I have a former co-worker who lives in San Diego. Before I continue, please understand, he’s a little crazy of the guano flavor.
We were talking about money. Now I think he’s way too open about money, but since this is a [relatively] anonymous message board, I’ll use actual figures you can you fully digest what I’m about to tell you. He makes $90,000 per year working at some for-profit college (like U of Phoenix). He has two brand new cars: An Audi RS4 and a Nissan NISMO 350Z. His new wife drives a Porsche Boxster, and from what I can tell is a complete shopaholic, and spends hundreds of dollars a week in primping herself. Her salary is somewhere around $60k a year. They just bought a condo in La Holla, CA for $750k, no money down.
OK, here’s where it gets good. I said something to the effect of, “Wow. How do you do it? I’m squeamish about spending $400k on a home without having a car payment and our household income is more than yours.” His reply?
“What we make only matters for minimum payments on credit cards. I just got a new credit card with a $22,000 limit. If I max it out, the minimum payment will be around $800 a month. I can afford that no problem. Just live on credit, dude, it’s the American way!”
“There’s no way I could live like that. I have trouble sleeping if I owe more than $1000 on a credit card.”
“Dude, look at it like this. All my credit cards combined, my payments are like $3000 a month. The cars are around $1800 a month, and the mortgage is around $6200. Every time it gets close, we get raises.”
The Audi RS4 is my favourite car! With the Canadian dollar at par, the more of them going on the auction block, the better! Give you friend my thanks in advance.
That being said, I think a lot of people have misconceptions about debt. It would be foolish NOT to use the cheap credit available to you. Most corporations operate on revolving lines of credit that they never really “pay back”, leverage is something most, if not all businesses engage in.
I myself have a few credit cards completely maxed out. Of course, they are all at 0% interest rate, and when it comes time to renew, I tell them to renew at 0% or I will pay the complete balance and take my business elsewhere. I’m not the sucker here, THEY are the ones who called me up to offer me free money.
The thing is, he never expects to pay it back. It looks like he will try to apply for more credit whenever he maxes out one of his cards. Of course this will come to a crashing halt at some point. Something will push them over the brink, or a job situation will change, which will lead them to declare bankruptcy. Then he and his wife will have years and years of having to eat rice and beans out of their rental single-wide trailer as penance. Or, they’ll reach retirement with a few million dollars in debt, which he thankfully won’t be able to pass on to his kid.
I’m just glad that his ex was smart enough to get away from him. Hope his daughter has some better role models in her life.
Luckily it is less common than we are lead to believe. While I have heard that the average credit card debt in the US is 8K, the truth is probably not so dire.
And what happens if he loses his job, or his wife gets cancer and the medical bills skyrocket? They have no safety net.
Ivylad and I are working the Total Money Makeover. We haven’t used a credit card since May, and if we want something, we save up for it. It’s very nice not having debts hanging over our heads.
But isn’t it better to build up your credit by paying for things you need and would use cash for normally, then pay off the balance each month? Like I use my credit card to pay for my lunches and subway tickets to and from work each day (which I have budgeted for), and at the end of each month I pay it all off. I have to pay for these things anyway so why not put it on my credit card since I know I have the money to pay for those things each month. Isn’t that a good way to build credit if you don’t have a mortgage or somesuch large purchase like that?
It can be, but often it isn’t. For most people its a trap. And if you have things like a mortgage and a car loan and a cell phone contract, you are already “building credit” you don’t need credit cards to do that.
Disciplined folks can do pretty well off credit card rewards and paying the bill in full each month - but you have to be very careful as one mistake can make the fees not worth this. And, in my experience, credit card companies are not to be trusted. Money leaves my account on the 25th, bill is due on the 27th, credit card company credits me on the 30th and charges interest and late fee. It quickly becomes “not worth my time to play the game.”
We pay off our card each month. In the past, we never used the card for day-to-day purchases, but it is infinitely easier to balance the checkbook with fewer checks flying around out there. Plus, I get a statement at the end of the year that details how much I’ve spent in various categories. We pay it off within a week of it hitting our mailbox so we don’t run the risk of getting hit for interest payments.
I don’t even own a credit card. I live my life by a simple credo: if I can’t afford it right now, I don’t need it. I’d rather have no credit than the bad credit that would result from the potential abuse of credit cards.
Of course, such an attitude causes me to pay more in the long term, but it’s worth it for the peace of mind that I have knowing that I don’t have to worry about potentially wrecking my life for years to come.
I think you’re just being too much of a door mat with them. Remember, they are the ones lending you the money, so you are the one with all the cards.
If such a thing happens again, I would advise you to call the credit card company, explain your situation to them and politely ask that the late fee be waived. If they refuse, just tell them that you will be paying the balance minus the late fee, and that they can close your account right now, as they have just lost a customer over $20 that they can easily make back from the next sucker who just pays without contest.
Of course I’m perfectly willing to carry out my threat, but those nice CC company folks have always been very understanding once I explain it to them.
I’m not sure, but I think that if you pay off the credit card bill each month, it doesn’t improve your credit score. Instead, I think you need to maintain a balance if your goal is to improve your credit score.
That said, I always pay off the credit card bill when the bill arrives. (I used to pay the credit card company just prior to the end of the statement period, just so I could get a zero balance bill but then I noticed that the frequent flier miles were awarded based on the final statement amount, so instead I wait for the statement period to end and then make the electronic payment before the bill arrives.)
My father, on the other hand, waits until the last possible moment to pay bills, just so he can have the money sitting in his account. Sometimes this means driving to the bank or the store on the day the payment is due. And then there’s Throatwarbler Mangrove approach, which seems to be to run a balance on zero-interest credit cards and keep the money in an interest-earning account. Both of these approaches seem like too much work to me.
The guy described in the OP sounds nuts. Eventually something (like an interest rate hike, a job loss or an unexpected expense) is going to cause his scheme to fall apart.
The credit bureaus are looking for a history of on-time payments. Carrying a small balance can help your score, but demonstrably paying on time is more important. I never carry a balance on my cards, and have a FICO north of 790. As you can see from this list, your debt utilization only counts for up to 30% of your score. (And in actuality, the amounts shift around as you move through different classes of credit profile.)
Thanks, OP. The guy in your anecdote makes it perfectly, delightfully clear to me that there are people in the world worse at managing money than I am. I feel positively vindicated.
