Credit Karma review

This evening my friend and coworker Frank told me about Credit Karma, a site that allows you to get free credit scores. This site was apparently reviewed by the News and Observer this past weekend that explains a little more about the service but was fairly wordy as a review goes. So, here is my review:

Pros

• Free credit score, something you normally have to pay for
  
• Nice modern website look and feel
  
• Lots of clear information pertaining to your credit score, how it is determined, and what it means
  
• Uses your credit report information for targeted advertising rather than charging you
  
• Does not store your social security number and does not ask for credit card information
  
• Easy to read credit report card helps show you the areas that negatively affected your credit
  

Cons

• Advertisements for new loans, mortgages, and credit cards only account for "lower my payment" based financial situations and lacks intelligence to meet other people's goals (maximize rewards, eliminate debt, etc)
  
• Credit score simulator is missing basic things like what happens if I pay off a specific loan
  
• Credit report card lacks certain vital information. Showing you the number of accounts opened but not listing them or suggesting which to close to help your credit for example seems an obvious extension.
  
• Suggestions can really lack intelligence and you wonder what thought if any was put into it.
  

Overall the service is useful for seeing your credit score for free and I am eager to see what or how much it emails me based on activity.

Interest Rates

So, like many "homeowners" I have been watching the interest rates plummet and preparing to refinance. I finally began the process of refinancing on Tuesday when 15 year fixed rate mortgages hit between 4.25% and 4.5% locally. Heather and I are on an aggressive track to pay off our house and so we had to make sure our closing costs were as low as possible. I called many companies and here is my anecdotal occurrences with each of them:

• One of my friends had luck with Citi using our employee referral program and I contacted them. I immediately had the phone answered and they took my name and number on Tuesday. On Thursday, after having not received a callback, I called again and got someone after less than one minute on hold. They quoted me nice rates, gave me their contact information, and told me they would be available Friday and Saturday morning. When i called Friday the lady's voicemail said she was on vacation.
  
  
• Two companies never returned my calls - Wells Fargo and Chase.
  
  
• The current company who holds my mortgage, HSBC, had rates 3/8 higher (4.875) than the next highest person I contacted (4.5%) and still wanted a full origination point.
  
  
• My credit union, Coastal Federal, was the only one who came through. They had low closing costs, low rates, and gave me no hassle. You can check their rates here. They charges 1/2 pt origination, no discount points, no application fee, and I locked in a 4.5% 15 year mortgage which is a substantial savings from my current 5.875%. Overall closing costs were around $2100 which in NC seems to be a great deal.
  

Also on the interest rate front, the high interest online savings accounts are rapidly dropping their interest rates in the 2.5-3% range. My credit union has a pretty cool program called "Go Green Checking". The biggest issue I have is that who wants to put your real savings, like emergency savings and long term savings for cars, in a checking account with a card you use frequently. See, you have to use this card 12 times a month, which means you have 12 chances to get your numbers stolen. Sure, Visa says it will replace your money if stolen but reports say that this can take 2-4 weeks sometimes. This is my emergency savings, I don't know if thats secure enough for me. Thoughts?

The dream of a lake house

I was viewing a friend's pictures of their gorgeous lake lot and went down the rat-hole of looking into lakefront properties and the prices and viability of buying a lakefront home. I have been dreaming of owning a lake front property for years. It probably all started when going to my sister's in-law's house in Maine. (The picture above is from that lake house when Heather and I visited there in 2004). Heather and I also enjoyed multiple relaxing weekends in Virginia at her uncle's river house. These non-beach but very nice vacation homes have given us something to dream about for our future...

The problem is, as you know if you have been following my blog, I don't want any debt...let alone on a house we don't use frequently. Our ability to save up the money to buy a house will be near impossible in the next 10 years while meeting our other financial objectives relative to our primary residence, retirement savings, college savings, and schooling for our children.

I have to admit, the thought of waiting for 15-20 yrs to have my dream vacation home kind of stinks. Anyone else have a similar dream they are holding off on?

Will a credit freeze affect my insurance?

I am still considering whether or not we should freeze our family credit reports. Having recently sifted through a credit report, I noticed that my insurance company, Erie Insurance, checks my credit every year. I decided to surf on over to their website to see why they do this and if having a frozen credit report would affect my credit.

Erie is calling what they create with your credit report an "insurance score." They claim that they have found some correlation between people with bad credit issues and risk:

Erie Insurance uses credit information in order to help predict a policyholder or prospective policyholder’s propensity for future loss. Many independent studies have shown that there is a distinct and consistent decline in risk of loss as an insurance score improves. Therefore, the more favorable an individual’s insurance score, the less likely the policyholder is to experience a loss, and vice versa.

Erie further describes how it uses the score on another page:

When evaluating a person’s credit information to determine an insurance score, an insurer only considers those items from credit reports that are relevant to insurance loss potential. Both an insurance score and a credit score are derived from the same thing: a credit report; but they are distinctly different.

The main difference between an insurance score and a credit score is that insurance scores do not take into account a consumer’s income. Unlike a mortgage company, an insurance company is not assessing a customer’s credit-worthiness and therefore doesn’t consider income. Instead, an insurance company only considers those items on a credit report that will indicate future loss potential.

We recognize that people sometimes face difficult circumstances in their lives such as job loss, medical bills or divorce. When we consider an applicant’s insurance score, an isolated instance of a late payment will not have a significant impact on your eligibility. We are looking at long-term patterns and overall responsible use of credit.

Similarly, applicants who use cash for purchases or who don’t have established credit will not be scored negatively.

I assume then a credit freeze will lock in current credit information and move to the last line about people who use cash...therefore would not be scored negatively. Based on that, I believe a credit freeze would not negatively affect my insurance rates.

Good article on the new tax provisions in the housing bill

I finally found a good article about the new tax provisions in the big housing bill that was signed last week. Although each of the provisions targets a very select audience, I thought I would try to summarize:

1) If you are a first time home buyer (did not own a primary residence for 3 years prior to this purchase) between April 9, 2008 and July 1, 2009, you can get an interest free loan of 10% on the house up to $7,500. It comes in your next years taxes as a tax credit and must be repaid starting in the second year for 15 years. You can't make more than $95,000 for singles and $170,000 for couples and the credit is reduced for those above $75,000 and $150,000.

2) If you own a home but don't itemize your deductions and therefore take the standard deduction, you can property taxes on your home above the itemized deduction of up to $1000 for couples and $500 for individuals.

Those are the "helping" provisions. To pay for this, there is a third provision which is a tax hike. Here is a quote from the article describing that tax hike:

To pay for the new breaks, Congress adopted some revenue raisers, otherwise known as tax hikes, including one that affects homeowners. At present, taxpayers who own a vacation or rental property can begin using it as their principal residence and then sell it after two years, taking advantage of the break that excludes from income capital gains from the sale of a principal residence. The excluded amount is up to $500,000 for a couple or $250,000 for a single.

But thanks to the new law, after January 1, any time a house isn't used as a principal residence it reduces the gains eligible for exclusion on a pro rata basis. So, if a couple uses a house as a vacation or rental home for five years and then as a principal residence for five years, only half their gain will qualify for the exclusion.

If the couple has a $100,000 gain, they can only exclude $50,000 of that gain from their income. But if the same couple owns a mansion and sells at a $1 million gain, they can still claim the maximum $500,000 exclusion, because it's just half of their gain.

An odd result from a law that was supposed to help struggling, ordinary homeowners.

Well, it looks like that hurts people also that maybe haven't been able to sell their home because of the bad market. For example, if they moved from a house they lived in for 4 years and established another primary residence, and didn't sell their home for 1 year after that, they would only be able to exclude 80% of their gains regardless of the fact the last year of house taxes have been dismal. That's how I read it, but I am no tax professional. I think this is going to hurt a lot of people who already were hurt by the housing market.

SUV prices

Check this out:

Wholesale industry prices for sport utility vehicles and trucks declined nearly 25 percent during the quarter, about four times the normal depreciation expected over the period and greater than the depreciation expected over a full year, the company said.

Wow!

The ramifications of our financial decisions

I have been considering more and more the ramifications of our financial decisions. There are a couple of financial situations in my past that have rippled into other areas of my life and its interesting to try to find those today. The first time I have seen this pattern in my life was when I had bought my first house at 22 years old and was house poor. The stress from that financial decision rippled into my work life and affected my job satisfaction. For the most part, I kept it out of my relationships although I was upfront with the girl I was dating (who would later become my wife) and we dated differently then. I often cooked her dinner instead of taking her out and when it came to us getting engaged, she got a hand-me-down ring my dad gave my mom instead of a big shiny rock. (Yes, she has the big shiny rock now but she didn't get that until after we were married)

I have read a lot about how personal financial stress can affect you throughout your life. In the workplace, some examples are people unhappy with how much they are earning, not getting good results at work because they are distracted by their finances, becoming workaholics to get overtime or to ensure they keep employment. In relationships decisions are made that can negatively affect people. Some examples include people avoiding activities because they can't afford it, ruined relationships because one person is trying to mask their financial problems, and avoiding trips to see relatives and friends that you haven't seen because of the cost. There are lots of other ways this personal financial stress can eat away at your life.

Recently, I found another area that I myself have allowed a financial decision to affect relationships. I found this when considering this Sue Stock blog posting that said that CarMax claims SUVs have gone down 25% in value and she asked how our lives in SUVs have changed. I wrote the following:

Unfortunately where it hurts us the most is our trips to see friends and relatives that live further away. Our SUV is our primary kid carrying vehicle. Traveling nearby is not so painful, however when traveling to neighboring towns like Chapel Hill from North Raleigh can be a painful commute. I think we reconsider plans with friends and relatives when the trip itself will cost $20-40. What used to be a "one and a half hour each way trip" to see parents has now become a "$40 trip." Cost starts to become the largest factor rather than distance/time.

With cost now bubbling to the top, we do tend to make fewer trips and use the vehicle more sparingly.

I think that letting relationships suffer in the name of keeping our monthly gas expense down may be a bad decision. What do you think? Should we cut other areas to keep making those "$40 trips" to see relatives and friends? Or should we be locking down and cutting out excess trips?

How much of a house can you afford?

Many experts say that your mortgage payment (principal+interest+tax+insurance) should not be more than 25% of your gross income. If you listen to the likes of Dave Ramsey, that mortgage should be no more than a 15 year fixed rate. But, I was looking at what different salaries could afford (maximum) as a 30 year fixed rate under this plan:

$40,000 salary - $122,000 mortgage ($833/mo)
$60,000 salary - $183,000 mortgage ($1250/mo)
$80,000 salary - $244,000 mortgage ($1667/mo)
$100,000 salary -$305,000 mortgage ($2083/mo)

If you change it to a 15 year fixed as Dave Ramsey suggests:
$40,000 salary - $90,000 mortgage
$60,000 salary - $135,000 mortgage
$80,000 salary - $180,000 mortgage
$100,000 salary - $225,000 mortgage

The assumptions I made were that the interest rate was 6%, taxes at 1%, and I used this calculator which adds in insurance. This assumes also a 20% down mortgage with no PMI. That mortgage calculator incidentally doesn't allow you to go over 28% of your gross, which isn't that much more than the 25% rule. It also allows you to indicate other debts.

A generation who isn't prepared to sacrifice?

I met a young man on the flight back from New York yesterday who just graduated from college and was visiting his girlfriend. He lamented about whether or not he could go up there. He had a good job down south where cost of living was lower...so he also had a nice car and apartment. He feared not being able to find a job around NYC that would allow him to live so comfortably and was not ready to move. I told him that one thing I learned from my grandparents and parents is that sacrifices must be made sometimes for your priorities. If this girl was a real priority, then he can make the sacrifices to make it work. Sure, he may live in a bug infested apartment where he can touch two opposite sides of the apartment at once, but he can live there. Its all about making those decisions to sacrifice for things that are important to you in life.

I read recently but cannot find the reference now that we are a generation unprepared for sacrifice. That our generation expected to live a lifestyle similar to that of our parents while we are in our mid-20s. Our parents may have had 20 years to make it there in life, but thanks to credit and debt we can make it there tomorrow. Its like, lets say that a person in my generation needs a new coat. He/She goes to Macy's and finds one she loves. Most of the people my age would buy it and worry about paying for it later. A couple may save and wait to buy the coat, freezing their butts off in the process. Fewer of us would do what our grandparents would have done...went to Walmart or the Thrift store and bought a coat and kept our money for things more important to us...for our priorities. Now, just because you don't spend anything on clothing (lots of people I know are proud of that) doesn't mean this axiom doesn't apply to other areas of your life.

When Heather went to be a stay-at-home mom, we knew we were going to have to make sacrifices. Heather had a very well paying job at Fidelity Investments and we just wouldn't have the wiggle room we once had. We played with our budget and at one point stated the non-obvious....if it doesn't work we will start cutting to make it work. This means cable. This may mean (gasp!) cell phone. This may even mean moving to a less expensive house. Finally, it may mean we save less. Cable, cell phone, and our house were on the block before savings. Our savings represented our future as well as our children's future, and that was more important than even our house. Our house is larger than either Heather or I grew up in, by over 1000 square feet. That means its more expensive to maintain and pay for utilities. We could buy an older smaller home if we needed to and live comfortably as we did when we were children.

But thats just it with our generation. We want to have as good or better than our parents had...only not put the 10-20 years in to create that wealth. My parents lived in dumps when they first had kids. They made sacrifices consistently to keep us afloat. Some of our friends parents also have done amazing things. The most impressive I think is Heather's college roommate's parents who raised 8 kids on a teachers salary in NC. He had to pull side work to make ends meet, but he did it and his wife was able to be a stay-at-home mom for all of those kids. As a generation, we are quick to idolize those who have a lot instead of those who have sacrificed a lot. I hope I am able to teach my kids to appreciate the latter more than the former.

"Debts are easy to fix but liability is the nightmare"

I was listening to the US Open and saw a commercial I had seen a million times, but I finally picked up on what one statement was made. The little kid says, "Debts are easy to fix but liability is the nightmare." Wow, I guess it makes sense an insurance agency is trying to sell that. But, I know people who spent over 5 years trying to "fix" their debts...amazing. Check it out about 16 seconds into the commercial.

Poor Dad?

I read this blog from Sue Stock and thought, I hope my family isn't planning to spend $100 on my father's day gift. Last year my wife got me a wonderful card and some prints for my first father's day and this year I asked for a book about Daddys to read to my girls. Heather and I are pummeled with gift giving events by June with most of our immediate family's birthdays being in the first half of the year, valentines, mothers day, and our anniversary. In the end, I find myself saying my wish for father's day is not to spend anymore money!

Now, I am one of those guys who can always think of something cool to get. I love gadgets and electronic toys. For example, for my birthday this year my dad got me this cool 5 day wireless weather forecaster that takes radio signals from Accuweather and displays the current weather as well as the forecast for today and the next 4 days. It now proudly sits on my refrigerator and I look at it every day before I get my shower and dress for the day.

Although I love the toys, I feel more and like I would rather have my family pocket the money instead of spend it on non-necessities. How can I convince others to do that? I have been slowly trying, stopping or slowing Christmas presents to close friends and family so that we can both keep our money. For example, my close friend John and I used to consistently exchange the same amount in gift cards from Best Buy every Christmas. What's the point? We put a stop to that.

So, the question is how do you get your family to hold back on gifts and let you hold back to? Especially with all the weddings, baby showers, birthdays, kid's birthdays, etc that are going on in our lives? Heather has a group of like 10 friends who meet for a playgroup all of which have 2nd birthdays between now and October. If we just buy a $25 gift for each of them, thats $250! How can we politely say, I won't spend it if you won't? Especially since a lot of these same friends just bought us baby shower gifts.

To take it back to the first mentioned blog...I don't want to be "Poor Dad." I would rather slow gift giving and be rich dad! How do we stop this consumerism and save more money without insulting people?

Credit Cards Cost

Here is an article from Michelle Singletary who is a syndicated columnist whose columns are in the N&O frequently. Here is an interesting quote from it:

Peter Tufano, a professor of financial management at Harvard Business School, has found in his research that transaction credit card users -- those who pay their bills off every month and who are not overly indebted -- are more financially literate.

"Their credit card purchases are under control," Tufano said. "But that is not to say that they are spending less."

Greg Davies at Britain's Warwick University found in one study aimed at marketers that customers using credit cards spend more than those paying with cash or checks in purchasing situations that are otherwise identical in every other respect.

In the end, I understand this is generally true. But, if we would use the credit card for just something like gas and no other purchases, is that still true? I still can't buy it being true in that limited use scenario.

The advice is general, not specific

I Googled recently for Dave Ramsey's credit card study information and found lots of blogs spreading anti-Dave Ramseyisms and I realized that people just don't get it. Dave Ramsey provides general advice which can be applied to everyone. That doesn't mean every piece of advice is the best for everyone, but its good for everyone. For example, someone called in to his show a couple month's ago and asked about 529s. He admitted on the show that not all 529s are bad, but some of them are so its easy to just say avoid them all. Looking into it, I found that some states limit investment choices and charge high fees for their 529s. If you are in a state where you can invest in a mutual fund with a long track record (10-15 years) that has low fees and get a tax deduction for doing so, I believe he would say that is a good choice. But, since not all states and 529 plans are like that, its easier to suggest other investment methods when they exist and also are tax advantaged.

Other areas where I think he gives general advice are the amount to save on retirement and never to use credit cards. The amount to save for retirement he suggests is 15% (once consumer debt is paid off) of your gross income. Advice can't possibly be global like that and perfect for everyone no matter their age, salary, and family situation. So, he gives the best rule of thumb, 15%. You can calculate how much you will need for your particular lifestyle, salary, and age and probably come up with a better figure for yourself. But, if you can't figure it out, 15% of gross will probably work.

Another example is credit cards. Dave says the following:

You’re also paying more. A study by Dunn and Bradstreet showed that the credit card user spends 12 to 18% more when using credit instead of cash. After McDonald’s began taking credit cards, they found that people spent $5 to $7 more per sale.

If someone was disciplined and got a credit card purely for gas purchases making 5% cash back (instead of rewards they will never use)...I doubt they would buy 12-18% more gas just because they are using the credit card or they will buy gas from places with 12-18% higher prices than they would have with using cash or a debit card. The fact is most Americans are not this disciplined. So, a better general rule is to avoid the credit card altogether.

Would Dave agree with that? Not sure, but I believe it :-)

Opt out of pre-approved credit cards

One of the other things NoScamNC.gov suggests is to opt out of pre-approved credit cards. To do that, you can go to OptOutPrescreen.com. This means that no one will be able to pre-approve you for a card by looking at your credit report before you ask them to, known as prescreening. It won't stop the offers, just stop the pre-approved ones. They give you two options, first to opt out electronically for only 5 years or to mail in a signed piece of paper for permanent opting out. Obviously, they want you to not stay opted out which is why they require the paper to be mailed. But, fill out the permanent one and it will give you the 5 year electronic one while you file the permanent paper one.

Freeze! Or should we?

One of the looming questions regarding finances I have is whether to not to freeze our credit reports. We don't get new loans or credit cards ever really, so that wouldn't be a problem at all. So, a credit security freeze may help prevent identity theft since if someone stole our identity, they wouldn't be able to go to a company who pulls our credit report to give us a card or a loan. There are a couple outstanding issues:

1) How often will we have to unfreeze our credit report for non-debt items?
2) How much theft does this prevent? I understand there are some credit companies that don't look at credit reports.
3) Is it overall worth the $30/person to freeze the reports when we will have to also pay $10 for each temporary unfreeze.

Some of these issues are covered in this USA today article. There, Sandra says:

Many consumers are unaware of how often their credit histories are reviewed. Even if you don't plan to borrow money, you might need to suspend a credit freeze to get an insurance policy, utility service, an apartment, or even a job. If you lose your cellphone, your provider probably won't give you a new one until it verifies your credit.

I recently saw this when calling my company's HR solution to add our new baby girl. To verify my identity because I typed in my pass code incorrectly, they asked me for some information to confirm my identity which they only could have pulled from my credit report like a previous address from years ago. What would they do if my credit report was frozen? Would they deny my request to change my health care coverage?

Even when planning ahead, do you remove the freeze on all 3 reporting agencies or try to figure out which agency the company you are working with uses?

The state of North Carolina also has some good information here at their site NoScamNC.gov. They do suggest freezing your credit to protect yourself. They also have some other suggests which I thought were good recommendations.

Of the major credit reporting agencies, only one allows you to initiate a freeze online. That one provider is Experian whereas others like TransUnion and Equifax require mailed in letters. Equifax seems to be pushing you to use their monthly credit security services instead with a minimum monthly payment of $9/person.

The good news is that they all take credit cards :-)

Investment or Mortgage

I had a conversation with a friend this morning about how poorly our 401ks have faired this year. Although they are almost breaking even for the year, the market volatility had me thinking...

One of the popular questions people ask is whether it is better to push money into investments or on to your mortgage. Some financial advisers will tell you to put it into investments which will get you 8-10% while you only pay 6% on your mortgage. Others will point out the tax advantages of the interest on your mortgage, while ignoring the tax implications on your investments. Either way, working out the numbers you can make more if you assume an 8-10% return than you spend would on a 6% mortgage.

Other financial advisers, like popular anti-debt talk show host Dave Ramsey, will tell you to fully fund your 401k and Roth IRAs before paying off your mortgage. Fully funding, according to Dave Ramsey, means 15% of your gross income towards Roth IRAs and your pre-tax retirement accounts like IRAs and 401ks. At that point, he would tell you to put it towards your house debt because you wouldn't take equity out of your home to put it in the stock market, would you? The answer is, you especially wouldn't do so now.

The key is that the 8-10% return on investment is projected and you will not find guaranteed interest higher than your mortgage. The market has proven its volatility this year and you would have struggled to get over 5% back on stocks, mutual funds, through money market/savings accounts, or through CDs/bonds this year so far. Yet, most of us with mortgages have primary mortgages somewhere between 5-7% with some secondary mortgages from 7-10%. So far this year, paying off your mortgage would have been the better financial decision. In the end, paying down your house also brings more financial stability to your family and more freedom overall.

An executive who I reported to around 2004-2005 when hearing I was purchasing a house made the comment that he hopes it was a big mortgage, cause "thats how we lock in our employees." Was he joking? He said it jokingly, but there was some truth behind that joke. Many people rely on their salaries to pay their mortgages and couldn't take a pay cut. If you had your house paid off, you might be able to support your family while working a lower paying job. That helps financial stability. Also, you might be able to choose to do something you love rather than what you put up with. :-)

Finally, imagine what you can do with an extra mortgage payment in your pocket every month. Let's say you have a low mortgage payment of $1000 per month. If you could invest that over the next 10 years instead of use it to pay off your mortgage, in 10 years at 10% annual return your would have over $205,000. Try it with your mortgage numbers using this Investment Calculator.

As my friend concluded our conversation today, "That guaranteed 8% by paying down my [second] mortgage is sounding pretty good about now."

How much life insurance do you need?

I have written about this very subject in the past, but I was reading the magazine Erie insurance sends us and the Q&A section was this very question. The cynical side of me said, why would you ask an insurance agent how much life insurance you need? Insurance agents are not like brokers, they are not held by law to look out for your best interests. That means they can sell you a $10 million policy if you only need $100k. That does not mean they are all that way, but some are and a second opinion is a good idea. Otherwise, its like asking a car salesman how much you should spend on a car or a Realtor how much you can afford to spend on your home. Sure, some may answer the ways we wish they would. I have a friend who is a Realtor who would be helpful and honest. But, that doesn't mean they all will be. Anyway, the Erie insurance agent answering essentially said, talk to me or use the insurance calculator on erieinsurance.com. So, I decided to check out the insurance calculator there, on the right hand column of this page.

I think its interesting what their defaults are, but the calculator is not bad. I think that you need to carefully read each of the sections and make decisions. I wonder if insurance agents actually take you through all of these or assume the defaults? One example is the private school versus public school. The defaults say that your kids are going to private school. In the end, I actually was told that I was over insured right now. Its better than the one I linked to in the past on Smart Money. In my opinion, its also better than the Zander Insurance calculator, Zander being the company Dave Ramsey suggests you purchase term life insurance from. The Zander Insurance calculator, unlike the other two, asks you how much the person being insured makes per year and how many years the surviving spouse will need that money. The other two, in contrast, ask what the surviving spouse's annual living expenses are minus their annual income, which is more accurately what you need to insure for.

Overall, I would recommend the Erie insurance calculator. But, I would recommend that people carefully fill it out themselves instead of letting an salesman, I mean life insurance agent, do it for them.

Personal Responsibility in Finances

Listening to Dave Ramsey and watching Maxed Out have reiterated in my mind the need for personal responsibility in finances. When I was at the highest point of debt I had, it was due to my own miscalculations, stupid decisions, and lifestyle. I didn't blame the credit card companies, the car dealerships, the price of higher education in this country, or the housing market for the debt I had, but rather I accepted that it was my personal decisions that led to credit card debt, car loans, student loans, and a mortgage at an age that was entirely too young, 22 years old. I liked high tech toys and spent too much on them. I liked cars, and had two of them. I spent my earnings while in college on eating out and having fun rather than on the necessities that my student loans paid for. All of these were dumb decisions.

What's amazing is the numbers of people who do blame these other factors and are not willing to own up to their decisions. Even Maxed Out, which was an eye opening movie talking about the state of debt in the country, puts the blame squarely on the shoulders of the credit card companies for offering too much credit or to people who are too young, for credit collectors for harassing people, and to the federal government for not regulating the big businesses offering loans and credit to the people. Granted, many collectors may be the scum of the earth and I think Maxed Out proved that nicely, but if a person were not in debt in the first place, they wouldn't be coming after them.

I realize that others get in debt out of necessity. They may have lost their job or got very sick. But again, the debt wasn't the fault of the credit card companies. It probably wasn't the fault of the federal government, although I am sure there were cases where it was, but the government regulating banks lending closer would not have helped those situations often.

I think in the end a lot of consumer debt is because people are living a lifestyle they can't afford. Not all, but a lot. I just wished people took more personal responsibility in those cases.

Maxed Out - American Economy's Credit Woes

I wanted to see the documentary Maxed Out on the American Economy's Credit problems, too expensive houses, cars, way of living, and the effects it has on people. It was eye opening and worth watching. The good news is, you can apparently see it for free on Google Video here. I recommend checking it out.


Maxed Out as a documentary was very well done although I am not sure I agree 100% with the direction they took on it. They did not blame consumers or lifestyle creep as much as I think needs to be blamed. Instead, they seemed more prone to blame cost of living, the banks for offering credit and loans, and the government for not stopping the banks. For example, they point out that people have less money today than they did in the 1970s if you cost-adjust things for inflation. While that might be true, people are tending to live more lavishly than they should be as well.

As my friend Aaron said, "The system is set up for people to fail, but still, if [those people] could do basic math they should know that."

Speaking of lifestyle creep, its interesting that many of my friends tend to live in or purchase houses that are larger than those they grew up in. Are we more successful than our parents or more in debt? I think its a little bit of everything, interest rates back in the 1980s and 1990s were less, some of our parents maybe weren't as successful, now many more people do 100% financing and are more in debt, and finally I think that the new houses these days are built larger for less money but done so also with less quality.

All that said they do point out that the government debt is astonishing and needs to be taken care of, a point that a fiscal conservative such as myself wholeheartedly agrees about.

Amortization schedules show the real problem

Financial Advisors love to flaunt the power of compound interest, that is the amount of interest money can earn over time when you earn interest on the principal and interest that exists. If you look at an amortization schedule, you will see the opposite, almost a negative compound interest thing happening.

First, an example. Using an Amortization calculator and Freddie Mac's current weekly average mortgage rate of 5.85% on a 30 yr loan starting in April of let's say $150k, you will find I would pay off the first half of principal in February of 2029 making the minimum monthly payment. Thats almost 21 years to pay off $75,000 at almost $900 per month! By the end of 30 years, the total interest paid is over $168k!

While changing the principal doesn't change when you pay off half, your interest rate does. If you have a higher mortgage rate, lets say 7%...you pay off half in December of 2029. So, when you pay off your first half of your mortgage varies from about 20-22 years based on the current interest rates.

Now, in the past people have paid little to no attention to these schedules. Its because paying off principal wasn't an issue when houses were growing at 4% compounded annually. But, with the recent housing market growth slowdown, I hope that more people pay attention to it. If someone gets a 100% financed $150k house now and prices only go up 1% per year for the next 3 years and then they try to sell it, they will have paid off roughly $6.5k in principal and gained about $4.5k in value on their home. So, if they sell it at that $154,500 with a standard Realtor fee of 6%, they will pay $9,270 in Realtor fees. This will leave them with a whopping $1,730 check for paying $32,400 in mortgage payments not including PMI, homeowners, and taxes. Sure, they will also have got a small tax deduction during that time...but I think they might have been able to rent and save more money.

Just as a matter of opinion, look at your amortization schedule and consider dropping some more money into your mortgage monthly. Maybe you can pay off the first half a bit quicker than in 20 years then :-)