This is a guest post from Debt Free Hispanic over at http://www.debtfreehispanic.com. You can read more of his inspiring posts by checking out his site, or subscribing to his RSS feed here.

Remember this: Whoever sows sparingly will also reap sparingly, and whoever sows generously will also reap generously. 2 Corinthians 9:6 (NIV)

Today, I’m Debt Free Hispanic, but in 2005 I was just a Hispanic that had $20,000 of debt.

Building A FICO Score And Piling Up Debt

How did this happen?

The same way it happened to so many Americans. I fell into a trap and believed the myth that buying on credit was what wealthy people did and I wanted to be just like them. I tried so hard to rack up credit so that I wasn’t a ghost in the credit industry. It’s true, I went into a CarMax dealership to purchase a vehicle.   After putting down a large down payment  I couldn’t get a loan for the remaining balance of the car because as the guy running my credit put it, I was a “ghost” in the system.  I didn’t have enough credit history out there to show that I would pay the money back. This is called a credit rating and a FICO score. After that day I decided to buy as much as I could to bring my score up.

I figured since I was attending college and I didn’t have the finances to pay for it that I would put my school tuition from a private University on school loans through Wells Fargo and that would bring my credit rating up. I had a Mitsubishi Galant and one day after school I noticed I was missing a hubcap. Well I couldn’t drive around like that so I went to Discount Tires and bought new alloy rims and tires on credit. By this time I was $20,000 in debt and was about to finish college and was working 20hrs/week making $6/hour. This was not a fun time in my life.

Getting A Wake-Up Call

One day reality set in when my minimum payments were not paying down the balance and the opposite was happening, the balance was growing every month. During a Thanksgiving dinner my brother told me about a guy named Dave Ramsey. After listening to the show, I purchased his book on CD and listened to it within two days.  I’ve since listened to the book about 10 times and next year (2010) I will attend my 4th Total Money Makeover Live Event here in Dallas, TX.

After listening to the book for the first time, I was determined to get out of debt. I was hungry for financial discipline and for somebody to set me straight. I am also a Believer and the scriptures about the rich ruling over the poor and how the borrower is slave to the lender made me madder about debt. I told myself I was no longer going to be a slave and little by little I loosened the chains that the banks have put on me.

From then on every month I gave my wife (girlfriend at the time) a number that was the key to unlock my chains. The first number was $20,000. I sold almost everything I had on eBay, baseball jerseys, textbooks, clothes; you name it I sold it. I sold so much stuff on eBay they sent me a certificate for selling at least $2,000 consistently for 2-3 months.

The key number was getting lower and lower and I was starting to pay off my debts. $16,000 became $14,000 the next month. Then, after graduating college, I received a full-time job and with my first month of pay, I paid off $3,000. Every month I was paying off $2,000 from my school debt. Within a year I paid off $20,000 of debt. I remember emailing my wife when the key number was $0 and my chains were gone, I had been set free.

I called Wells Fargo and asked that all my accounts be closed and to send me proof in writing that they had been. Within two weeks I received 10 notes from banks saying that my accounts had been paid in full and that they were now closed.

I did it.

I became debt free and from then on, I knew I was going to change my family tree and I was going to help other people do the same.

Building Wealth And Living Debt Free

The next year I started building wealth like no other time in my life. I had four roommates and my monthly rent was $350, bills included. For a bachelor wanting to build wealth, this was very encouraging. I saved up and bought a HUD home in November 2006 and spend $4K fixing it. Two month later I bought an engagement ring and ask my girlfriend to marry me.  Her dad said he would let me marry her when the ring was paid off.   After showing him the receipt we began making wedding plans.

Today my wife is working towards a PhD in Organizational leadership and we are paying cash for her school expenses. I graduated from grad school with a Masters in Management, a degree that was paid for this time in cash. We now use cash to do whatever we want to do in life because at one point in our lives, we were living like no one else. Our story has just begun and I’m glad that my wife and I started out debt free. Her debt was only $1,000 so that was paid off right away. We each put 15% of our income in 403b’s and Roth IRA’s.

I now write about money on Debt Free Hispanic (http://www.debtfreehispanic.com). This is a blog about personal finance from a Hispanic perspective. It is in English, although many people associate the word Hispanic and assume Spanish speaking. I write about ways to save money and pay down debt. Since our income will make us wealthy, I talk about how to free it up by paying down personal debt. I am also frugal in my thinking and I like to share my ideas with my readers. I’m a Dave Ramsey fan and my wife and I were able to scream “I’M DEBT FREEEEEEEE” on his show. You can hear the call on my blog.   Click Here To Hear The MP3

Join me in becoming debt free and the good stewards that God intended us to be.

Copyright © Bible Money Matters - please visit biblemoneymatters.com for more great content.


This Blogger Fell Into The FICO Trap, But Saw The Light And Became Debt Free

This is a guest post from blogger Adam Faughn who preaches for the Lebanon Road church of Christ in Nashville, Tennessee. Married to the former Leah Moon, Adam is the dad of two children: Mary Carol is 3, and Turner is 2. Adam is also co-hosts iPreach the podcast each week. He blogs at Faughn Family Of 4

A special thank you to Bible Money Matters for letting me tell this story of our journey. Hopefully, it will help others as they seek to do God’s will with finances.

August 10, 2009 is a date that we will remember in our family for quite some time. It’s a day that some will think isn’t any big deal, but it’s a huge day in our family.

Taking Stock, And Making A Plan To Be Debt Free

In May 2007, we sat down and added up all our debt. It included a bank loan for the adoption of our daughter (good reason for some debt!), some medical debt from the birth of our son (another good thing), and our car (yuck). All told, it was just shy of $30,000.

We had been firm believers in Dave Ramsey’s Baby Steps for quite some time, and we decided to use those steps to snowball our debt away as quickly as possible. As a preacher’s family, we knew that the Bible clearly teaches that having debt isn’t a wise decision (cf. Proverbs 22:7).  We wanted to give more,  help others more, and (yes) do some fun things in the future.

On August 10, 2009, the final debt of that original amount was paid off! Along the way, we added about $4500 in medical debt, of which we still owe about $2100. We are disputing that amount with insurance, so we are continuing to pay, but we really think we will get to stop soon (and even get some money back!).

Along the way, we just decided to live on less than we make. We sold a few smaller items (totaling about $400), but our major way of paying off debt was living below our means. I drive a car that cost $800. We turned off our DirecTV package and we go “TV-less”, saving us about $75 each month) Our budget for eating out is very tiny (less than $50 each month), and we don’t splurge on presents at all.

Most of all, we are thankful that God has continued to bless us with employment and with a family that has supported us through the process. While they didn’t always understand our total focus on this, they supported us. Other young people at church also were behind us (and we will be going through Financial Peace University with many of them starting in a few weeks).

You Can Dump Your Debt Too!

Our journey has not taken as long as some others, but we are thankful to God for what He has done in our lives. We are happier in our marriage because we have done this as a team. As a preacher, I often mention money (since Jesus did), and am thankful that I was at least trying to live what I preached in that area. We are grateful that one reason it took us as long as it did to pay off our debt is that we were able to give no less than 13% of our income at any time during the journey.

Friend, you can do this! The feeling is amazing, because it’s a feeling of freedom. My wife and I have already listed our next goals, and now we know those goals are attainable.

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Debt Free Story: How Frugality, Hard Work And Determination Can Lead To Debt Freedom.

I get a lot of searches on this site from people looking for information about debt consolidation. Why do people want to consolidate their credit card debts, student loans, and medical debt all into one payment? Because oftentimes they think it is a magic wand of sorts – that it will cause all their debt problems to disappear. Unfortunately that’s not the case, and in many instances people end up making their situations worse by signing up for a debt consolidation loan.

The reason I haven’t written about debt consolidation until now is because in most instances I’m not a big fan of doing debt consolidation. Many of the debt consolidation companies that you’ll find out there really aren’t going to do much for you that you already can’t do on your own – and they’ll charge you an arm and a leg to do it. Other debt consolidation companies are just plain scammers looking to take advantage of people when they’re down.

Still, there are situations when a debt consolidation loan can be the right thing to do. Just remember to be careful and consider some important things before jumping into a debt consolidation loan.

What Is Debt Consolidation

First things first. What is debt consolidation?

Debt consolidation is when you take several debts, and consolidate them into one loan in order to take advantage of lower interest rates, lower payments or the lure of having a simplified situation and one easy payment instead of several payments. Doing a debt consolidation loan should mean that you’re moving into a better situation that is more manageable for you and your family.   Unfortunately this often isn’t the case.

Things To Remember About Debt Consolidation

When doing a debt consolidation loan there are a few important things that you need to consider.  If you don’t examine these things it may mean that you’ll make your situation worse – rather than better.

• Even with a debt consolidation, the problem still remains.  Debt: When doing a debt consolidation loan people often feel like they’ve fixed their debt problem, when in fact all they’ve done is move the debt around, and possibly improved their interest rate a little bit.   Don’t be lulled into a sense of security by doing a debt consolidation.  You haven’t truly accomplished anything until you’ve erased the debts and become debt free.
• Consolidating both high and low interest loans could mean you’ll pay more in interest:  Too often people will make their debt situation worse by doing a debt consolidation loan because they’ll lump all of their low interest debts (like student loans) in with their high interest debts (credit cards), just for the sake of having one easy payment.  Too often this means that the consolidation loan has a higher interest rate than some of the debts they’ve lumped in – and they end up paying more interest because of it.
• Consolidating your debt may mean  you’ll be in debt longer:  Often people consolidate their loans because they want to lower their total payment and make it more manageable.  That sounds great, but the problem is that this means they’ll often be in debt for a longer period of time – and for a larger sum of money.    Sure the lower payments are nice – but they come at a steep price.   Debt slavery!
• By consolidating your loans you haven’t fixed the source of the problem – overspending/undersaving:  By consolidating your debt you’re really just treating a symptom of the illness, instead of treating the illness itself.   What is the illness?  Overspending and undersaving.  According to figures that Dave Ramsey cited, a full 78% of people who consolidate their loans end up creating new debt to replace any gains they’ve made.  Change your behavior instead, put yourself on a budget, do a debt snowball and you’ll be in a much better situation.

So as you can see there are a lot of reasons that doing a debt consolidation may not be in your best interest.  Carefully consider these points before heading down this road – and make sure that you’re actually addressing the underlying issues that have gotten you into the situation in the first place.

When Should I Do A Debt Consolidation?

Are there times when doing a debt consolidation is actually a good idea?  Sure.  You  just need to make sure that you consider the points mentioned above, get yourself on a written game plan, and make sure that the debt consolidation loan is actually improving your situation instead of making it worse.    That means you aren’t lumping low and high interest loans together in a rate somewhere in the middle, you’re not extending the debt out into the future, and you’re not consolidating your debt without first getting yourself on a budget.

When can a debt consolidation loan be a good thing?  Take the situation of my good friend Matt over at DebtFreeAdventure.com.  He recently did a debt consolidation loan through Lending Club.  He took several higher interest debts, anywhere from 10.5% to 19.5% interest, and consolidated them all into a lower 9.32% loan.    He didn’t extend the length of the loan, and he has gotten his family on a written gameplan to get out of debt.  They’ve made a commitment to making more money, getting gazelle intense, and getting out of debt as fast as he can.  His consolidation has improved his situation, and in the end should be a good thing.   Unfortunately not many people are as conscientious as Matt, and just get themselves into more trouble after getting their consolidation loan.

To find out if a debt consolidation loan can improve your situation, check out a calculator like this one found on MSN Money Central: Debt Consolidation Calculator

So What Other Options Do I Have?

There are a host of other options out there when it comes to getting rid of debt.  Personally my preferred debt elimination method is the debt snowball through Dave Ramsey’s total money makeover program.  You can read about Ramsey’s 7 Baby Steps to debt freedom on this site  – as well as his Financial Peace University class that we took.  If you don’t care to read the whole series of posts, here’s a quick look at how the debt snowball works.

1. Put all your debts in order from the smallest balance to the largest.
2. After your necessities are paid, pay the minimum payments on all of your debts.
3. Put any surplus money towards paying off the smallest debt first.
4. Pay off your smallest debt, get a psychological boost from knowing you’re one step closer to being debt free!
5. Once the smallest debt is paid off you roll the money you were paying on that debt over to the next largest debt.
6. Wash, rinse, repeat until all your debts are paid off!

While paying off debts many people will choose to take on part time jobs temporarily to create new income – so that they can get out of debt that much faster.   When they are disciplined and create a written game plan most people are able to get rid of their debt within 12-24 months.   You can too!

Want a free debt snowball calculator spreadsheet?  Here’s a good one: Debt Snowball Calculator

What do you think about debt consolidation?  Is it something you would consider doing?  If you have done a consolidation, did it improve your situation? Were you able to get rid of your obligations and become debt free?  What steps have you taken to improve your spending and saving habits? Let us know your thoughts in the comments.

Copyright © Bible Money Matters - please visit biblemoneymatters.com for more great content.


Should I Do A Debt Consolidation Loan? Important Things To Consider Before You Do.

If you’re thinking of signing up for a Lending Club account, please check out the referral code and affiliate link at the bottom to get a $25 cash bonus if you sign up using our referral code!

Peer to peer lending has been a hot topic on personal finance blogs for the last year or so. Lots of people are promoting it as a good way to make decent returns on  your money – even in a tough economy like we’re in (Some might argue that it’s because of the hard times we’re in that it’s becoming a better way to make good interest on your money).

I have stayed out of the social lending market because up until recently my wife and I were still building up 3-6 months of expenses in our emergency fund (actually we’re closer to 8 months, we’re a bit more conservative than some), and we didn’t really have a lot of extra money to put into things Lending Club or Prosper.

We’ve finally completed our 8 months of expenses, and since we now have a little bit extra discretionary income, I thought I would sign up to use one of the more popular person to person lending services, Lending Club.

The Idea Behind Peer-To-Peer Lending

For those of you who aren’t familiar with P-2-P lending, here is a quick primer of how it works.   Sites like Lending Club bring together a large network of borrowers and investors.   As an investor/lender you can choose to invest as little as $25 with one borrower, or if you want to invest a larger sum you can spread out your money between a larger number of loans.  (You can lend a large amount to one borrower, but it isn’t suggested.  Better to diversify your holdings. )  As a borrower you can get a loan for up to $25,000 and have that amount lent to you from many different sources.   P-2-P lending may allow people who might otherwise not be able to get a traditional bank loan to still fund their business, consolidate debt, or fund a wedding – all while getting a lower interest rate than they might have at a bank or on their credit card.

Peer-to-peer lending isn’t without it’s downside – and as with many traditional loans there are going to be plenty of people that default on their loans, and don’t repay.  So you need to take that into account when choosing the loans you want to fund, and looking at the higher interest rates on riskier loans.  The higher the interest rate that you’ll receive, the more risk you’ll take on.  Also, Lending Club and other P-2-P sites are not available in all states.

Signing Up For Lending Club

I chose to sign up for Lending Club as my first foray into P-2-P lending because it has a pretty good reputation in the blogosphere, and elsewhere.  They also successfully registered with the SEC  in 2008, which has given them even more credibility.


Signing up for the Lending Club was a simple process, although it will take you a few days from signing up until you can actually begin lending.   Here are the steps to sign up.

1. Go to Lending Club web site
2. Click on Join Now link at the top right of the screen and complete the application to be a borrower or investor on the screen that comes up. If signing up as an investor don’t forget to use the referral code below for $50 free!
3. You should receive a confirmation email, in which you’ll need to click on a link to confirm your registration.
4. Go back to the Lending Club website and login with your new login info.
5. Click on the Invest button.  Fill in  your  profile information in order to verify who you are, and to link your bank account to Lending Club. (Lending Club will make two small deposits into your account to verify that you have access to the account).
6. Once your bank account is verified, go to the My Account tab, and then choose Add Funds.  You’ll need to transfer at least $25 to your Lending Club account in order to get started.  This may take a few days.
7. From My Account tab, click on Invest to start lending money

Once you’ve finished to process above, you’ll be ready to start lending money.  This is the fun part – lending money, and making a bit of money in return.

Lending Money With Lending Club

Lending money using Lending Club is actually kind of fun. You get to read about people’s situation, find out why they’re taking out a loan, and then see if they are in fact a good credit risk.   I decided to look mainly at loans that were from borrowers with good credit scores, verified income, and what I considered good reasons for taking out a loan (I’m usually against taking on new debt of most kinds, so I didn’t want to fund loans unless they were for people bettering their debt situation, and trying to get out of debt).   Since I’m just testing the waters, I decided to invest $100 for now.  If I’m happy with the returns and borrower repayment I’ll consider investing more in the future.

Originally I was planning on investing my money with my friend Matt over at DebtFreeAdventure.com who is currently repaying a Lending Club loan to consolidate a couple of higher interest credit cards and an auto loan.  Unfortunately (for me) his loan was completely funded before my deposit was credited to my LC account.  So I had to find other loans to fund.  To find borrowers to fund just do the following:

1. Click on the Invest tab at the top of the page.
2. Enter how much you would like to invest with each loan.
3. Hit the Run LendingMatch button to match your lending amount to borrowers.
4. If you would like you can increase the amount of risky loans you are willing to take on (and the interest you can make) using the slider on the page.
5. When you are done hit the Next button and it will bring back a list of matching loans for you to invest in, based upon your risk tolerance that you’ve selected.
6. If you prefer to select loans manually, you can also do that by selecting the Browse Notes link at the top of the page (this is what I chose to do).

Since I was investing with Lending Club for the first time I decided to manually select the notes that I would be investing in.  I didn’t want to invest in anything that sounded overly risky, or to invest with anyone that sounded like they weren’t very responsible.  Since I am only investing $100 to start, it didn’t take me very long to find 4 notes to invest $25 in, with people who had good credit scores, and who were either in the A or B credit rating.

Once you have your notes selected you just click on the Invest button, and then confirm your purchase order for those loans, and those amounts.  Piece of cake.

Now, I just have to sit back and watch the interest pile up!

Sign Up For Lending Club And Get $25 Free Cash!

I’m going to be charting my experience with Lending Club here on the blog, so stay tuned.  If you’ve been thinking about signing up for an account, now is the perfect time.  If you register for a new investor account and enter the Bible Money Matters referral code, you’ll get $25 in your lender account – for free!

When registering online for your new investor account, type in this referral code to get $25 in cash!:  moneymatters

OK.  Ready to sign Up For Lending Club And Start Investing?

Click Here To Sign Up Now

(yes, that is an affiliate link. thanks for signing up through me!)

More Social Lending Resources

• Lending Club: My Review of Social Lending (From A Borrower’s Perspective)
• Intro to Peer To Peer Lending
• How Is Your Lending Club Account Doing?
• P2P Lending Update
• 3 Years of Peer-2-Peer Lending

Have you entered into the peer-to-peer lending arena as a borrower or investor?  What has been your experience?  Are you finding that you’re making a decent return, or have you run into a situation where people are defaulting on their loans?  Let us know your experience in the comments!

Copyright © Bible Money Matters - please visit biblemoneymatters.com for more great content.


Introduction To Peer-To-Peer Lending: Signing Up To Use Lending Club

It is better that you should not vow than that you should vow and not pay – Ecclesiastes 5:5

In this day and age it seems to have become more and more common for people to live above their means, and to use credit and debt to increase their lifestyle. Instead of saving up for things and paying cash, they buy today and pay the consequences tomorrow. In fact, many people buy things knowing full well that they won’t be able to pay, or that they will most likely will default.

This verse speaks to me about the importance of living up to your obligations. Whether it is continuing to pay the mortgage on a house that you’re underwater in (because you signed that contract saying you would pay), or paying off the credit card debt you racked up on your last vacation, it is important to live up to the promises that you’ve made to others.

Have the integrity to follow through on what you’ve said you would do. If you know you aren’t able to afford something, it is better that you never take out the loan in the first place. Don’t fall vicitim to the mentality that it’s ok to wrack up debt, and then not pay.

Are there times that you wished you had heeded this advice, and not have taken out a loan you shouldn’t have? What did you learn from that experience? Tell us about it in the comments!

Copyright © Bible Money Matters - please visit biblemoneymatters.com for more great content.


Personal Finance Bible Verse Of The Day: Not Paying Your Debts

If you’ve been reading this blog for any period of time, you probably know that I’m not a huge fan of credit cards.  As a Dave Ramsey fan and facilitator for his Financial Peace University class, you’d probably understand why.  In general I think that using debt and credit are just poor ways to get ahead.

I’ve also talked about how Credit Card companies often do things that are unethical, and how they won’t look out for your best interests.  Sometimes they’ll even do things that are downright illegal!  Needless to say, in many respects the credit card industry is in need of some increased regulation.  It looks like that may be happening.

Credit Card Accountability, Responsibility and Disclosure Act (CARD) of 2009

On May 22nd, 2009 Barack Obama signed new legislation into law called the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (Credit CARD Act).  The bill looks to put some limits on what the credit card companies can do in regards to charging fees, upping interest rates,and in theory forces them to be more transparent with customers.  Many believe it will significantly change the face of the credit card industry.   Some of the major provisions include:

• Requires credit card companies to give cardholders 45 days advance notice of an increase in interest rates.
• Prohibits credit card companies from increasing interest rates retroactively on existing balances unless the cardholder is more than 60 days late in making a payment. If the cardholder pays on time for the following six months, the company will have to restore the original rate.
• Prohibits credit card companies from marketing and issuing cards to borrowers under the age of 21.
• Requires balances with higher interest rates to be paid first, instead of lower interest first as many companies do now.
• Permits consumers to set credit limits lower than the limit offered by the credit card company.
• Requires that statements be mailed out at least 21 days before payment is due.

Most of the provisions in the bill will not take effect for another 9 months (February 2010), others slightly longer.

The full language of the bill is available to view here: CARD Act

A Good Idea Or Not? Could There Be Unintended Consequences?

Not everyone is hot on the idea of this credit card legislation saying that it could hurt the industry, and have the unintended consequence of hurting those it is trying to help.  From the Washington Times:

“When you start restricting the price banks can charge to customers, they are going to start cutting back their lending,” said Erik Benrud, finance professor at Drexel University in Philadelphia.

“If the banks know they can’t raise rates on existing balances, that too will restrict their desire to make loans to certain groups,” he said.

In essence he’s saying that the people who might be helped by the provisions in the bill would actually be harmed because they wouldn’t be able to get credit in the first place, or as another person mentioned, the cost of higher risk borrowers would be transferred to responsible borrowers through higher interest rates and fees for everyone.  It could also mean fewer rewards programs.

Consumer advocates disagree that the bill will hurt as some industry experts have mentioned.

“You mean, if they can’t rip us off they are going to give us less credit?” said Gail Hillebrand, financial services campaign manager at Consumers Union. “We’ve been hearing that argument for a long time.

“I don’t think they’re going to give us less credit, but if they can’t rip us off, that’s a good thing,” she said.

Others went on to say that the argument that all borrowers will pay higher interest rates is a moot point – as many responsible borrowers are already seeing rate increases or added fees for no reason other than the companies are trying to make up for losses in other areas.

Personally I can see the law having some unintended consequences, and I fully expect that the credit card companies could in fact restrict access to credit, raise interest rates for all borrowers and cut rewards programs significantly.  We shall see if that actually  happens.

Conclusion

The credit card legislation really isn’t a big issue for me as i don’t use credit very often, and when I do it gets paid off right away (with cash I already have saved).  For borrowers that are responsible and pay off balances quickly, the provisions in this bill will probably have limited effect.

For those that carry a balance from month to month this bill will most likely give some added stability and transparency to their credit card relationships, and keep the companies from completely taking advantage of them.

Personally the only reservations I have about this legislation is that once again it means the government is getting way too involved in another industry, and they’re on their way to controlling pretty much every aspect of our financial lives.  I’d much prefer the free markets take their course, and that the government instead stress personal financial responsibility for average Americans, and help to make credit card use a thing of the past! (yeah right)

What do you think of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD)?  do you think it’s a good idea?  Do you think it will have unintended consequences? Let us know what you think in the comments!

What Others Are Saying

• Credit Card Reform Disputed
• Credit Card Legislation – Winners and Losers
• Credit Card Act Of 2009
• New Credit Card Legislation
• Problems With Credit Card Reform
• Credit Cardholders’ Bill of Rights Act of 2009
• What’s Your Take On The Credit Card Act?

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New Legislation Will Bring Changes To The Credit Card Industry

I was listening to the Dave Ramsey show on my way to work this morning, and Dave was talking to a caller on his show that had just taken the plunge, pledged to go no further into debt and then cut up his credit cards.   He was talking about how it had been extremely hard for him to get out those scissors, and actually cut up the cards, they had just been sitting on his desk for like a week.  The problem was that he had become emotionally invested in his credit card.  Cutting up that card was like saying goodbye to an old friend.

Why Do We Become So Attached To Our  Credit Cards?

There are a lot of reasons why we find it so hard to just get rid of the credit cards, and start living a cash-only lifestyle.  

• Credit cards  help us to create fun and be spontaneous:   It was fun to buy that new big screen TV for the Super Bowl party wasn’t it?  Of course you had to pay off that TV over a few months at 18% interest, but still!
• Credit cards give us a sense of security: It’s nice to know that you have a safety net there in case something were to happen.  Engine goes out?  Don’t worry, credit card to the rescue!  Never mind the fact that setting up an emergency fund would fill the exact same purpose, and not put you into so much debt!
• Credit cards reward us for spending our money:  Hey, we’re going to spend the money anyway, why not get rewarded for all that spending we do?  Problem is, a  2006 survey by GMAC Mortgage and Harris Interactive found that more than 41 percent of reward cardholders either rarely or never even bother to use their rewards.  Add to that the fact that people who use credit cards actually spend up to 18% more than those who use cash, you’re probably spending 12-18% more to get a 1% cash back check!  Does that make sense?
• The credit card company is helping me:  You’ve probably seen all those commercials lately where the credit card companies talk about how they’re helping you to “spend responsibly” and how their credit card bills are just  as good as setting up a budget.   The thing is, they never discourage spending – they just help you figure out where you’re spending so you can spend it in other areas. Remember, the credit card companies are not your friend, and they didn’t become huge multi-billion dollar companies by being “helping” people.
• Credit cards help us be nostalgic:  For some of the cards that you’ve had for the longest amount of time, just taking it out of the wallet can remind you of a simpler time – when you were in college going out with friends.  Or going out on that first date with your spouse – paying with this credit card.    Don’t worry – you won’t lose those memories just by cutting up your old friend – the credit card!

Becoming Emotionally Invested In A Credit Card Is Silly

Instead of becoming all emotionally invested in your credit card because of the things it can provide, try changing things up and living cash only.  You’ll find it much more emotionally satisfying than your relationship with your credit card.  Think of it this way.  The credit card is the one night stand that gives you an STD.  It might be fun for that one night, but you’ll be paying the consequences for a long time.  Saving up and paying cash is much more rewarding.  It’s like an emotionally satisfying relationship with a loved one that always pays dividends, even when times are tough.  

So how can you replace your credit card without feeling that sense of loss?

• Set up an emergency fund:  Set up an emergency fund of 3-6 months of expenses, and you’ll have an even better sense of security than a credit card can give you.
• Set up a fun money category in your budget:  You can be fun and spontaneous without a credit card!  Set up a category in your budget of discretionary money that you can blow or spend at the drop of a hat.   Fun money that you won’t have to pay 18% interest on!
• Reward yourself for NOT spending:  Set up your first budget and reward yourself reaching savings goals.   No need to spend 12-18% more to get those rewards!
• Help yourself:  Instead of  relying on the credit card bill to show you where you’re spending money, set up your own budget and figure it out on your own!
• Reminisce on your own: You don’t need an inanimate object like a credit card to remind you of the good times.  Just call up a loved one and they’ll be happy to reminisce with you!

Just Say Goodbye To Your Credit Card

Don’t become emotionally invested in that credit card.  While it may seem like it’s hard to say goodbye, destroying that card and cancelling that account will be more fun that you could have realized.

Check out this video of how one creative guy destroyed his credit card!

Have you ever found yourself emotionally invested in your credit card – finding it hard to say goodbye? Tell us about it in the comments?

Copyright © Bible Money Matters - please visit biblemoneymatters.com for more great content.


Are You Emotionally Invested In Your Credit Card?

I’ve noticed lately that the credit card companies are using a new tactic (or at least new to me).  They’re doing things for cardholders that on the surface appear to be helpful in order to make you think that they’re on your side.  They’re you’re friend, and they’re here to help you!

I’ve seen a Discover Card commercial lately where they talk about how we should all use their card because they can help you identify problem spending areas.    By using your credit card, you’re getting a built in easy to do budget and spending tracker!   Budgets are a great idea, but usually are only helpful if you’re the one doing it, and you have a handle on where your money is going.  Most of the time people who are relying on their credit card as their spending tracker are the same ones who have a hard time using a credit card responsibly.

I was opening my mail last night when I found a nice little ad touting the benefits of my Chase Rewards credit card. It was titled:

Here Are 5 Tips To Help You Make The Most Of Every Dollar

(along with a scan of the title):

Wow, isn’t that nice of them?  They’re trying to help me make the most of my money, and in fact, they want to give me free money!  The credit card companies care about helping me save (yeah right)!   Here’s how they plan to help me:

1. Use Your Card Wherever You Go: 1% cash back on all eligible purchases!  No purchase too small! Get cash back on that bag of Doritos you just bought on credit!  Never mind the fact that when you use a credit card you’re very likely to spend more than if you had just paid cash.  There is just something about using cash that hurts more.  Dun and Bradstreet found that on average people end up spending 12-18% more when using a credit card! By way of example, when McDonald’s started taking credit cards for purchases, the average purchase went from $4.50 up to $7.00!  NPR had a  show a while back about why people spend more when using credit. Listen here.
2. Make Chase Rewards Plus Your Favorite Place To Shop:  Get up to 10% bonus cash when you shop at Chase’s online shopping portal!  Hey you were going to buy that basket of fine wine and cheese anyway, right? You may as well save 10% on it too!  While you’re at it buy that pair of new shoes, and that Wii game!   Are they really trying to save me money, or just buy more stuff that I don’t need?
3. Pay Bills Using Your Card:  You’re paying everything else on your credit card, right? You may as well start paying your bills on your credit card too!    You don’t want to miss a payment and get your water turned off do you? Budgeting for regular expenses is for suckers when you can just pay it on credit, and save!
4. Add An Authorized User… At No Extra Cost!:  Adding an authorized user to an account is usually a bad idea (there is reason why they can’t get their own account), and a good way to run up your credit card bills.  Hardly making the most of your every dollar!  This one should be filed under “ways to start going into debt even quicker“.  Shouldn’t adding an authorized user be free anyway?  In fact, they should be paying us to add an authorized user!
5. Feel Secure With Your Upgraded Benefits:  Here’s where they throw in some nice features like price protection, identity theft insurance, rental car insurance, theft and damage protection, extended warranties, etc.   The problem is that most people, even when they’re aware of the extra coverages, never actually use them!   They’re nice features, but not usually something that you’re going to use.  Often,  when you do want to use the extra coverage, the eligibility is defined very narrowly, and you may not be able to make  a claim anyway.  If you do use these features make sure that you know the fine print in case you do end up needing them.

Out of all of those, the only one that really makes any sense to me is the using the extra warranty coverage or theft coverage, but even those benefits are minimal when you take into account the added risk you’re taking on by using the credit cards.  The rest of the company’s ways to “help you make the most of your money” are actually just ways they’re getting you to spend more money with them.  The more you spend, the more they make in interest!

A lot of people think that they can pull one over on the credit card companies, and get ahead by taking advantage of all the cash back schemes and money back cards.  When it comes down to it, though, most won’t win this way.    Credit card companies aren’t stupid, they do these cash back cards for a reason.  These cards make them more money by encouraging debt, and by encouraging the normalization of the use of credit.  When people use rewards and cash back cards, they end up spending more money, and often these cards have higher interest rates wiping out any gains they might have made.

In the past people wouldn’t even dream of using credit for small purchases.  But today we think nothing of using credit cards for everything from a pack of gum to a flat screen TV.  The more we spend  on the cards, the more the credit card companies make.

So next time you get one of those friendly ads that are telling you how to save money, be wary.  The credit card companies are not your friend, they just want your money.

Copyright © Bible Money Matters - please visit biblemoneymatters.com for more great content.


Tip: The Credit Card Companies Are Not Your Friend, They Just Want Your Money

Last time we looked at Baby Step 1, saving up an emergency fund of $1000.  You’re saving up that money for a variety of reasons, but mainly because you know you’re going to have little “emergencies” popping up all the time, and the baby emergency fund will help keep you from going further into the hole while you’re on the way to paying down debt.  As a review once again, here are the 7 Baby Steps.

Dave Ramsey’s 7 Baby Steps

• Step 1 – $1,000 to start an Emergency Fund
• Step 2 – Pay off all debt using the Debt Snowball
• Step 3 – 3 to 6 months of expenses in savings
• Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement
• Step 5 - College funding for children
• Step 6 – Pay off home early
• Step 7 – Build wealth and give!

Baby Step 2: Pay Off All Debt Using The Debt Snowball

Now that you’ve got your $1000 emergency fund saved, it’s time to move on to step 2, paying off all your debts using the debt snowball.  This step could easily be one of the longest in your 7 baby steps.  If you’re  dealing with a lot of debt from school loans, car loans, credit card debt and other things you may be in baby step 2 for a couple years or more.  If you only have a few small debts, you can be out of baby step 2 a bit quicker.  Remember, the key here is that you are paying off your debts – because it is the right thing to do. You made those obligations, and you need to stick by them.  Bankruptcy should only be entered into in a worse case scenario – and you’re probably not there.

The wicked borroweth, and payeth not again: but the righteous showeth mercy, and giveth.   Psalm 37:21

So how does the Debt Snowball work?  First things first – if you have done your quickie budget as we talked about last time, you’ll probably have a good idea of where you’re now standing in relation to your income, expenses and debts.    If you haven’t done that yet, take the opportunity to do it now!  Download your quickie budget from Dave Ramsey’s site here.

Once you’ve got all of your income, expenses and debt listed, follow these steps to get rid of your non-mortgage debt. (Mortgage debt is paid off separately in another baby step, so exclude it for now)

The Debt Snowball:

• Put all your debts in order from the smallest balance to the largest.
• After your necessities are paid, pay the minimum payments on all of your debts.
• Put any surplus money towards paying off the smallest debt first.
• Pay off your smallest debt, get a psychological boost from knowing you’re one step closer to being debt free!
• Once the smallest debt is paid off you roll the money you were paying on that debt over to the next largest debt.
• Wash, rinse, repeat until all your debts are paid off!

Pretty simple, right?

Controversy Surrounding The Debt Snowball

Over the past few years there has been quite a bit of controversy surrounding the debt snowball.  The reason?  There are those that say that Dave Ramsey is bad at math and that the debt snowball isn’t the best mathematical way to get out of debt.   They say if you were to do it the BEST way, it would be to list your debts in order from the highest interest, to the lowest interest.   Once they’re in order you pay the minimums, and put any extra money towards the highest interest debt.   Some have called this the debt avalanche.

Mathematically their way IS the best way to get out of debt.  Dave Ramsey has even admitted that the debt snowball isn’t the best  mathematical way to get out of debt.  But he still pushes it as the BEST way to get out of debt. The reason Ramsey believes the debt snowball is still better is because it takes into account the psychology of debt reduction.

His theory is that since you’re paying the smaller debts off first you’re getting a series of “quick wins” that give you that psychological boost  you need in order to keep you motivated and keep you paying down your debts.  The problem with paying the debts another way is that you don’t get that psychological boost from the quick wins.  Too often you’ll end up burning out and giving up on debt reduction.

The debt snowball is more sustainable, and gives you the best chance of succeeding.   You may end up paying a little bit more interest, but they’ve found that you’re more likely to actually succeed in paying off your debts with the debt snowball.

I obviously come down on the side of the debt snowball in most cases.   I know there are those that will still prefer to use the debt avalanche or another similar hybrid debt repayment scheme.  The important part to me is that you take control of your finances and start getting out of debt.  Whether it is the debt snowball, the debt avalanche or some other  method, just get started on getting out of debt.  Whatever works for you!

As Dave Ramsey says, “You can’t go wrong getting out of debt“.

Keys To Not Going Into New Debt, And Paying Off The Old

If your debt snowball is going to be effective, you need to make sure you don’t go into new debt, and continue paying down the old. Here are a few ways you can do that.

1. Quit borrowing more money.  No new debt!
2. Cut up credit cards, and become credit card free.  I know it may feel weird at first, but it’s freeing!
3. Sell stuff. You have more than you need or use, so sell it and put the money towards debt!
4. Get an extra part time job. Take side jobs and earn extra income to accelerate paying off your debts.  You won’t be doing these jobs forever, they can be temporary.

Get serious about paying off your debts, and take any extra money you have coming in, and put it towards your debts. You’ll have them paid off in no time!

Next Up:  Baby Step 3 – 3-6 Months Of Expenses In Savings

Next time we’ll be looking at what you do after getting all your consumer debt paid off.   (Hint: You’ll be saving up for a really rainy day by putting away 3-6 months of expenses!)

What’s your opinion of the debt snowball?  Have you used it – or another system – to get out of debt?  Tell us about it in the comments.

Copyright © Bible Money Matters - please visit biblemoneymatters.com for more great content.


Dave Ramsey’s 7 Baby Steps: Step 2 – Pay Off All Debt Using The Debt Snowball

I’ve been writing about personal finance for just over a year now.   During that time I’ve written a lot of about Dave Ramsey and his class “Financial Peace University“,  but I realized that I’ve never written in depth about his 7 baby steps plan to getting your finances in order and on track.  So today I’ll be starting a series of posts about his system that I’d like to call “Dave Ramsey’s 7 Baby Steps By The Numbers”.  In this series I’ll be going over the 7 baby steps in depth, talking about each one and going over what you need to do to achieve each step.

So first of all,  who is Dave Ramsey, and what are the 7 Baby Steps? Dave Ramsey is a personal money management expert, radio talk show host and TV personality who over the years has helped thousands of people become debt free and change their financial lives forever.   He gives no-nonsense advice to folks who have gotten in over their heads, and helps them to find their way out, in a responsible way.  If you’re afraid of hard work, you may want to look elsewhere for your advice.

In addition to his best selling books and radio and tv shows Ramsey also teaches “Financial Peace University” at huge live events, and the 7 Baby Steps are an offshoot of the FPU class.

So what are the 7 Baby Steps?

Dave Ramsey’s 7 Baby Steps

• Step 1 – $1,000 to start an Emergency Fund: Before you even get started on the rest of the plan, you need to save up a little bit of cash just in case small emergencies happen.  Things like flat tires, doctor visits, and flying somewhere for a funeral will usually be covered by this small emergency fund.
• Step 2 – Pay off all debt using the Debt Snowball:  You list your debts from smallest to largest.  Pay the minimums on all of your debts.   With any leftover money you may have you pay extra on your smallest debt until it is paid off.  You then roll that amount over to the next smallest debt.
• Step 3 – 3 to 6 months of expenses in savings:  Save up 3-6 months of expenses in case of extreme misfortune like a job loss, illness or other long term problem.
• Step 4 – Invest 15% of household income into Roth IRAs and pre-tax retirement:  Save for your retirement.
• Step 5 - College funding for children: After saving for retirement you can save for your children’s education and college expenses.
• Step 6 – Pay off home early:  Make extra payments on the mortgage to pay it off early.
• Step 7 – Build wealth and give! (Invest in mutual funds and real estate):  Continue building wealth through mutual funds and real estate, and give, give give!

So those are the 7 Baby Steps.  Pretty simple, yet effective.  Even though it may seem like common sense to a lot of people, a lot of times people just don’t think about doing these things if they haven’t actually been  told how to do them.  So let’s get started.

Baby Step 0:  Getting Started, Making A Decision To Change

Before I even get into the 7 Baby Steps, I think it’s important to start out by talking about just how key it is that you sit down, talk with your significant other (if you have one), and actually make a decision that you want to change.

A lot of people talk about how to change, but never touch on the fact that if you or your spouse isn’t ready to change, it isn’t going to happen.  You have to want to change.

I know for my wife and I there wasn’t one moment where we decided that we wanted to change, it was just a gradual realization that we weren’t spending our money as wisely as we should, that we were accepting too much debt as a part of our financial plan, and that we craved the freedom of not carrying any kind of debt.  We wanted to be free!

Getting to the point where you want to change might mean that you’ve hit bottom and declared bankruptcy, or it might just mean that you’re sick of not saving enough towards retirement. It’s a different point for  everyone.   But when you get there you’ll know.

No More Debt

Once you’ve made a decision to change, you need to be able to begin the change immediately and make a decision as a family that you aren’t going to incur any more consumer debt. Credit cards and home equity lines of credit are off limits now. No more high interest auto loans! If you want a new TV or a new kitchen countertops, you’re going to have to save for them.  No more store credit cards to buy clothing at ridiculous interest rates!

Cut up your credit cards, and draw a line in the sand. No more debt!

photo credit: SqueakyMarmot

My wife and I used to use our credit cards in a variety of ways.  We would use them to pay for vacations because we wouldn’t plan ahead and save up for them in advance.   We’d use them as a safety net for our household, instead of saving up a cash emergency fund.    If we needed new furniture we would just finance it at the store, and pay it off over time.   Once we made a decision to change, we realized that we couldn’t do that any more.  We had to make a life change.  Using the 7 Baby Steps we were able to make a change in the way we looked at money, and in the process change our lives for the better.

Prepare Yourself

When you’re starting on the road to financial freedom you need to brace yourself and realize that it isn’t always going to be easy getting out of debt and building wealth.   There will be bumps along the road, and there will be times that you’ll want to quit.  Your family and friends may even think you’re a bit odd for all the “strange things” you’re doing – like not using credit cards, not incurring debts to buy nice cars or not upgrading your house.  You’ll seem abnormal, but that’s ok.  Normal is being broke.  Being debt free and financially sound IS strange.  So you want to be strange.

Make a commitment today to simplify, and get started on the road to financial freedom!  Join with me, won’t you?

Next in our series, baby step 1,  “$1,000 to start an Emergency Fund“! In my opinion, this step is one of the most important, so don’t miss it!

Have you made a decision to make a change in your financial life?  What steps have you taken to prepare yourself for this change?

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Dave Ramsey’s 7 Baby Steps By The Numbers: Getting Started