Confessions of a Laid-off Lawyer

Just Your Average Joe Blogging Away His Debt—In One Year or Less

Good Little Boy

with 9 comments

Total Black: $3,323.08
Total Red: $270,855.95

A discussion in the comments to Burning a Hole prompted today’s post.  I found valid but conflicting information on the internet and in those comments about how to handle credit card debt.  Even Suze Orman has modified her advice.  So I thought I’d take a moment and blog about it.

I’m first starting from the assumption that all debt is bad.  Even the good one.  I understand that some advise that student loans are “good debts.”  Lesson 9 from Money 101 on CNN Money claims, for example, that “[g]ood debt includes anything you need but can’t afford to pay for up front without wiping out cash reserves or liquidating all your investments.”  The examples they cite: a house, education, and a car.  Two out of three I’ve got there.  “Ideally, experts say, your total monthly long-term debt payments, including your mortgage and credit cards, should not exceed 36 percent of your gross monthly income. That’s one metric mortgage bankers consider when assessing the creditworthiness of a potential borrower.”

Who creates these rules?  36 Percent?  Why not 32?  Or 41?  36 seems just as random.  But that’s a digression.  “Expert” advice notwithstanding, I’m assuming that all of my debts—even my student loans—are “bad.”  Why?  Because they all equally pull at me when due.  They all can equally harm my creditworthiness, a term I wrestled with back in Slow Going.  And they all can come after me in debt collection—some more so than others.  It’s correct that credit cards, for example, are unsecured, i.e., nothing backing them, whereas my auto loan is secured—with the automobile I just bought.  Visa isn’t going to repossess the coffees I may have purchased with their card.  At least the credit card companies haven’t figured out a way yet.  It’s only in bankruptcy that the ranking of debts may come about.  On the street level, they’re all thugs I must pass each day and each one can trip me up.  So I’m assuming they’re all bad and all equal for my day-to-day purposes.

Assuming that all my debts are bad and need to be eliminated, I next need to figure out which one(s) to pay first.  Not as simple.  CNN Money’s Lesson 9 claims that “[t]he basics of debt reduction are simple: Cut down on your variable spending and put the extra money toward your debt payments.  Once you determine the maximum amount you can pay off each month, pay down the debt with the highest interest rate first—that usually means your credit-card balance—while paying at least the minimum monthly amount due on all other revolving bills.  Once the debt with the highest rate is wiped out, put your money toward paying the debt with the next-highest rate.”  And here’s where Suze Orman chimes in.

In one of her Suze Scoops (sounds like a cereal—a hearty, helping of Orman fiber), Orman advised in her scoop, A Change in Credit Card Strategy, that we should “only pay the minimum due on your credit card balance and instead make it your top priority to build as much of an emergency cash fund as you can.”  Why did she shift gears and switch to minimum-payment only advising?  Because “[t]he sad reality is that the credit card industry is taking actions to protect themselves with no regard to your needs or how good you have been about paying your bills on time.  The problem is that most credit card companies are either reducing your credit limits, raising your interest rates and are even paying you to close down your account.  Many of you are even finding that when you do finally pay off your credit card debt that the issuing credit card company of that card is closing that card down as fast as they can so you cannot ever charge on it again.  You did everything right, and yet still you could have your credit limit reduced, which can have a negative impact on your credit score.  So here is the problem.  If you do not have a stash of cash in an emergency fund and you have been using all your extra money to pay down your credit card debt and they keep closing your cards down—what are you going to live on if you lose your job?  Chances are you may not have any available credit, or too little credit, to use in the event you are laid off.  Nor will you be able to get a new card if you are unemployed.”

That is a helpful scoop of hearty advice.  It certainly does mirror my situation with the credit card companies, something I blogged about, most recently back in Absolutely Infuriating and Limits and Liens and Loans.  But I’m not sure it applies to me.  At least not at this moment.

I’m now a government employee.  Whether it’s wise to rely upon that or not, the government has been acting as a safe-harbor of sorts for the laid-off masses.  The U.S. Virgin Islands gets much of its finances from the United States Congress.  So, I don’t foresee getting laid-off as a realistic possibility.  The funds for my law clerk position have already been budgeted for this fiscal year.  So I think I’m safe from unemployment for a year.

Assuming then that I’ll remain employed over the next year and don’t need to store away a significant financial safety net, what should I do with any extra income each month?  Orman’s advice is still applicable, but not because I may lose my job.  In fact, there’s a possibility I could renew for another year if I wanted and the judge agreed.  So, I could have job security until June 2012.  But if he doesn’t agree, then the chance exists hat I could be jobless again in a year.  But the somewhat more immediate concern right now is not joblessness, but hurricanes and any other emergencies that may arise.  If a bad storm hit the U.S. Virgin Islands, for example, and damaged my apartment or my car, I’d really be at a loss.  But that doesn’t mean that I should take my first paycheck and, in a frenzied panic, horde away every penny out of fear of some unknown catastrophic future.  A small amount squirreled away each month, and left untouched, should be sufficient.

See the good little boy does everything he’s told.  He eats his vegetables and gets his three to five servings each day too.  He gets eight hours of sleep a night.  He reads good books, stays away from bad people, and goes to church on Sunday.  In matters financial, he’s a good boy too.  He never spends more than he earns and never buys needless things.  Or maybe every so often—truth be told.  When a bill comes due, he pays it on time, or maybe even a few days early.  Credit card companies like good little boys.  And they rely on you being a good little boy too, to your detriment.

In those comments to Burning a Hole, many commenters advised me to—in effect—be a good boy.  Put some money aside.  Pay my bills on time.  And just pipe down.  Stop vexing about ways out of debt.  And my intention here isn’t to disparage them or to trivialize my situation or their well-meant advice.  Rather, what came to mind while thinking about the discussions in that post is that no one likes an outlier.  No one likes the boy who talks back.  We’re all supposed to play by the rules.  Don’t take chances or risks.  Gambling is a sin and is a stone’s throw from women and booze and other vices.  Debt racing is phenomenon because it’s so risque.  Especially when it’s women racing their debts.  That is certainly not like the good little girl!  But if there’s another way, why not seek it?  Who wrote the rule that you should only pay the minimum each month and that you have to keep money stashed away?  Who says you can’t send $3,000.00 to one card and then tighten your belt a bit for the next two to four weeks—especially if it means eliminating a debt like the one below.  My focus in starting this blog was not to think inside the box.  Rather, I wanted to think outside the box.  I’ve been a bit distracted from doing that over the past few months with working two jobs and then moving here.  So it’s time to return to outside-the-box thinking, especially with numbers like those shown below in snapshot of my credit card summary.

The statement snapshot below comes from the closed Visa account.

The “Account Summary” column shows that I paid nearly $1,000.00 last month.  I had been about $300.00 behind on this card from my financial lock-down while leaving New York and moving here.  I paid that and then later paid the current payment due for June.  Once the money came through from my mother, I sent another $500.00 to this card—that same five hundred, if I recall, referenced in Sigh of Relief.  Despite paying down the account by $1,000.00, the balance due increased by one hundred dollars.  Next month’s minimum payment pretty much only covers the interest; forty dollars would go on the principal if I were to pay the minimum.  And, as required by the CARD Act, many of us have seen the minimum payment warning and are paying more than required.  MSN Money noted as much in an article “Are Consumers Winning the Credit Card War?”  If I paid only the minimum amount—as advised by everyone, including Orman—it would take me twenty-three years to pay just over four thousand dollars back.  That’s insane.  But not as ludicrous as having paid back nearly three times as much in interest.

So . . . umm . . . yeah . . . I’m done being a good boy.  Mark Twain told us what happens to them in his Story of the Good Little Boy.  It’s time for this good little boy to start talking back.  One way to do that is by putting my money where my mouth is.  As soon as I can, as much as I can send will be routed to this card.  It’s possible that I’ll have this card paid-off by next month.

9 Responses

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  1. If this card is one of your highest rate cards, then good for you.

    If it’s not, then, I’ll say it again, not as good for you.

    The advice about the emergency fund makes sense in a lot of cases, but in your case, I do not believe that it does.

    Why do I say this…? Well, because you DO have a source of funds if an emergency comes up (mom). You’re much better off assuming that you’ll borrow a grand or two from mom IF something happens than letting money sit in a savings account earning .5% per year while Visa charges you 25%.

    No matter what though, if another loan has a higher rate than this card you showed, then you should be paying the minimum on this card.

    Not everything is shades of gray…extra money that you’re going to spend on debt goes to highest APR. ALWAYS. NO EXCEPTIONS.

    T

    T-Bag

    July 17, 2010 at 22:46

  2. All of my cards are at the exact same rate. All four of them. Thus, the “smartest” moved next would be to send any large payment to the card with the largest balance. That would be the active Visa. But that wouldn’t be the most strategic move since—as I’ve seen personally and as Orman noted as well—its possible a large payment will trigger an internal review and could result in me being penalized and losing credit again. Thus, the strategic option would be to pay down one of the other cards—or some other account—that won’t penalize me for being fiscally responsible.

    I could payoff my AmEx card, only $2,400.00, or pay on the closed Visa to bring it down as close to zero as possible.

    This is what I’m getting at when I talk about not just following advice blindly. No financial adviser / planner is strategic about debt management. They all want to put you on a payment plan and send you on your way. In October I’ll have another $2,000 or so when my security deposit from the New York apartment is returned. What do I do with that money? I’ll also have another grand coming in travel reimbursement / moving expenses. What do I do with that money?

    I could hold on to this $3,000 and then add in the $2,000 in October and the $1,000 that’s coming and then put $6,000 on my car and bring that balance down to $12,000—not $18,000.

    This is like high-level math that I want to be able to do, but I just don’t know how. I want various models that will play out my debts over the next year: if I pay $6,000 on this, then that other account will go up by X. But if I put 3K on two accounts, then all accounts will come down by Y amount because I’ll have more each month to pay. Etc. Etc.

    I feel like Helen Keller unable to find the language or the structure to explain what I want to say. Or even how to think about it.

    Laid-off Lawyer

    July 18, 2010 at 14:36

  3. It really is quite easy to get overwhelmed by it all. Especially when you’ve been groomed to analyze and may have a tendency to hyper focus. I say that very lovingly : ).

    I recommend the debt snowball method for several reasons. One, the name makes me giggle. Two, it takes into account the psychology behind debt – the all important human element. Three, it simplifies the overall picture.

    T-Bag I hear you, loud and clear. Financially speaking, it is sound advice. But LL must consider the human element. He must decide what works for him.

    Frankie

    July 18, 2010 at 15:34

  4. Yeah…debt snowballing. I learned about that term a few months back. One of the commenters pointed out the importance of not leaving off the “debt” part. 😉

    The psychology is part of it, Frankie. Being able to feel better about yourself because you’ve got one less bill to pay. That you’ve got one more debt eliminated. And being able to send more to larger bills. I like the advice of tackling the smaller debts first.

    If that’s the strategy, the I guess I pay off the AmEx bill first.

    Laid-off Lawyer

    July 18, 2010 at 15:48

  5. Well, not sure when you came along, but that’s kind of the issue…he hasn’t done what’s worked for him, in many cases.

    To LoL: If all of the cards are the same rate, that actually makes things much easier for you. In that case it makes perfect sense to direct whatever extra payments you want to make to the card with the lowest balance in order to eliminate it.

    I can’t recall what you said your rate is on the car, but I don’t think it could be as high as on your cards, so I would absolutely say do NOT pay that down as it will not help you at all. Your monthly payments for the vehicle are set–it is a fixed loan with fixed payments. At least if you pay extra on the credit cards the minimum payment due SHOULD decrease for future payments as well.

    It really is not that complicated and it really does boil down to applying extra funds to the highest rate debts or applying to savings. There is no magical way to allocate payments to make balances come down faster or stretch your money further other than paying the highest APR debts before the others.

    The only thing you could do to free up more cash (flow) would be to consolidate multiple accounts, as the combined minimum payments as separate debts is higher than the single minimum payment on a consolidated account (usually, depending on time frame). However, even this is no magic bullet as you simply extend your payments further into the future while freeing up more cash in the present (but that is necessary for people who can’t pay the minimums).

    T

    T-Bag

    July 18, 2010 at 15:50

  6. But which account? As Frankie pointed out, you start with the smallest and snowball. Presumably the more you pay off the more you free up. But in my case, the AmEx bill may only be about $48.00 a month or thereabout, whereas the canceled Visa is—as we see above—$145.00 (I had accounted for it at $200.00 per month so I’ve already got $60 more per month if I do pay only the minimum). If I sent $2,400.00 to the AmEx I’d wipe it out but I’d only free up $48.00 a month. If I sent $2,400.00 to the canceled Visa I’d bring it down to $2,200.00 and possibly cut that monthly payment down to about $50.00

    Eh . . . if that’s the math, it looks like it’s a wash. I’d save the same amount each month regardless of which account I pay down.

    Laid-off Lawyer

    July 18, 2010 at 15:57

  7. Sometimes what makes the most business sense is not what makes the most sense in real life. I learned that after business school.

    Yes, T-bag I can see LL has done some things that didn’t work as is typical of the human condition. I did it myself for quite some time until I realized the err of my ways. Now, I’m perfect.
    ; )

    Solutions aren’t always perfectly packaged. I think the key here is to try something.

    Frankie

    July 19, 2010 at 01:33

  8. Heh, I think you’ll find that they’re all going to work out much like that 🙂 That was what I was getting at…

    Most credit cards use basically the same formula for determining your minimum payments v your total balance. But think about this: IF you plan on using any “extra cash” due to a lower minimum payment total as cash to apply to the next credit card debt you tackle, then it actually makes no difference how your minimum payment amounts measure up. Reason being…you’re using any extra cash flow to pay credit card debt anyway.

    I agree that, all rates being equal, you pay off the smallest card first, or at least pay it down significantly, but here are a couple of other things to keep in mind:

    1) IF you pay a card off completely, the bank may simply close it, which will hurt your ratio of available/used credit.

    2) Your credit score is based not only on your total debt load / available credit, but on each particular account as well, so if your credit score is what you care about most (it should NOT be right now), then you’d be better served by lowering the ratio on whichever card is highest rather than paying off the smallest one (again, assuming all APRs are equal…that is your top priority for payment).

    3) Paying extra on the cancelled Visa is not helping your score as you have no additional charging power on it.

    4) The AmEx probably has an annual fee. You may want to ditch that anyway.

    Lastly…all things being equal, I can not totally discount the psychological effect of paying off a debt in full. If the APR is not the highest, but it is also not relatively low compared to your higher cards, then it may be worthwhile to you to pay it off. However, in your case you said all rates are the same (prob. the max allowed by law, at this point)…so it doesn’t matter.

    T

    T-Bag

    July 19, 2010 at 08:12

  9. Normally I’d agree with advice on credit cards given here. BUT. . .

    I think a cash reserve in the bank is a much better idea. Getting a 5 week check at once is only going to happen once in this job. Your cash flow situation is pretty tight – there are many scenarios where a cash reserve will come in very handy and prevent you from having to borrow or use credit cards more. You may seem flush with cash now but think about 3 or 4 or 6 months from now.

    anon

    July 19, 2010 at 08:49


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