Staying Out of Financial Trouble in Troubled Times

It is impossible to read the newspaper or watch the television news without hearing about the sad state of our economy. As I have previously talked about in this space, some areas of our economy are suffering. But there is no need for panic.

That said, the sad side of our current economic situation are the personal stories. According to the Associated Press, the value of credit card accounts at least 30 days late jumped 26 percent to $17.3 billion in October compared to a year earlier. Personal bankruptcies in September 2007 totaled 132,008, which is a 37 percent increase over the 96,442 personal bankruptcies filed in September of 2006 (Source: BankruptcyAction.com).
Home foreclosures continue to rise at alarming rates, with national foreclosures rates increased by a staggering 79 percent between December 2006 and December 2007, according to RealtyTrac.

How did we get here? How do we get out of this trouble? How do we keep from getting back in this situation?
How did we get here? The credit card companies are partially to blame. Our current economic growth cycle started in 1991. This means everyone 39 and under has never seen an economic down turn in their career. So if you graduated college and went to work for a credit card company in 1991, today you would be 39 years old. How many decision-makers at these credit card companies are under 40? I’m guessing quite a large number of them.
Another way the credit card companies have contributed to consumer problems is by lowering their standards. By mass-marketing their cards, and sending pre-qualified offers to practically everyone with an address, they have put cards in the hands of people with either a poor credit history or no credit history. College students and recent high-school graduates are examples. The credit card companies use volume to keep their loss percentages lower.

This is not to say consumers are not responsible for their problems. There is no question most people have created their own financial mess. In the same way an alcoholic needs to stay away from a bar, the person who is unable to manage personal bills needs to stay away from more credit.
Unfortunately, we are constantly bombarded by offers of credit, not only from the mail, but now also from the cash register. I love when I am buying something and the person working the register asks me if a I want to save 10 percent by putting my purchase on the credit card they want to give me. I always ask them the interest rate of the card and it is always above 10 percent. I then ask them how am I saving 10 percent by using a credit card with an interest rate far above 10 percent. That person usually returns to being a check out clerk instead of a credit card sales person.

Yes, I know I can pay the balance off with the first statement and not be charged any interest. But it is just fun to stop the harassment -- and that is what it is. Harassment. We are constantly offered credit. No wonder we are where we are.

How do we get out of this trouble?
If you are one of these people that has unfortunately fallen on hard times you are not alone. How you handle this situation will determine how quickly you can put this difficult time behind you.

First, admit the situation you are in, both to yourself and to your creditor.
Not answering the phone when a creditor calls will not help. If a credit card company or a mortgage lender is calling you because you are past due and you don’t answer the phone, they will assume you have no intention of paying. Lenders can declare you in default and turn your credit card account over to collections, where the entire balance will be demanded in full, or, in the case of a mortgage lender, foreclosure proceedings might begin.

Second, answer the phone.
Explain your situation. Most importantly, explain to your creditors how you are going to pay them back. The credit card company does not want to charge off your account and the mortgage lender does not want your home. Furthermore, a charge-off or foreclosure stays on your personal credit report for 7 years. Past due accounts basically go away within 2 years.

Bankruptcy is not the answer.
A bankruptcy stays on your credit report for 10 years and may be reportable for the rest of your life each time you apply for credit. Bankruptcy is extremely difficult to get behind you.

How do we keep from getting back in this situation?

First, live within your means.
Know your income and know your expenses. Make sure your income always exceeds your expenses. This may sound simple, but you would be surprised how many people don’t truly know their actual monthly cash flow. Include everything. Lunch money, dry cleaning, gas, and midnight Krystal runs. Then add 10 percent more to the budget, because invariably something will have been forgotten or an unexpected expense will arise.

Second, resist additional credit.
Use cash for everything except absolute emergencies. Save for vacations. Save for Christmas or Chanunkah. Save for emergencies. If you need motivation take each of your credit card statements this month and add up the interest you paid. Multiply that number by 12 to see how much money you could have spent this year on other things instead of repaying credit card interest on your debt. Your situation is most likely not terminal. You can get out of trouble by being honest with yourself and your creditors. Live within your means and resist the temptation of additional credit. Credit is not free money. It is deferred repayment at a cost. The real question is: Is the cost tomorrow worth the joy today?