Episode 21: The Wealth On Any Income Book – Section II – Step 3: Good Debt vs Bad Debt – Transcript
Hi Folks, Welcome to the Wealth On Any Income podcast. This is where we talk about money tips, techniques, attitudes, information and provide inspiration. I’m your host, Rennie Gabriel.
In the previous episodes I spoke about your five year financial goal and how to work with other people to achieve your goals.
Today, you will hear about some attitudes that can get in your way about money, like confusion over bad debt versus good debt, and how good debt can support you to create wealth.
As I read, I could stumble over some words. I am not a professional voice over actor so please forgive me if that happens.
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Step 3: Recognize Good Debt from Bad Debt
Bad Debt
How did this problem (or challenge) begin of so many people having nearly nothing after 40 years of work? We’ve already seen how you’ve not been taught in school or by your parents to handle money effectively. So, maybe the banks can help. Do you remember when you opened your first checking account how the new accounts person showed you how to balance it? No?
How about when you got your first credit card? Didn’t the bank explain how to use it wisely? Didn’t they warn you not to abuse it? Didn’t they tell you that debt was easier to get into than out of? You don’t remember that? Probably because it never happened.
Maybe under hypnosis we can create a memory for you, and you can make believe you were told those things and then feel guilty because you think you’re too stupid to do what they said. Not likely. Of the thousands of people I’ve spoken to, fewer than 10% were given any kind of financial education.
It’s more likely you get items in the mail encouraging you to abuse your credit card, with suggestions such as buying your groceries, getting frequent flyer miles and discounts on a new car. Or touting contests in which each charge becomes a game entry with only one winner. Bank of America ran a contest like this in 1995. Each time someone used their card, it was another entry into the contest and the winner got their balance paid in full. Well, what about everyone else? What about the tens of thousands who ran up their credit limits? You know who got stuck paying that off, don’t you?
The people I met in my workshops and those who bought my materials were all smart enough to know how to balance a checkbook and understand the risks of debt when it was explained to them. Anyway, who says you have to personally balance your checking account? I don’t do mine. My bookkeeper can do it better and three times faster than me. So, she does it. I just write down what she needs. If you don’t want to do it, you can find someone else to do it. I’m just suggesting you get it done.
An inability to handle debt is one of the major roadblocks to creating financial freedom or Complete Financial Choice®. So, how did this problem of credit abuse start? In the early 60s credit cards came into common use with Bank of America Visa cards as one of the pioneers. As I said, no instructions were provided, no warnings other than small print, and using credit was glamorized.
Let’s say you just left home to start out on your own or you just got married or re-married. You want to furnish an apartment and you go shopping at various department stores. It doesn’t matter which one, because the way they finance merchandise is very similar. The following is an example for a furniture sale from a department store advertisement. You’re a smart shopper and wait until furniture is on sale before you buy. You pick out a dining set with a retail sale price of $599, and with the sales tax it totals $648. The advertisement offers the opportunity to pay only $12 A Month*. Now you tell me which is more attractive, $648 or $12 per month? The * next to the monthly payment in the advertisement directs you to the finance charges.
Make believe department stores are charitable organizations and they decide not to charge interest. How long would it take to pay off the furniture at $12 per month? Most people don’t take the few moments necessary to figure this out. It would be 54 months, or 4.5 years. However, this is without interest. Department stores are not charitable institutions; they are businesses, and just like any other business they have to pay rent, utilities, salaries, and shipping fees whether someone comes in and buys something or not. They deserve to make a profit. If businesses don’t make a profit they couldn’t stay open, and then you would have nowhere to purchase furniture, groceries or anything else.
Well, they do charge interest; in California it’s about 21.6%. It does vary from state to state, but that’s the rate in most states. The others range from 18–21%. Generally, most department stores that are still in business, like Macy’s, are at that same level or higher. It’s easy to see if you carry a balance and pay over an extended period of time, you could pay less interest with a Visa or MasterCard than using a department store card.
Adding in the interest, your payments will last a little longer. Want to guess how much longer? Do you think it would go from 4.5 years to 7 or 10 years? Wrong! At 21.6% interest your payments would stretch out for more than 17 years! At $12 per month, if you had a four-year-old child they could be done with college before you paid off the furniture, providing the furniture lasted that long. Your $12 per month payments for 205 months totals $2,460.
With a sale price of $600, if you purchased it on credit you would have paid $2,460. That’s about 400% of retail! (2,460 ÷ 600 = 4 times retail).
Have you heard of the book Buying Retail Is Stupid by King, Newmark and Cunningham? In that book, they list stores all over California where you can “get it wholesale.” So, let me ask you—if paying retail is stupid, what is it when you pay 400% of retail?
If we look at finance charges from another angle, it would be the additional profit the store earns. If most stores purchase merchandise for half of what they sell it for, then our $600 dining set costs the store $300. Again, the profit is used to pay rent, salaries, utilities and more, and there’s no guarantee they will sell each item they buy. When you pay for an item in full, whether you pay cash or write a check, the store will have a 100% gross profit, or $300 in my example. However, if you finance the purchase as I’ve shown, the store would have a profit of $2,160. This is an increase in profit to 720%. Now, you tell me: Does a store want you to buy something and pay in full, or finance it? That’s right, they don’t care what you buy, as long as you finance it. The profit is in financing, not the retail sales. If you don’t believe me, look at the annual report of Sears, or any other public department store.
If you’re carrying a balance on your credit cards and you make minimum payments, you could be paying 180-400% for whatever you purchased. Actually, if you allow the payment to reduce as the balance declines, which is the way minimum payments work, you could pay even more. If you saw an item you wanted on sale for 25% less, and you didn’t have the money to buy it right then, don’t put it on a credit card and make minimum payments. You would be better off to save up and pay the full price. Full price would only be 100% of retail. Paying it off on time even at the reduced price could be 150% or more of retail.
Think about it. You go out for dinner and spend $30, and charge it. First, you just spent plenty for someone else to prepare the food. Second, by the next morning your body has processed it and you dispose of the waste. Third, if you have a balance on your card and you make a minimum payment, you’ll now spend 15 or 20 months paying for the meal you disposed of the next morning. Does this make sense to you?
What are the attitudes that caused this mess? First, many people viewed their credit limit as an increase in income. It’s not income, it’s debt.
Second, Madison Avenue is not your ally in creating financial independence. Advertisers do not want you to keep your money; they want you to spend it. And, they’re going to tell you how. They want you to be their pawn. There are plenty of people who want to live well off your money. There’s a reason the United States is a consumer society. Advertisers want you to consume. The definition of the word consume is to use up, waste, squander, destroy totally and ravage. This is how Madison Avenue advertisers view you. Not as a consumer, but as someone who wastes, squanders and destroys.
I’m not one to propose conspiracy theories. In an article in the Los Angeles Times in 1996, it was reported that John L. Mitchell and Sam Fullwood III had done research into American politics and history. They concluded that people who feel powerless in society also suspect that grand forces control their lives. It leads to the type of violent actions taken by the Ku Klux Klan, or those responsible for the Oklahoma City bombing. Those who feel they have some power in their own lives give greater credence to the role of the individuals shaping both history and their own destiny. This led to the kinds of actions taken by Ghandi in having the British leave India, Martin Luther King, Jr. moving our nation to a greater level of equality, or Golda Meir becoming one of the first women leaders of a nation. You have to choose for yourself whether you feel you have the ability to alter your own circumstances or your life is controlled and dominated by grand forces. Beware of the methods used to market consumer goods, services, and even money. Despite what you hear in an advertisement, you still have the power to choose to buy or not buy, to believe what you are told or not to believe it.
When you look at what your neighbors are doing, your extended family members, the people you work with, or even the people you go to for advice, you’ll see they’ve bought into a system that will have them be wage slaves for the rest of their lives. They’ve been sold the idea then can buy now and pay later. They can have any car they want, furniture, clothing, vacations, or homes on low easy monthly payments. You’re even encouraged to use a credit card to charge meals in a restaurant and groceries at the store. Discover calls it ‘Smart Money.’ How is it smart to pay 200% to 300% of retail?
If you look closely, you’ll see that most people handle money in a way that obligates them to make payments to finance companies, department stores, or other creditors for the rest of their lives, and they think there’s no way off the treadmill or, worse yet, this is the way to live the good life. They’re trapped in their job or career because of the monthly payments that have to be made month-in and month-out, year-in and year-out. Retirement is unrealistic. And, my talking about financial independence is not only a dream, it’s a cruel joke. Stop listening to people who have bought into a system that is designed to have you work the rest of your life for financial institutions. It doesn’t have to be that way, and I’ll show you how to end the cycle of debt and create financial independence or Complete Financial Choice®.
Dahlstrom & Company did a survey to find out the top three recreational activities for people in the United States. Do you know the game “Family Feud” where 100 people surveyed provide the answers? I think that’s how this survey was conducted. The number three recreational activity was “shopping.” The number two activity was “watch TV.” And, the number one recreational activity was “do nothing.” Please don’t ask me how this is done. I haven’t met anyone who knows. I can just imagine myself saying, “Honey, I’m done watching TV. I think I’ll go do nothing now.”
Well, if you’re involved in the number two activity, watching TV, what do you see every 10–15 minutes? Commercials to encourage you to go out and buy something, whereby you partake in the number three leading activity, “shopping.” Or, let’s say you watch the Home Shopping Network. You can do the recreational activities “TV” and “shopping” at the same time; telephone in one hand and credit card in the other. Would you define this as a fulfilling life? I hope not.
Finally, even the credit issuers abuse our language and twist it to induce you to finance everything you purchase. In 1996, the Los Angeles Times reported GE Credit was going to tack on a $25 fee to people who pay off their balances promptly. In the article, it states the credit industry considers these people “freeloaders” or “deadbeats.” Can you imagine that? If you handle money responsibly by paying off your balance in full each month, you’re considered a freeloader or deadbeat. Take into consideration, whether you pay interest or not, every time you use a credit card the merchant is charged a fee, but apparently that’s not enough. If this is how the credit industry views you, then your goal should be to be a freeloader and a deadbeat. This is how advertisers and credit issuers twist the language to influence you to do what is in their best interest, not in your best interest.
A cartoon called “Real Life Adventures” by Wise and Aldrich shows someone reading his mail. He received a letter from a credit issuer that is translated to read as follows:
Congratulations! Because you have no discipline, and are the kind of person who runs up charges and then spends the rest of your life making the minimum payment at usurious interest rates without so much as a peep complaint, and are gullible enough to think this computer-generated fawning letter somehow elevates your status as a person, you’ve been pre-approved for the Garbank bronze rewards card!
This is another reason for the credit card mess. It’s the opportunity to hide our low self-esteem. This was one of the areas where I saw myself. Let’s say I realized I needed some help with budgeting, so I go to the bookstore and I find a helpful book for $3. I open my wallet to find I only have $2. So, I return to the shelf and see what other books could help. I then walk back to the register and charge $30 worth of books to avoid the embarrassment of trying to charge $3.
Some people need to look like a big shot, and that’s how they create credit card debt. Again, this deals with low self-esteem. In the early 1980s, my father-in-law and his wife would invite us out to dinner and pay on his credit card. At the time my wife would turn to me and ask, “Do you think my dad can afford this?” I would offer to pay but he wouldn’t accept it. We didn’t think he could afford it and we were right. When he died, his wife sold off everything they owned, including their home, and she was still left with $25,000 of debts! Then she had to go move in with one of her other children. Is this any way for someone to live in their golden years?
If you’re dealing with credit problems, you’re not alone. 120 million Americans have credit cards. On average, they have 10 cards each. Seven out of ten people (72%) carry a balance from one month to the next. I’m telling you that about one out of four people who charge something on their credit card can pay the balance in full when the statement arrives. One in six pays late, has missed a payment or exceeded their limit. One in ten, or 12 million people, can only make the minimum payment. More than 6 million people can’t even make their minimum payments. We’re talking about a payment of 2–3% of the balance owed. One in twenty can’t even do that. This book will allow you to get off the hamster wheel of credit card use. If you want financial freedom or Complete Financial Choice®, this is one of the first areas to change your habits, and I’ll show you how.
Good Debt
Be aware, not all debt is bad. When someone deposits money in the bank, they are loaning money to the bank. The bank uses the money they’ve borrowed from you to make a loan to someone else. The bank is using good debt. They’ve borrowed from your at one rate to turn around and make a loan at a higher rate. (This is called the spread). They make money on the difference in rates. They did not borrow the money to purchase some consumer item or a meal which the next day will turn into . . . well, you know. The bank borrowed money to make money. This is called good debt. Don’t get carried away; buying stocks on margin, or borrowing on your home to go into business may or may not be good debt for you. I borrowed money to buy apartment buildings. This is an example of how you can use good debt to create wealth.
Excessive debt comes from wanting—and deciding to get everything—now! Debt obligates your future income, it’s expensive, and the interest payments work against you. It easily leads to overspending. You have probably experienced getting into debt is much easier than getting out of debt.
Know Your Credit Score
It’s no secret that maintaining good credit is valuable. What you may be unaware of is how many organizations access and use your credit information to make decisions. In addition to those you would expect to check on you like a credit card issuer, department store, mortgage lender or car dealer - it can be a new employer, life or auto insurance company or prospective landlord. Why would a life or auto insurance company care about your credit score, especially if you’re not financing anything with them? Some companies feel if you’re responsible in how you handle your credit, you will be responsible in how you live your life and drive your car. An employer can expect that if you pay your credit cards on time, you may show up for work on time and also be responsible there. From these situations, you can understand how much others see your good credit as a reflection of who you are as a person. And, you can create a good impression if you choose to focus on it.
One of the primary areas of credit scoring is in the housing industry, from selling homes to renting apartments, and the use of a FICO score. FICO stands for Fair Isaac Company. This is the company that developed and keeps the top secret scoring system. FICO uses different models and adjusts the score depending on various factors such as low or high credit balances, the number of late payments, a bankruptcy, or the length of time you’ve had certain credit cards. Fair Isaac is a third party company that provides the score to a potential lender. The lender does not calculate the score, but uses it to establish a borrower’s credit worthiness. You can get more information at their Web page, www.fairisaac.com .
The top FICO score is 850, and a score of 720 is very good and would allow the potential borrower to qualify for A or A+ quality loans, which would have the lowest interest rates and most favorable terms. When I updated my book in 2017, mortgage rates of 4-5% were common. As I read this in 2020, there are 2-3% loans to stimulate the economy due to the Covid-19 Pandemic. A person with a 720 score would qualify for those low rates. If the score was around 650, they could qualify for B- or a B+ loan and the interest rate could be 1-2% higher. With a score of 580–620, a borrower might be in the C range and find the interest rate offered is 5% higher, or maybe no loan would be offered. In addition, the loan fees are also higher.
When buying a house, besides the money a borrower would pay for obtaining a credit check, getting title insurance, paying escrow charges and appraisal fees, there is an additional cost to get most mortgage loan. Points. Points refer to the cost of purchasing a loan. One point represents 1% of the loan balance. On a $100,000 loan this would be $1,000 to purchase the loan. If a credit score puts someone in the B or C range, the points could rise to 4, meaning $4,000 to purchase the same loan. Other fees could increase from $275 to process the same paperwork for a typical A borrower to $650 for a B or C borrower.
After all these costs and fees are paid, there is a nasty little practice many lenders have. It is primarily from lenders who have provided loans to people with less than stellar credit; they DO NOT report good payment history to any credit bureau. If they have a customer paying 10% interest on a loan for several years, with each payment made right on time, they keep this a secret. Why? Because they don’t want other lenders soliciting to this customer who might refinance somewhere else because they now qualify for a lower interest rate loan. They want to unfairly keep this customer and the extra profit they earn because the customer is paying 10%. For the lender, just a 3% higher interest rate on a $100,000 mortgage loan amounts to an additional $90,000 of profit!
In 2008 the banking industry went into a near collapse due to the practice of lending money to people when it was likely they would have difficulty repaying their loans. Property values dropped below the outstanding loan amounts, payments rose and people by the thousands defaulted on their loans.
This book will support you in the process of handling money effectively and improving your credit score. You can also seek the support and assistance of Consumer Credit Counseling Service. They are a member of the National Foundation of Consumer Credit, a federally approved counseling agency, and have an office in almost every major city across the United States. Stay away from credit agencies that charge fees for their services, which often do not have your interest in mind. Why pay for services you can get for free, which may also be more reputable?
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Here’s your opportunity to grow: Review your credit card statements to see how much interest you’re paying if you don’t pay the balances off in full each month.
In the next episode we’ll look at the six roadblocks to financial freedom, or creating Complete Financial Choice® in your life.
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Until next week, be prosperous. Bye, bye for now.
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