The program itself started out by revealing the history of how credit card companies positioned themselves to take advantage of a lack of regulation in some states. They then went on to discuss how the companies then came to exploit the lack of regulation to take care advantage of the consumer/borrower (told you they were biased…but then again so am I).  I’m not going to suck the life out of you with the intricacies if the credit card business here today but I will say the more I pay attention to the business the more I wonder, aside from the stock holders, who is really benefiting from their practices. The one thing I found surprising was how many ex-credit card industry professionals came out to speak against industry practices.  

Now I’m not here to completely bad mouth these guys but it does reinforce to me why I choose to find other options than credit cards. Remember these consumers, including myself, signed up for this ride and if you don’t understand the contract maybe you shouldn’t be so quick to sign on the line. I am personally a share holder in several banks through my mutual funds so I love it that people several million people can’t control themselves almost to the point of bankruptcy then manage to fight their way back through 30% interest rates and late fees then immediately jump back on board for another trip. To that I say….YEEHAW boys! Let’s ride these hogs all the way to retirement on the backs of out of control consumers trying like hell to save the embarrassment of a low credit score! Keep it up suckers, daddy needs a new Maserati!   

So if you have 40-ish minutes of your life you won’t regret spending on the couch and you have an odd fascination with money, business & credit click here: FRONTLINE: Secret History of the Credit Card or even better read my Credit Card Debate page to learn how you don’t have to ever deal with them if you don’t want to.

The first reason is because this simplifies my life greatly in several ways. One I don’t have the stress of debt hanging over me every minute of every day. Second I don’t have many bills to keep track of and pay every month (I currently pay 8 bills each month and half of those are deducted automatically).

The second reason is the big one for me. Taking debts out of the equation means my income is no longer being used to support those debts. Not paying these payments means my income is now free to invest, spend & save. When debt is sucking your income out of your hands as fast (or faster) than you earn it you cripple yourself. You spend your energy and, more importantly, your time trying to climb a mountain you have the weight of payment books trying to drag you back down. You spend your days trying to make money for someone else – I don’t like that feeling.

So by eliminating debt payments you simplify your life and free up energy and cash that can be used towards more productive goals like retirement planning and building wealth. How hard would it be to stash away 15% of your income towards retirement if you had no car payments, credit card payments, or student loan payments? If you don’t believe me calculate your debt to income ratio then swing by the local old people farm and ask them what they would do differently if they had the chance. I’m sure they’ll be more than happy to give you their take on credit cards and car payments.

From October 2008 through April, an estimated 24 million U.S. card holders had their credit card limits reduced or accounts closed, even though they had no new “risk triggers” such as late payments in their credit reports, Fair Isaac says. Of that group, 8.5 million saw their credit scores fall.

Lenders are doing this to cover their butts, lower limits, and less risky accounts, to help ensure a predictable customer base with less loses in the future (thats the theory anyway.)

What people are whining about though is the fact that since their credit score is partially based one how much debt to available credit they have and how long these accounts have been open, they’re taking a hit to their credit scores when card issuers make these adjustments (BTW they’re allowed to make these changes according to the contracts the borrowers signed). In my post Zero Credit Score I talk a bit about how scores are calculated and how I feel about the formulas they use. The lower credit scores mean some folks may have trouble borrowing more money in the future, and if they are able to borrow they could receive less favorable rates (that could be the best thing that ever happened to some of these people!)

USA Today quotes some 62 year old lady named Reid to make their point. This is what they had to say:

Chase had closed two of her accounts, citing inactivity. Since then, four other lenders have closed or cut limits on eight accounts. One lender also more than doubled her credit card interest rate, prompting her to close the account.

Reid says the lenders’ moves have taken a toll on her credit scores.

Her FICO scores have dropped — each of the three major credit bureaus has its own FICO score — with her Experian score plunging the most, down 52 points to 722. She attributes the lower credit scores largely to lenders’ credit reductions. As multiple issuers closed or reduced her credit lines, Reid says, she borrowed from an inactive card to try to prevent it from being closed.

Wow! She sure showed them! My guess is with lenders making adjustments to six of her eight credit card accounts maybe…just maybe, she’s not as credit worthy as she thinks, just a thought Mrs. Reid.

Here is another great quote from this article:

Consumer advocates say regulators and Congress need to address lender actions that are unintentionally hurting credit scores. They say that as underwriting standards tighten, even a small change in a credit score could affect what rate consumers get on a loan — if they get one at all. Some analysts also say the fact that consumers’ credit scores can fall even if they’ve never missed a payment or exceeded their credit limits raises questions about the score’s usefulness.

Now here’s an even better plan, run to Congress to save you from the contract you signed up for! So to that I say if these folks (the companies) are making your life so darn difficult that you need to run to Congress to fix it maybe you should shut your whining pie hole and just stop doing business with companies you don’t agree with…just another thought Mrs. Reid, remember you signed the contracts. All eight of them! 

Then again maybe we can regulate the lenders out of business by taking away their ability to remain profitable, then throw an even bigger fit when they lay people off and we get to bail them out again.

After a fair amount of un-reliable research on personal Debt to Income ratios here are some numbers I came up with – remember your home mortgage payment is also included in these numbers, no cheating here

45% or higher debt to income – Things are scary (you probably already knew that). You are walking too close to the edge and some drastic measures should be taken to address the issue.

35% to 45% debt to income - You’re still walking close to the edge but not quite as close as above. Don’t slip up here though since you likely have no cash cushion you’re one mis-step away from stumbling into serious trouble. Now is the time to make some changes while you still have a little breathing room.

30% to 35% debt to income - You’re probably feeling like you’re in pretty good control of things compared to your peers and lucky you they’re offering to help you run up debt as fast as they can get the offers into your mailbox. This area is manageable and should allow you to fund retirement at a reasonable level (especially with employer matches in place)

30% of below debt to income – Below 30% you looking solid! This means you pay 30% or less on your debts each year. You could save 15% towards retirement, pay all your debt payments and still have 45% of your money for all your other junk.

So take minute, pull up your little list you created here: No shortcuts here, now let’s calculate you debt to income ratio. For the steps to do this read check out Calculate your Debt to Income Ratio and see where you stand. This should help you plan your next steps accordingly, remember the more information you have to work with the better decisions you can make.

Step 1: Add up all your monthly debts (I know you already did this, but I’m just making sure!) Mortgage payments (including taxes, insurance, PMI, etc.), Car payment(s), Minimum credit card payments, Student loans payments, Child support, Doc bills, etc.

Step 2:Add up all your monthly income.  Add your Salary, any additional bonuses, tips, any additional income you receive through dividends, a side business, embezzlement, theft, or whatever your case may be. Total these all up and you have your monthly income.

Step 3: If you don;t have your calculator out yet you’ll want it for this part. First type in your monthly debt number, press the “divide” key, now enter your monthly income number, press the “equal” button. That will give you a decimal number, now move the decimal point two places to the right and you have your debt to income ratio. For example, if you came up with a $2,800 total debt payment number and monthly income of $4,500, that leaves you with a debt to income ratio of 52%.

There you go thats pretty much it. Now see my post Debt to Income Ratio and see how you measure up.

The first objection I always hear is the issue of buying a home. True a high credit score will help in financing a home but there is also a process known as “manual underwriting.” The way they used to do home loans before a number was used to determine your worthiness. In this process they do weird things like confirm you have a real income, confirm you have real bank accounts and that you have money in those accounts, confirm you’ve honored your other financial obligations appropriately (landlord, utility bills, medical debts, etc.). This process is still used today and it’s most often seen with people who are self employed, or others that may have trouble proving their income, or for those that have (get this) low or zero credit scores. So to debunk the myth, no you do not need a good credit score to finance a home. You can qualify for a Fannie-Mae mortgage with a credit score of Zero (if you’re not familiar with Fannie-Mae they are said to have over $800 billion in mortgages – if you can afford your house it’s likely they can afford to lend you the money). True this process can take a bit longer than just running your FICO score for approval but in the end if you’re proven to be credit worthy the rates and terms will be likely be the same. (Note, again, that a low credit score do to you mismanaging your debts is not the same as a zero credit score and will complicate your financing – as it should!)

The second place people argue a zero credit score will work against me is if I’m trying to land a job that requires a security and/or background check. Examples could be banking or financial jobs, some government positions and in some cases military security clearances. Here the credit report can be used as a judge of character or as an indicator of potential risk for the employer. A good credit score is not necessary though for this purpose…sort of. By law, companies are not allowed to pull your credit score though they are allowed to pull your credit report once they have your written permission.  Also, just in case your credit really sucks, due to the Federal Bankruptcy Act a company can use any information found in your credit report except information regarding as past bankruptcy, no matter how recent.

Though I defiantly support the military I don’t see myself needing a high level clearance any time soon so that takes care of that one. As far as a future employer goes I figure if they want to hire me, a credit report that displays an obvious long term track record of financial discipline should be enough to show them they can trust me. I figure if I can’t talk my way through that discussion to the point they understand and appreciate how I handle my finances and my life in general I doubt they’ll like many of the other things I have to say! So I guess at that point I’d have to find an employer that won’t judge me by how much money I don’t borrow and don’t have to pay back every month.

Here are some of the results: (this shows what they would pay first - last)

1. Mortgage or Rent 79%
2. Car Payment 41%
3. Auto Insurance 39%
4. Credit Cards and/or Cell Phones 38%
5. Cable and/or Satellite Television 32%

The survey results look good to me. If someone is in crisis mode the first thing they need to do is shore up their position as best they so they can hopefully “live to fight another day.” This means taking care of the essentials first. Food, Shelter, Clothing, & Transportation. If these four things are taken care of you can hopefully keep workong to address whatever your other issues are (and we know people got some issues!) Beyond the essentials look to cover your secured debts next. Things next like car payments or other property. Since these debts are secured by liens the lenders may be much faster to attempt a repossession of the property.  Next address your unsecured debts. Things like credit cards, phone bills, cable bills, old medical bills etc. Obviously all these debts need to be addressed but aside from questionable and sometimes illegal collection tactics these folks have little ability to retrieve their money with out taking you to court first. True, you do need to get these thing taken care of but the dentist can’t usually repo your dental work instead he’ll have to slap a lawsuit on you before he can legally take back the fat gold grill in your mouth.

Remember the unsecured debts (especially credit cards ad payday loans) will likely be the first to start yelling since they are in the first loser’s position if you file bankruptcy. They yell loud and they yell often hoping that you’ll become emotional and pay them before you feed your kids.  All the creditors obviously need to be addressed but if you or someone you know finds themselves in a seriously tight spot try to leave emotion (as much as you can anyway) out of the process and address the bills in a way that gives you the most flexibility to keep fighting.