Credit Challenges

<div class='quotetop'>QUOTE(pogo @ Oct 17 2006, 05:13 PM) [snapback]334159[/snapback]</div>

Hi Pogo,

You are counting the cycle period from statement due date to statement due date, but the credit card companies set up like this (approximately):

Day 1 - 28 -- cycle
Day 29 - 50 -- interest free grace period on balance if prior statement balance paid in full by *its* grace period

Day 26 -- balance reported to credit agencies
Day 29 -- statement mailed, in the mailbox around Day 34

 

<div class='quotetop'>QUOTE(Mystery Squid @ Oct 17 2006, 04:49 PM) [snapback]334147[/snapback]</div>

"on an individual level yes, I agree, especially if you ONLY transfer"

That's what I am saying. Anyone can do it; it is perfectly legal. Just takes discipline (I hope that includes me!)

<div class='quotetop'>QUOTE(pogo @ Oct 17 2006, 05:32 PM) [snapback]334175[/snapback]</div>

When I buy a car, I intend to keep it for 10 to 15 years. I have a Tercel that is 11 years old with 150,000 miles still running like new. To change cars every 2 or 3 years is very expensive.

 

<div class='quotetop'>QUOTE(daniel @ Oct 17 2006, 05:48 PM) [snapback]334183[/snapback]</div>

"The stress you impose on yourself when you go into debt, vs the peace of mind when you owe nothing."

Stress is a relative thing, and not necessarily bad. Too much causes illness, but too little causes terminal boredom.

If someone will lend you - say $20,000 for 12 months at zero percent interest and inflation is 4%, then at the end of that year you have gained 4% of 20,000, or $800. The lender has lost $800. You are better off borrowing than using your own money by exactly $800. That would pay for a nice dinner in Manhattan.
But if you would rather not have someone give you $800 - -

 

<div class='quotetop'>QUOTE(daniel @ Oct 17 2006, 04:48 PM) [snapback]334183[/snapback]</div>

NOOOOO! Have you ever *heard* anyone learning the oboe? I agree that it's a beautiful instrument when played well, but there are *no* mediocre oboe players. Oboe players start out as atrocious, remain that way for some period of time (usually measured in years), and one day there is a mystical transformation te excellent. Some never acheive this transformation. Are we really willing to risk that? Is avoidance of credit really worth the risk of loss of any ability to appreciate music due to overdose of squeaks, squawks, and other unpleasant sound exposure?

 

<div class='quotetop'>QUOTE(7lions @ Oct 18 2006, 10:53 AM) [snapback]334428[/snapback]</div>

Excellent first post!

We did go the keyboard route, buying a Yamaha keyboard for about $250.00 It is a lot of fun, but not a real piano.
The sound is smooth, but lacks the resonance of a real piano and the touch is completely lacking. You need the weight of real keys, real wood. As for the oboe, I suspect it is like the violin in that you will sound terrible until you get quite good. The piano sounds good even if you can't play (like me).

 

The other *major* problem with the whole credit game is that the
agencies and providers care not one whit for anyone's privacy, and
the whole thing is indexed by SSN [like they're not supposed to].
This encourages any chump-change merchant to say "I need your social
for a credit check" and unfortunately, most people just fork up
without even thinking about it. Said merchant pays no attention to
their own data security, so off goes yet one more SSN to the many
underworld bodies that accumulate such things, and that's why
identity theft is such a huge problem these days. Credit bureaus
play on peoples' instant-gratification weakness and then turn around
and place them at serious risk, all the while never telling them
how this vaunted "score" is actually derived or actually holding
merchants to even minimal security standards. It's a *mess*.
.
_H*

 

<div class='quotetop'>QUOTE(jared2 @ Oct 18 2006, 10:01 AM) [snapback]334434[/snapback]</div>

Thanks! Been lurking for a few hours (my wife and I just bought our Prius yesterday) but couldn't resist. I have a brother who attempted the oboe for a few years. Luckily, I was already out of the house by then!

An interesting, but only semi-related anecdote:

I once had a voice teacher who purchased a new grand piano for her home using a home-improvement loan. As it happens, merely having a grand piano (not an upright or spinet, mind you) in your home at the time that it is appraised and.or shown, with no implication whatsoever that it will stay after you leave the house, boosts the value of the house by approximately the value of the piano. At least, that was the case back in 1997, when this occured. So you can actually plan on recouping the cost of the piano at the time of the sale, and you get to keep the piano. Hence, mortgage lenders are (were?) willing to loan you money at mortgage rates to buy the thing! I wasn't sure to be amused or outraged at the fact that a buyer's (and appraiser's) perception can be skewed so easily...

Also, a comment about student loans, which were also raised up as a harbinger of doom in this thread. Yes, it is unfortunate that students often leave college with a small house worth of debt. However, you'd have a hard time convincing me that student loans aren't a good idea. Here's my logic (based on my own personal case):

I went to school to study music on a full scholarship, but eventually realized that wasn't what I wanted to do with my life, so I switched over to Aerospace Engineering at another school. What I didn't know is that transfer students, no matter how excellent, receive pretty much diddle in terms of merit scholarships. So student loans it was, along with other need-based grants, and a few paltry private scholarahips. At the end of the day, I emerged into the workforce with a Bachelor's degree and about $50k in student debt. Sounds scary, huh? Not really. With my degree, I net about 20k more (at entry-level) than anything I could have done without it (and I worked for a while in fairly decently-paying non-degree jobs while I was establishing residency for the second school). Monthly, that breaks down to ~$1667 in additional income thanks to the degree. Compare that with my loan payment, which once consolidated and extended to a 20-year term, amounts to ~$285/month. Even if I had to make that payment in perpetuity, it would still be well worth it for the net gain of ~$1400/month. Add on that with the degree, I can advance much further than without, and the story is only going to get better.

I'm sure that at this point, lots of folks are panicking about a 20-year term right out of college. Don't - here's why: The interest rate on student loans is less than inflation! In my case, the loans are at 3.85%. If I recall correctly, federal inflation is around 2.8%, but independent studies suggest that for the goods that middle-class folks buy, it's more like 5-7%. This higher range is also backed up by the high yields of money-market funds at the moment. So there's no benefit to paying that student loan down any faster than I have to - it's only getting cheaper as I go!

I'm not advocating irresponsibility with credit, but provided you choose a reasonably marketable field, student loans are a no-brainer. Would I be better off if I didn't have to make that payment but still had the degree? Sure! But TANSTAFL! If you want an education, you've got to pay for it somehow. If your parents or the college can't/won't do it for you, you've got to take care of it yourself! Unfortunately, even state schools are expensive enough that you really can't "work your way through school" anymore, unless you're willing to take a *very* long time to do it. Student loans offer a basically interest-free loan to finance your education, allowing a much larger economic payoff in the long run.

And so help me, nobody better tell me that my parents should have done a better job of providing for my education. My parents did a spectacular job - they spent the time and gave the encouragement that allowed me to become the kind of student that gets a full scholarship! I took it upon myself to change fields, forgoing that benefit. And in any case, college happens when you are an adult, and I really feel that taking responsibility for your own actions and expenses is a very big part of adulthood. I know I valued my education a lot more and applied myself a lot harder when I knew that I was going to pay for it!

Anyway, I strongly believe that the student loan system is a responsible way to make sure that young people have an opportunity to get an education without placing an undue burden on anyone. So don't knock it until you take a long, hard, look at it. The only major problem with the federal system of financial aid is that it's getting very tough to finance an education on their current maximum limits. The amount that a student can borrow per semester is not keeping up with the cost of attending school in many places...

Incidentally, because of the federal system of allowing forebearance on student loans, your student debt is usually not taken into consideration when a bank determines whether to finance you for a house, car, etc. Because it is so simple to suspend payments for a time (though interest may accrue during that period), student loans don't really don't make you more leveraged, the way a mortgage or other loan does.

Of course, all this applies to the federal system of loans, not the thinly-masked consumer loans that pass for "private student loans". Those have car-loan interest rates at a minimum, and don't have nearly as generous a system for forbearances.

Wow, that was a long rant! :blink: My apologies...

 

small comment: my car loan interest rate is 1.25% lower than my federal student loan rate.

 

<div class='quotetop'>QUOTE(galaxee @ Oct 18 2006, 11:25 AM) [snapback]334507[/snapback]</div>

That's a pretty killer rate - I'm assuming it was some sort of promotional rate? Normally car loans are prime+a bit...

Right?

 

car loan: 5.24
student loan: 6.49

so. you tell me...

fortunately i paid mostly saved-up cash for tuition and owe far more on the car than on the student loans. the bad news is that my loans are unsubsidized (long story) so i'm responsible for the interest.

 

Ahh - I misunderstood. I thought you were saying your car loan rate was 1.25%, which would be seriously sweet. Now I see your point - nice rate on the car, but I guess student loan rates have climbed a bit since I exited student life and consolidated.



Even at 6-7%, I sould gladly have borrowed the money for school, though. I might not have refinanced to 20 years, though.

 

"I once had a voice teacher who purchased a new grand piano for her home using a home-improvement loan. As it happens, merely having a grand piano (not an upright or spinet, mind you) in your home at the time that it is appraised and.or shown, with no implication whatsoever that it will stay after you leave the house, boosts the value of the house by approximately the value of the piano."

That's assuming you have room for one. A grand piano would take up our entire living room. Those things are enormous.

 

Interesting topic. Credit is something that is really misunderstood. Its a sort of neccessary evil, but as long as you're careful it really does more for you than you realize.

My comments are going to go towards those members who advocate never buying anything on credit. This is a shortsighted approach, and actually hurts your overall financial profile. Buying on credit does not mean "buying something before you can afford it", at least it shouldn't mean that. Credit is a financial management tool, and people who are fiscally savvy buy things on credit all the time despite the fact that they can pay cash for them simply because the cash they would use to purchase those things can be put to higher use. Cars are a great example.

Okay, nobody stone me...

If you keep a car less than 5 years you should lease, not buy or finance. The amount of value a new car looses in the first 3-5 years is staggering. Lets say someone purchases a $30,000 car. What is it worth after 3 years? 55%? Thats an overall loss of $13,500 over 3 years, or $4,500 a year. If the same car were leased at a $425 payment, the total cost of driving the car for 3 years would be $15300, or $5,100 a year. At first glance paying cash seems to be $600 a year cheaper right? Ask yourself this, if you hadn't used that $30,000 cash to buy the car, what would it be doing? Do you think its reasonable to assume that $30,000 may be able to earn you $600 a year or more if they were properly invested? If you can write off a vehicle as a business expense, then it makes paying cash even crazier vs leasing. You can make a similar argument for financing vs paying cash, provided the cash used to purchase the car nets you more than the interest you're paying on the loan.

How about a house? I had a client a few months ago that bought a $900,000 house. She had just gotten remarried and she and her husband had sold houses to where they had more than enough to buy the house outright for cash. Instead of paying cash, they put 20% down and financed it with a 10/1 Interest Only ARM. Why did they do that? Because paying cash would have made no sense for them and here's why.

They plan t live in the house for 7 years until they retire, at which point they will sell it and move down south. Since they both still earn incomes, high incomes, they have a signifcant tax liability. One of the best ways to offset that liability is what? You guessed it, tax deductible mortgage interest. Why a 10/1 interest only ARM? because in the first 10 years of a normal 30 year amortizing loan very little principal is paid, and principal is not tax deductible. The interest only loan maximizes their ROI because it keeps the payment low and affords them the maximum deduction. Why 20% down? Because that gets you the best rate. They invested the windfalls from their home sales and also earn money in dividends from that, so all in all their making MUCH more money than they would be buying the house outright.

For them, paying cash for the house made no sense. In fact owning a house outright, or having more than 20% equity makes no sense for MOST homeowners, providing they pay income taxes.

Also, never using credit means you don't have any, meaning you pay more for insurance and have difficulties securing utilities without deposits, etc. You simply MUST have credit in modern America.

I think people who feel all credit is evil confuse credit with credit cards. Credit cards are evil and insidious, credit when used wisely is a huge asset to your financial picture.

 

Interesting post. You make a lot of good points. When you mentioned house downpayments:
"Why 20% down? Because that gets you the best rate." you forgot to mention the best reason for putting 20% down - to avoid Private Mortgage Insurance. As for credit cards being evil, again, it depends on how well you control them. If you can get zero percent interest for 12 months, wouldn't you be crazy to turn it down?

 

It is true, and a bit or irony, that 'good credit history' is a common surrogate for TRUSTWORTHY, RESPONSIBLE, AND REASONABLE.

btw, another good reason to put down 20% for a house in addition to avoiding PMI is avoiding escrow. If the home is paid in full at purchase, that blarney known as title insurance can be striked out as well.

Arguments that mortgages are good because of tax deductions are true some of the time, depending how much itemized deductions exceed the standard deduction.

I'm not arguing against mortgages per se (altough I do not have one), only against blanket statements for or against, even when the question is restricted to what leaves more money in one's pocket in the end.

 

"If the home is paid in full at purchase, that blarney known as title insurance can be striked out as well."

Damn! If I had only had $500,000 in cash when I bought my house. No rich parents for me, unfortunately.

 

<div class='quotetop'>QUOTE(EricGo @ Oct 19 2006, 09:02 AM) [snapback]335071[/snapback]</div>

It seems foolish to buy a house without escrow or title insurance. The latter protects you should it turn out that the seller did not have clear title, and the former assures that title is actually delivered to the buyer and the money is actually delivered to the seller.
<div class='quotetop'>QUOTE(jared2 @ Oct 19 2006, 09:08 AM) [snapback]335073[/snapback]</div>

When I was house-shopping I looked at a really beautiful half-million-dollar house, but instead bought a perfectly adequate and very comfortable home for $168,000, allowing me to pay cash. While I did not avoid title insurance or escrow, as Eric suggests, I did avoid the tedious and time-consuming process of applying for a mortgage. I think it was 10 days or two weeks from the time I put down my earnest money until the day I moved in, and some of that was waiting for the movers.

Of course, I benefit from my intense aversion to big cities. I suppose my house would have cost ten times as much in L.A. or N.Y.

 

<div class='quotetop'>QUOTE(daniel @ Oct 19 2006, 05:56 PM) [snapback]335269[/snapback]</div>

My understanding is different.

Escrow is an account you put money into, so that a third party may pay home taxes and insurance. You are talking about 'closing' Daniel, which often takes place at a title company, but it can happen at a lawyer's office for a couple hundred dollars just as easy -- and does, in more enlightened states. And in the latter case, the lawyer represents *your* interests, unlike the title company, which represents the lender, if anybody other than themselves. I closed on one home, and found an error during signing. No one in the room except me cared less -- it was not their problem.

Regarding Title Insurance: Due diligence was performed by the title company the first time the house was sold; every time after that, it is just a bit of paperwork for the title insurance company, yet the fees stay the same. Consider, that from the issuer's perspective the major risk of faulty title isn't from the last owner or the one before that, or before that .. but from legal challenges related to land grants, native Indian lands etc. Yet the system is set up so that a home kept for 50 years by one owner pays title insurance once, while the same home that exchanges hands 10 times during that period is charged 10 times as much. I've seen data on principal payouts for the title insurance industry -- it is around a penny on the dollar. If I find a link I'll post it.

It is a legal scam. There is one state, Iowa I think, that has taken Title Insurance out of the hands of private industry, and administers it through the state for a fraction of the cost -- even though we all know the state office is going to be quite a bit less efficient that a private one.

Addendum, taken from Wikipedia: ---------------
Industry profitability

The title insurance industry is a profitable one. In 2003, according to ALTA, the industry paid out about $662 million in claims, about 4.3% percent of the $15.7 billion taken in as premiums. By comparison, the boiler insurance industry, which like title insurance requires an emphasis on inspections and risk analysis, pays 25% of its premiums in claims.

Comparing claims with premiums tells only part of the story, since, for example, title insurance companies have marketing expenses not incurred by the boiler insurance industry. But the industry's profitability is also hinted at by the repeated instances of state regulators uncovering cases where title insurers have engaged in illegal marketing tactics. Although owners are free to shop around for title insurance, many owners defer such decisions to lenders or real estate agents, and title insurance companies have sometimes used illegal tactics in marketing to those decision-makers. Illegal tactics noted in a CNN/Money article include kickbacks, free vacations, and the free use of office space and equipment. The article noted that in 2005 alone over a dozen title insurers settled with regulators for tens of millions of dollars over these practices.

Further evidence of the industry's profitability can be found by comparing the title insurance costs in the 49 states where such insurance is issued with the costs associated with the state-run Title Guaranty Program in Iowa, where title insurance is illegal. The program is run by the Iowa Finance Authority. It costs $110 for up to $500,000 in coverage in the state; after adding costs for the services of an abstractor (who does the research on the property) and the legal fees, such a title guaranty costs about $400.00, versus the $1,100.00 paid for that same home in other states (based on figures cited by the Iowa Bar Association).
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<div class='quotetop'>QUOTE(daniel @ Oct 19 2006, 05:56 PM) [snapback]335269[/snapback]</div>

It does depend where you live. As they say, "location, location, location". I live in a small ranch house (1,600 square feet) in an excellent school district in Suffolk county that was appraised at $525,000. The average house in my area is $800,000 to well over a million. I know people paying property tax of $16,000 a year. A quarter acre lot on my street just sold for $400,000 - a lot, no house. It is the land that is expensive, not the house. In fact, people will often buy a house and tear it down to build a new one. As for closing costs, I think we paid well over $15,000 in closing costs in 2004. To buy even a small house here, you need a down payment of $100,000 and at least $100,000 in annual income. Long Island is one of the most expensive places in the country, but it is like that in many parts of California as well.

Why live here? Good jobs, excellent schools, proximity to New York City, beaches, and many other reasons.

 

Eric:

Title insurance also covers you if the previous owner got into some kind of trouble and a lien was placed on the property. When I bought my previous house, in ND, the house was on a quarter-section of land under one title. The farmer carved out 4 acres with the house on it to sell to me, but there were issues regarding the legality of doing that which had to be cleared up, and which delayed the transaction. I believe there was a government farm loan on the land, which caused the difficulty. Title insurance covered me in case it turned out later that this had not been done properly.

I bought my present house, through a realtor, from the son of the elderly owners. Title insurance covers me in the unlikely event that the son didn't really have the authority to sell the house. In both cases the amount was very small, and assures that I really own my home.

My understanding is that escrow is specifically an account into which a seller deposits the title to a property, and the buyer deposits the money. When everything is in order, title is turned over to the buyer, and the money is turned over to the seller. Historically, I believe banks usually performed this service, but now I gather other institutions may do so as well. I believe it was some kind of law office that did it in the case of my house.

Jared:

Like I said, I consider myself lucky that I don't want to live in a big city, where property values are so inflated. My sister I believe paid around half a million for a house a quarter or a third the size of mine, and not in nearly as good a condition, and last I heard my step-sister wanted a house priced at well over a million. Both live in big cities. Neither would ever consider living in a small town. I benefit economically from my preferences.