Feelin’ Poor?

A few days ago, I wrote a little about the experience of getting to take some friends out to dinner – just recently I read an MSNMoney article by MP Dunleavey called “How Rich Friends Make You Feel Poor” that I wanted to share with you all.

Here is one of the quotes from the article with which I really resonate:

It’s uncomfortable, often painful, to feel as if you don’t measure up. Or as if you can’t keep up with people you like, admire or feel close to — financially and otherwise. Friendships are usually founded on a core feeling of equality or at least parity: “I get you, and you get me. We have similar resources and values.”

This is sooooooooo true. And this can definitely affect relationships.

I really appreciate the author’s stated goals for the next time she’s in a sticky spending situation with a friend – I think these strategies will work:

  • Stick to my numbers. A friendship isn’t going to expire over 20 bucks here or there.
  • Avoid situations (or people) that I know are going to be overpriced.
  • Communicate my preferences. It’s not embarrassing to state your limits. Would you mind if a friend stated hers?

What are your strategies for dealing with this situation??

Chickens roosting

This last week I was e-mailing with one of my friends whom I have mentioned before on this blog as one of those whom my husband and I have not had a ton of success in being transparent about our financial situation. We just haven’t had a lot of those conversations and it has been tense any time we start to approach it, so we’ve just kind of glossed over it.

Well, in last week’s message, she mentioned that she had an argument with her mother about her (my friend’s) debt. She hadn’t told her parents about how much debt she was in (sound familiar?), so when she “dropped the bomb,” her mother was in shock and said she was hurt to be lied to.

There are quite a few interesting aspects of this:

  1. those of us who are in debt choose who we tell and who we don’t tell for a number of reasons – it may be to “save face” or because we don’t want to worry them, or, to quote my friend “my financial debt is really my business, and if I so choose not to share, so be it.” And the truth is that we are generally in so much pain with the burden of our debt that we probably aren’t as focused on the pain that others might feel about being left out of the loop.
  2. this is the first time that we (my husband and I) had been informed that she was having any issues, even though she knew about our struggle. We’re not hurt, but we do find it ironic that we could have had a two-way partnership on this journey that we’ve been on the for the last year.
  3. even in telling us, there are no details, only a request for information about how we were able to negotiate lower interest rates (I don’t think she’ll be pleased to learn that she’ll most likely have to close her accounts to make that happen at this point).

As my husband and I went through this same scenario last year (although my mother responded much differently), we have the greatest of empathy for her situation. But we are also saddened by this cultural thing that keeps those of us with the “dirty secret” of debt from talking to one another.

We’re all so scared of judgement from other people and that they will stop being our friends if they “know the truth,” when in fact, our lack of transparency does a great job of cutting us off from authentic relationships all on its own.

Credit Scores :: Which service do you trust?

I had a conversation with my parents this weekend where my dad asked me what my credit score is – I explained that at one time, I had purchased them from the “Big Three” and they were all different, so I decided not to buy them anymore. I did buy one last year when I ordered my “Three Free” credit reports (I’ve yet to get one from Equifax, BTW – it’s a little hinky) – it was 695 and it was reported by Experian.

So I saw this Washington Post article the other day about credit scores and this quote stood out to me:

As scores become increasingly important, they have also become increasingly perplexing. Consumers have free access to the credit reports used to determine their scores, but they have to pay to check them. With the heightened interest, many borrowers have been doing just that, buying their scores from a variety of Web sites, only to find out that they might be different from the ones lenders use, according to bank officials and consumer advocates.

They go on to say:

Complicating matters is that Experian and TransUnion have developed their own scores, which the agencies call educational scores because they are intended to help consumers gauge their own creditworthiness. Lenders cannot even buy Experian’s score. They can buy TransUnion’s but tend to go with the FICO score instead.

You can read the rest of the article here: http://www.washingtonpost.com/wp-dyn/content/article/2009/06/20/AR2009062002022.html?referrer=emailarticle

All of this makes me think that I should order my FICO score. I *would* like to know what lenders are looking at, even though it’s been nice not to get so many credit card offers in the mail since they’ve upped the eligibility requirements.

What has been your experience with credit scores and which have you ordered?

Suze Orman’s New Policy

I’m not a huge follower of Suze Orman, but I’ve seen a few of her talks on television, and when she offered her 2009 Action Plan as a free e-book on Oprah.com, I downloaded and read the whole thing, so I know a little bit of what she is about. I recall being very used to hearing her say that a person who is carrying credit card debt has no business putting money into savings because they would save more by paying the higher interest debt off.

But things change…

A posting on her website says:

I want you to 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.

Let me tell you why I am now telling you to do this. With rising unemployment, having a big emergency cash fund is vital. The 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 in paying your bills on time. The problem is that most credit card companies are either reducing your credit limits, revoking your credit cards all together, raising your interest rates and are even paying you to close down your account.

You can read the rest by clicking HERE.

I appreciate her advice on this matter, as I think it is a realistic shift that alerts the consumer to the what is really going on out in the world.

What do you think? Are you surprised?

Which approach to paying down debt?

So I’ve been reading a lot of blogs and articles about approaches in paying down debt – there are several different programs being championed out there and I’m interested to know what yours is. Here are a few of the most prominent in my life.

Dave Ramsey – The Debt Snowball
I’m not a “Dave Ramesian,” so I may not be 100% on the details of this approach, but my understanding is that you list out all of your debts and the minimum payments on each. You then aggressively pay down the debt that is the smallest, using any additional funds that you can from your budget. When that debt is paid off, you put that payment toward the next smallest debt, along with its minimum payment, until that is paid off. Wash. Rinse. Repeat.

Suze Orman – Highest Interest First
Suze’s approach is slightly different – she also wants you to list out all of
your debts and the minimum payments on each, along with the interest rate. You then aggressively pay down the debt that has the highest interest rate, using any additional funds that you can from your budget. When that debt is paid off, you put that payment toward the next highest interest rate, along with its minimum payment, until that is paid off. Say it with me “Wash. Rinse. Repeat.”

Microsoft Money
My Microsoft Money program set up a debt reduction plan for me after I entered all of our obligations and targeted what amount we could pay above the minimums. It targets the highest interest rate first, also. We had 6 months of extra big debt payments (see Success), so I wasn’t sure that it was calculating everything correctly, but as I looked down the road at the total payments in 2009 and 2010, it showed that as we paid off out debts, Money would not apply that “left over” money to the next debt in line. It was really confusing to me for a time, until I realized that it was trying to help me build a reserve in my checking account. When we have about $5,000 in reserve, it tapers off and then starts applying the full amount towards the minimum payments, along with the extra that I said I could pay. At first, I thought that I should take the $5,000 and get us out of debt 3 months earlier. But then I realized that this is a great way to build up our emergency fund and that in a 3+ year plan, getting out 3 months earlier would feel great, but wouldn’t be any protection in an emergency, as we have closed the majority of our credit card accounts.

So, I’m comfortable with the Microsoft Money plan for now – I’m looking forward to having the emergency money and staying on track with the plan.

What is your preferred plan?

Dave Ramsey’s take

My younger sister (who doesn’t believe in owning credit cards, and therefore, hasn’t built up much of a credit history at age 31), is a big Dave Ramsey fan and I’ve heard many others talk about him, both digitally (online) and analog (in person).  So, I thought I’d take a look at his site http://www.daveramsey.com and see what I could glean in a 30 second glance. The first thing I lit on were the Baby Steps.  Here they are listed below (directly from the website):

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

This is interesting – the first goal is to build up an Emergency Fund. It goes against what Suze Orman *used* to advise (she has since changed her tune, but more on that later) and it is a little counter-intuitive for me. I understand that it is harder to get credit, now, and that even those who are paying on time and don’t maintain a balance are finding that their card companies are cancelling their credit lines, so it makes sense that you would need to build your own emergency fund for “in case” instead of counting on your credit cards. 

I’m just trying to gauge the practicability of waiting to pay of debt until the $1,000 is saved. At this point, we’d default on our settlements, so I think we’ll just continue on in putting a little aside each month into savings and work on building up the Emergency Fund while co-currently paying down our debt. It will be great to see how much we will have in savings three(ish) years from now when our debt is gone. I suppose I should set a goal.

What is your thought about Dave’s Baby Steps?

Bankruptcy Research and What We Found

Today’s post is a little more about our history and what we learned from our Bankruptcy research.

I wrote before about how a conversation about our finances led my Mom to suggest that we needed to file for bankruptcy. She told us “stop paying your credit cards, meet with a lawyer and file the paperwork this week.” So the next Monday, we started researching the process and we found out the following:

  1. Before you can file for individual bankruptcy, you need to attend a pre-bankruptcy counseling session (either in person on online) to obtain a Bankruptcy Counseling Certificate. 
  2. Chapter 7 takes your assets and distributes them to your creditors and the rest of debt (except student loans and a few other types of debt) are discharged. Chapter 13 develops a payment plan so your creditors get as much as they can for 5 years. (These explanations are over-simplified – I’ll post some resources that help with providing more detail later).
  3. After you file, your creditors can no longer call you, until the Meeting of the Creditors where you have to face your creditors.
  4. Both filings stay on your record for 7 years.
  5. If you are married, only one spouse *can* file, but both incomes are taken into account, which adds to #6.
  6. It’s really difficult to qualify for Chapter 7. 

The bulk of the debt is only in my husband’s name ($42,000+) and filing might cause some complications with my job, so we decided that my husband would contact his Employee Assistance Program and get a referral for a Bankruptcy lawyer. He was connected with one and the lawyer did a phone consult with my husband. The lawyer was very terse and said, “you can’t file, you make too much money.” This seemed to conflict with a lot of the research that we had done, so we contacted the EAP again and my husband got a meeting with a new lawyer – one who worked at a Bankruptcy practice. He took all of our financial records with him and at the end of the meeting it was determined:

  1. We could file for Chapter 13.
  2. The payments would take 5 years.
  3. The firm would require $2,400 to file the paperwork.
  4. Our credit lines would be closed. 
  5. Our standard of living would be very, very low for 5 years. 

Both my husband and I felt a little defeated – it had already been a really touch 18 months, and we felt so hopeless. We had really hoped that we would be able to file for Chapter 7, but even though our debt (over $60,000) was more than our annual take home (under $60,000), we “made too much money” to have any of our debt discharged. 

So, as our creditors were calling every day (seriously, EVERY day), I asked my husband to try and cut a deal (settlement) with them. I suggested that he tell them that we were about to file for bankruptcy and did they want to work something out with us so that neither party had to go through the system – I told him we should ask them to drop the principal and interest rate. Here is what happened:

  • MBNA – dropped the interest rate to 4.25% (from 19.95%) and put us on monthly payments of $370/month, which lowered our monthly payments by almost $200.
  • Citibank – dropped the interest rate to 9.9% (from 32.24%) and put us on monthly payments for $319/month, which lowered them by $200-300
  • Direct Merchants (they weren’t as friendly, but they cut us a good deal) – they cut our principal by 25% and took the interest rate to 0% – *however* we had to pay the balance monthly within 6 months – those payments are the $1,600+ payments (only 2 left as of this writing). 

The “hitch” for all of this: (1) the cards/lines of credit are closed, (2) my husband cannot apply for any credit while paying these off or the terms will revert to the previous agreement – this is for 5 years, (3) if we miss a payment, all the terms will revert. 

But all in all, I’m actually glad that we went through with this process instead of going through the bankruptcy filing. Sure, there would have been more protection and it would be nice to have it a little more “out of our hands,” but I really think that this allows us to push even harder to reduce our debt as our circumstances change. And even though the payment plans are 5 years, we’re still committed to being done with this process in 3 years, 3 months.