware of credit clean-up scams – it is not legal to remove accurate information from your report.
- In a survey done by the National Association of State Public Interest Research Groups, 79% of credit reports of the people surveyed contained mistakes.
It is recommended that you check your credit report annually to make sure there are no issues. Of course, this can now be done free using annualcreditreport.com. Through that website, you can get a copy of your credit report from each of the three credit bureaus once a year (FREE - you don’t even have to sign up for credit monitoring or any of the other junk – if you do, you’re most likely at a similarly-named site). So, you can check your credit report every four months if you cycle through the different credit bureaus.
Correcting Credit Report Inaccuracies
According to the 1977 Federal Fair Credit Reporting Act, a credit bureau is required to remove all inaccuracies within 30 days of you notifying them of the mistake. To do this, send a letter for each inaccuracy via certified mail to the bureaus with your credit report attached and the account number circled. The bureau will then request clarification from the company that reported the information in question. Often, that company will not respond and the credit bureau will remove the offending information. If the company responds to the bureau and claims that the information is accurate, then you will have to work with that company to clear up the discrepancy. Most times, the letter to the credit bureau will be sufficient. If they do not remove the inaccuracy within 30 days, however, you can then request that they remove the entire account from your report. Finally, if you are having problems with them, then you might need to complain to the Federal Trade Commission and your state’s Consumer Affairs Division.
Dealing with Collectors
During the remainder of this lesson, Dave discussed collection practices and how to interact with debt collectors. Here are some of the highlights of his teaching:
- The collector’s job is to get your money – not to be your buddy or to help your overall situation
- Typically, they attempt to induce strong emotional reactions from you
- It is illegal for a collector to harass you and they can only call you between 8 AM and 9 PM (unless they have your permission to do so).
- You are able to demand that they stop calling you at work
- It is even possible for you to demand that they stop all contact with you (except notification that they are suing you). Dave does not recommend this, however, as all negotiations then stop and there is no hope of a positive resolution. In fact, this makes it more likely that you will end up being sued by them.
- Except for student loan debt or the IRS, it is not possible for a creditor to garnish your wages or take money from your bank account unless they sue you and win the court case; a threat to do so is just a bluff.
- Of course, it is possible for them to sue you. If they do, they will win (remember you do owe them money) and then they have the right to garnish your wages after a 30 day waiting period.
The purpose of all of this is ensure your life is bearable while you are trying to deal with your creditors. It is not to try to avoid paying back your debts. If you borrow money or owe someone money, the honorable thing to do is to pay what you owe.
Luckily, so far I have not had to deal with debt collectors and I have not found any significant errors on my credit reports (though when I had student loans, so many of them show up on the report that it is hard to keep track of whether they are all accurate or not) so this lesson was not as interesting as some of the others. If you are dealing with collectors, however, Ramsey’s advice is to stay in contact with them once every two weeks and send them more information than they send you. Send them your budget, send them the plan that you are using to work your way out of debt, show them how much money you have to pay debts after your necessities and try to work something out. As long as you keep communicating with them and paying them, even if it is less than they want, they will probably work with you instead of suing you. A lawsuit is expensive and getting some of your money, even if it is slowly, is better than getting none (or spending more on court costs that you actually owe!).
Resources
Request a copy of your credit report:
- annualcreditreport.com or call 877.FACT.ACT
To reduce direct mail advertising and telemarketing calls:
- www.optoutprescreen.com or call 888.567.8688
- www.donotcall.gov or call 888.381.1222
(So I recently visited both the opt out site and the do not call site. The do not call site is pretty straightforward but for the opt out site it is so obvious that someone forced them to put that site together. They are not happy about you coming there to opt out of the marketing.)
Check out my previous FPU posts:
- Introduction
- Lesson 1 – Super Saving
- Lesson 2 – Relating with Money
- Lesson 3 – Cash Flow Planning
- Lesson 4 – Dumping Debt
Financial Peace University Lesson 4 – Dumping Debt
Beaking the Chains of Debt
I mentioned in the previous FPU post that Dave Ramsey is very big on creating and using a cash flow plan each month. I now have to say this week that he stresses even more the importance of getting out of and staying out of debt. I would probably say that this is the most important facet of his financial peace plan.
If you tell a lie often enough, loud enough, and long enough, it becomes accepted as truth
Ramsey spends the majority of this session presenting and debunking various myths about money and debt – some that I found very interesting. I’m not going to go through every myth in this post – I’ll just hit some I found more intriguing (I have to leave something for you when you actually take the course, right?).
Myth: Playing the lottery and other forms of gambling will make me rich.
Truth: Playing the lottery is a tax on the poor and on people who can’t do math. Ramsey asked this question, “Why is the lottery line not filled with rich people?” and also presented this telling statistic: People with no high-school diploma spend on average $173/month on the lottery while people with a college degree spend an average of $49/month. Do you know how much money $173 will grow to over time if you invested that money each month instead of wasting it on lottery tickets?
Myth: Car payments are a way of life and you’ll always have one
Truth: Staying away from car payments by driving reliable used cars is what the typical millionaire does. I admit that I totally bought into this myth; I simply did not see a way that you could drive a decent car without having payments every month. We used to pay $800/month on our two cars. You know, you can do a lot with $800 if you don’t have to give it away each month. We’re saving a lot more money these days since we accelerated and paid off our car loans. In fact, Ramsey states that the average car payment is $464/month and if you invested this amount at a 12% interest rate starting when you are 30, when you reach age 70 you will have $5.5 Million. Wow, I hope getting a nice, new car every few years is worth $5 M to you!
Myth: Leasing your car is what sophisticated financial people do. You should always lease things that go down in value.
Truth: The car lease is the most expensive way to finance and operate a vehicle. I remember reading reading an article in Consumer Reports about this exact topic. In fact, I found these statistics that Ramsey offered very enlightening: If you buy a new car with cash, the dealership makes an average profit of $82. If you finance that new car through them, the dealership makes an average profit of $775. If you lease that new car, the dealership makes an average profit of $1300!
Myth: I’ll take out a 30-year mortgage and pay extra. I promise!
Truth: Life happens! Something else will always seem more important, so almost no one pays extra every month. Never take more than a 15-year fixed-rate mortgage and your payment should be less that 25% of your take home pay. It is true that using a 15-year mortgage will save you tons of interest! In fact, on a $225,000 mortgage at 6% interest, you will save more than $143,000 in interest with a 15-year mortgage compared to a 30-year mortgage.
This is a hard one to do though. When we bought our current house, we didn’t buy one anywhere near what we were qualified for, but we are barely below the 25% of our take home pay and that is on a 30-year mortgage! Interestingly, this advice is the opposite of what Crown Financial Ministries will tell you to do. They suggest paying extra on a fixed 30-year mortgage to make sure you can still afford the payments even if something changes in your financial situation (of course, that’s probably why Ramsey tells you to keep the payment below 25% of your take-home pay).
Myth: It is wise to take out an adjustable-rate or balloon mortgage if “I know I’ll be moving.”
Truth: You will be moving when they foreclose! Remember, an adjustable rate mortgage transfers the interest rate risk from the bank to you. They are good for the bank, not for you. (Disclosure: we currently have a seven-year adjustable rate mortgage).
Myth: You need a credit card to rent a car or to make purchases online or by phone.
Truth: A debit card will do all of that, except for a few major rental companies (check in advance). Remember that you get the same level of protection as a credit card when you swipe your debit card like you would for a credit card (not when you enter your PIN number).
Myth: “I pay my credit card off every month with no annual fee. I get brownie points, air miles, and a free hat.”
Truth: A Dun and Bradstreet study found that when you use plastic instead of cash you spend 12-18% more because spending cash hurts. So what if you get 1% back! I am currently struggling with this actually. We typically use credit cards for most of our purchases but I am really re-evaluating this strategy as we go through this class. I hope to start moving to cash or debit card for some purchases next month as a trial to see if we spend less and if we can do a better job tracking it as we move through the month.
Myth: I’ll make sure my teenager gets a credit card so he/she can learn to be responsible with money.
Truth: Teens a huge target of credit card companies today. This is chilling: more young adults filed bankruptcy last year than graduated from college.
Myth: Debt is a tool and should be used to create prosperity.
Truth: The borrower is slave to the lender. In a survey, the Forbes 400 were asked, “What is the most important key to building wealth?” 75% responded that becoming and staying debt free was the number one key. Think of it this way, your largest wealth building tool is your income so don’t waste it on interest payments each month. Now think about this: How much money could you save, invest, blow, and give away if you had no debt payments each month?
Steps Out of Debt
Getting out of debt is hard and you have to be focused and serious about it to get it done. “You can wander into debt but you can’t just wander out.”
Dave presents the following five steps to getting out of debt:
- Stop borrowing!
- You must save money
- Prayer really works
- Sell something. (His famous line: “Sell so much that the kids think they’re next!”
- Take a part-time job or overtime (temporarily)
The Debt Snowball
A key component of Dave Ramsey’s FPU plan is the debt snowball. You’ve probably heard about it and seen countless debates over whether paying off your debt this way make sense or not. I’ll admit that in most cases, this is not the most “interest-efficient” way to pay off your debts but as Ramsey himself states, this is about behavior modification not about math (”besides, if you could do math you wouldn’t be in debt to begin with.”). The debt snowball relies on seeing that you are actually making progress and that tangible progress motivating you to stick with it and make more and more progress.
Here is the debt snowball process:
- List all of your debts from smallest remaining balance to largest.
- Pay the minimum amount on each debt except for the first one. Put all the extra money you can scrape together towards paying off the first one as quickly as possible.
- When the first one is paid off, put all the money that you were paying on the first one towards the second one. So, the money from the first debt will be added to the minimum amount you were already paying on the second debt thus increasing the payment.
- Repeat this process for each subsequent debt. As you can see, the amount of money being paid on each debt gets larger and larger as you pay off the smaller ones – hence the “snowball” concept.
This debt stuff is important!
I feel that this is one of the most important lessons in FPU. Most people just assume that car payments, mortgages, home equity loans, credit cards, and so on, are just a way of life but it doesn’t have to be that way! We strove for a few years to pay off our cars early and get rid of my wife’s student loans. At one point, we were paying $800 on our cars and $2000 on student loans – that adds up to a lot of money each month! Now, we’re saving that money. Instead of giving away $2800 each month, we’re giving it ourselves. That’s a great feeling.
My parents never made a ton of money through their working careers. They rarely use credit cards, paid off their mortgage years ago, and live fairly simply though. As a result, they can basically do whatever they want in retirement without even touching the principle of their savings. They’re not just sitting around listening to the radio all day either. Their indulgences are going out to eat a lot, getting a new car every couple years (and they lease!), and taking a three-week vacation to Florida each year.
Get out of debt – keep the money for yourself! If you want to give it away, it’s a lot more fun to choose whom to give your money to instead of being forced to give it to your bank. And I’m sure your church or some missionaries or some people who are struggling need that money a lot more than your bank does!
Check out the previous FPU posts:
Weekly Bible Verse – Servant to the Lender?
The rich rule over the poor, and the borrower is servant to the lender. Proverbs 22:7 (NIV)
You’ve probably seen this verse before somewhere (I see it all over the place) but I thought I’d take a moment and focus (again) on the restrictions we place on ourselves when we go into debt.
I saw a discussion take place (that sounds weird to say you “saw” a discussion but the discussion took place through comments on a blog – work with me here) once where a participant railed against the “overuse” of this verse in personal finance blogging. They claimed that the verse was being taken too literally today; that it applied only to Biblical times when you literally could end up a servant to your lender if you were unable to repay your loan.
I personally disagree with this interpretation. Though I do a agree that you won’t actually end up as a literal servant to your bank or whatever, I do feel that this verse is an accurate description of the seriousness of taking on debt.
Debt limits your freedom
Let’s think about it for a moment – say you take out a loan for something (car, boat, house, whatever). You have entered into a legally binding agreement to pay back the money you received (plus interest – don’t forget that). You have now placed a restriction on yourself and are probably no longer able to now follow any course of action that you desire.
For instance, you have just decided that you want to change careers and you need to stop working at your current job so you can focus on going back to school for a time. Oh, and the new job will not pay as much money as the old one. Wait! Don’t forget that you owe $2000 a month on your mortgage. If you can’t afford to continue making that monthly payment while not working and going to school, then that debt is now limiting your potential courses of action.
I could make up a number of examples like this. The point is that when you enter into debt, most likely you do not have full freedom anymore to do as you please (and if you are able to just pay the debt off at anytime and move on with your life, then why did you take out a loan and agree to pay interest in the first place!).
Well, you say, “that’s silly, I could just sell my house (or whatever) and then go to school (or whatever).” Sure, you could, but don’t miss the point of what you’re doing: you’re removing that debt from your life so you can have freedom again. Actually, you probably shouldn’t necessarily count on being able to do that at any time anyway. If you bought your house in an unfortunate location in the US a couple years ago and need to sell it right now to gain more freedom, that might be a difficult thing to do.
Freedom!
So, in summary, remember that, according to Dictionary.com, two of the definitions of the word “freedom” are “exemption from external control, interference, regulation, etc.” and “the power to determine action without restraint.” I argue that whenever you take on debt, you no longer are exempt from external control and no longer truly have the power to determine action without restraint. Therefore, I contend that the statement from Proverbs that the borrower is servant to the lender is applicable to our lives today. That’s something to remember the next time you’re tempted to buy something you can’t yet afford or someone tries to entice you to open a credit card account to save 10% on your purchase.
God bless and have a great week…
Retired Baseball Player Files for Bankruptcy with $31 Million in Debt
I read yesterday that Lenny Dykstra filed for bankruptcy with an incredible $31 Million in debts. For those who might not know (or care), Dykstra is a former Major League Baseball player who played at the highest level here in the US for 12 years. He was also an all-star during his career. My point is, I’m sure the guy earned some money during his career (millions if not tens of millions).
So how did he end up with debts of $31 Million and assets of less than $50,000? I don’t have the slightest idea! For me, I’m thinking if I could earn $2 Million dollars, I would probably be set for the rest of my life and if I was worried it would run out before retirement, I could easily make that stretch far enough by working for a few more years. Of course, I probably wouldn’t be living in a mansion, flying around in my private jet, and driving a Rolls Royce as reported by cnnsi.com (I guess that answers my previous question!).
Seriously, is it just me or are you also astounded by how some of these incredibly wealthy athletes and entertainers can run through tens of millions of dollars and end up broke (a la MC Hammer)? This isn’t common, but it’s not ultra rare either. In fact, Sports Illustrated ran an article discussing how and why athletes go broke just a few months ago. It seems like they would be smart enough to at least sock away a little bit of it somewhere safe so they could fall back on it if they needed to? No? Private jet just too enticing? (I don’t know much about private jets, maybe they are an appreciating asset…but I doubt it – but they sure do seem convenient!)
There’s my tip of the day to you, my faithful reader, if (let’s think positively -”when”) you come into a few million bucks, take a bit of it and store it somewhere nice and safe – think emergency fund on steroids. Granted, it’s not as easy as just sticking your millions into a savings account at your local bank (”Sorry, John, our bank went under with $10 Million in your account, but luckily it was an FDIC-insured account so here’s your $250,000″) so maybe I’m just being naive. Well, I’ll be sure to do a series of posts on how to safely diversify and protect your millions of dollars if I ever have that much.
But back to Dykstra for a moment – $31 Million in debt and less than $50,000 in the bank?!? How is that possible? I mean, who was still loaning this guy money? “Ok, Mr. Dykstra….can I call you ‘Nails?’ Anyway, let’s see here….$25 Million in debts, no income, no assets, ummmm, sure, here’s another $6 Million to buy another mansion.” What the?!?
Book Review: Your Money Counts
The biblical guide to earning, spending, saving, investing, giving, and getting out of debt
By Howard Dayton
BFN Book Reviews
Well, it has been quite a while since I did a book review here at BFN. It’s a habit that I’d like to get back into – so why not start again today? I provide a brief overview of the book and the author, touch on the good and bad in the book, and finally, give you my personal recommendation for whether you should borrow the book, buy the book, or neither.
What is this book about?
This book is a pretty small book but it basically tries to cover everything about money. Specifically, to clarify, it tries to cover most of what the Bible says about finances. It’s a pretty ambitious goal, especially given the size of the book (it is 175 pages, but it’s skinny). It actually does cover quite a bit of the ground it mentions on the cover. In fact, it touches on other subjects as well. Of course, it can’t go into much detail on each portion. Overall, however, the author is quite successful in jamming an extraordinary amount of biblical guidance into this skinny little book.
Who is the author?
Howard Dayton is a co-founder of Crown Financial Ministries with Larry Burkett. The mission of Crown Financial Ministries is:
Equipping people worldwide to learn, apply, and teach God’s financial principles so they may know Christ more intimately, be free to serve Him, and help fund the Great Commission.
Before founding Crown Financial Ministries, he founded Crown Ministries back in 1985. Therefore, Dayton has been studying Biblical financial principles for quite some time and attempting to teach them to others through the Crown bible studies and events.
What are the best parts of the book?
As I mentioned above, this book undertakes a very ambitious goal. I feel that it does, for the most part, meet that goal. This is a great introduction of God’s teachings on money, possessions, and prosperity. The book starts off by providing these statistics from the Bible:
- 16 of the 38 parables regard how to handle money and possessions
- There are approximately 500 verses about Faith
- There are approximately 500 verses about Prayer
- There are over 2350 verses about money & possessions
So, the author points out that the proper attitude and treatment of money and possessions is quite important. Why is there such an emphasis on money and possessions in the Bible, you ask? Dayton offers these three answers:
- How we handle money affects our relationship with the Lord (see Luke 16:11 )
- Possessions compete with the Lord for our focus and attention (see Matt 6:24 )
- Much of life as we currently live it revolves around the use of money
Dayton then spends the remainder of the book going through the various aspects of finances that touch us on a daily basis. For each section, he discusses the main points and provides numerous Bible references. Personally, I feel that the references are the most valuable part of the book. For the topics covered, this book provides a great starting point for personal Bible study.
The book really does cover a lot of ground, so I can’t possible summarize even a fraction of it in this review. Allow me to provide you with a glimpse of some of the interesting things I learned while reading it.
Giving
The author touches on the importance of giving and mentions that there are more Bible verses on giving than on any other individual financial topic. He points out that your attitude about giving is of crucial importance. He does not provide a set percentage that you should give, however, as he leaves that as a decision between you and God.
Working
Dayton also brings to the reader’s attention that work was designed before the fall of Adam and Eve in the Garden of Eden (Genesis 2:15 ). So, having to do work is not a result of sin, work just got a lot harder because of it.
Investing
The author advocates being a "steady plodder" when it comes to your investing strategy. He uses the quote "saving is making provision for tomorrow while debt is presumption upon tomorrow." He lays out these three important investment goals:
- Providing for your family
- Becoming financially free to serve the Lord
- Operating your business
He also stresses that it is not an acceptable investment goal to save and invest for the sole purpose of becoming very wealthy (1 Tim 6:9-11 ). His counsel is to determine the maximum amount of money you want to save and when you reach that number, stop saving and redirect the money you were investing to helping other people (kinda like those commercials where the people carry around those big orange numbers).
At the end of the book, there is a small section with some related questions (basically a FAQ), here are two questions and summarized answers that I thought were interesting:
How does the Bible define financial success?
It is achieved by being a faithful steward – not by how much wealth you have accumulated.
Should Christians give to secular charities?
There are many charities competing for our dollars and scripture does not specifically address whether we are only to give to Christian charities. The author and his wife have decided that, with some certain exceptions, they themselves will only give to Christian charities. This is mainly because, for the most part, everyone gives to secular charities but only Christians give to Christian charities.
What is not-so-good about the book?
This book covers a tremendous amount of information in a relatively short amount of time (well, I guess it depends on how fast you read). As you might imagine, there are not enough pages to go into terrible detail on each topic. As a result, your appetite is whetted but you will need to turn elsewhere if you want an exhaustive treatment on any specific topic.
Also, it is not nearly as practical or "step-by-step" as some other financial books. For instance, Dayton spends about half a page on his four step process for getting your finances in order. Dave Ramsey, in contrast, has an entire book on the subject . I feel that this book is not really trying to be that, though. The point of this book is to get you thinking about Biblical standards for money. It is to give you a primer on the main points, to maybe challenge some of the (wrong) ideas you may have about money, and to pique your interest to delve into the subject more. And in that scope, I think it performs well.
So what is my recommendation?
I think this is a good reference book to own. It has a ton of information crammed into it. In fact, it’s going onto BFN’s virtual bookshelf . I think it is a valuable read to get started on your path to understanding what God teaches about money. There are copious amounts of Bible references throughout, so it is helpful to open it up to a specific topic to see how the author summarizes the topic and start searching the Bible references provided.
As I mentioned, it’s not a practical step-by-step guide to getting out of debt or whatever. If that is what you need in your life right now, this is not the book for you. One option is to find a Crown Financial Ministries Bible study in your area – that’s actually where I received this book (you get it as part of the material for the class) – as it will provide that step-by-step process you’re looking for.
I would say that if you can do the Bible study or pick up a copy of this book at a good price, then it’s a good book to have and refer back to often.
Want to borrow this book? Search your local library
Want your own copy? Buy this book now at Amazon.com
Check out the other books I’ve chosen for my virtual bookshelf
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