Don't Make the Same Mistake Twice

I have heard a lot of people talk about "re-establishing" their credit after getting themselves into a mound of trouble through debt. I just read an article saying the best way to re-establish your credit after a bankruptcy is to get a low-limit credit card, make small purchases, then pay it off early each month.

I am sure it does help your FICO score, however, I have a problem with this advice for two reasons.

#1) Why should you care about increasing your FICO score anyway? All a FICO score is for is to allow you to borrow MORE money (even though that is the thing that got you in financial ruin in the first place.)

#2) This advice takes the "human" element out of the equation. If personal finance was 100% finance and 0% personal then my advice would be different, but it is inaccurate to say this.

When a person files for bankruptcy it is because they were so far in debt the could not get out of it. At this point isn't this something that that person should avoid rather than jump back into it?

I advise people to not be concerned with "re-establishing" their credit. There are steps that you can take that we talk about on this website that will enable you to eliminate debt completely from your life. The only thing that I consider "acceptable" debt is a home mortgage and getting a home mortgage is a different kind of beast when applying for it.

The lender is 100% concerned with probability of paying it back (not with FICO score). If they see your savings increase and you don't have any new entries on your credit report they will notice this (not just the FICO score). In fact, I don't know of any lenders out there who would even turn down somebody that drops a 20% down payment on their house.

Dave Ramsey says, "The definition of insanity is doing the same thing over and over and expecting different results." Getting back into what got you into a mess in the first place could be considered insane.

Should I borrow from my parents?

I recently got an e-mail asking me if it was okay to accept a loan from this person's parents. This person believes it is okay and actually borrowed money on two occasions from family members and it worked out.

Check out my previous post to understand my point of view on borrowing money from family. Out of Bounds.

I thought he had a valid point that I wanted to address on the blog. I am glad that borrowing money from your family worked out. However, what I am still saying is truth and it's good advice. You can drive down the road 100 miles per hour and get where you are going in one peace; but that does not prove it was a good idea.

In most instances families can produce strain on those involved and usually will be followed by regret. The borrower is always slave to the lender (Proverbs 22:7) and Thanksgiving Dinner tastes different when you are eating with your master.

Am I against all debt?

I get this question a lot, and in order to answer let me explain the kinds of debt that I am specifically referring to.

Types of Debt

Credit Card
Student Loan
Home Mortgage
Car Loan

The answer: Yes, I am against ALL debt. I want to make every effort to have (zero) debt in my life. That is the ultimate form of financial freedom when I don't have to make payments to ANYBODY. I do not want to ever be STUCK at a job because I need the security of being able to make payments. This is not freedom, it is what I call bondage. You are literally bound to doing something you may not want to do. So my plead is to make every effort to stay out of ANY kind of Debt.

With that being said, those 4 types of debt are not created equal.

My stance on debt is, it is only acceptable debt when you can sell it and be debt free immediately. It has to retain monetary value.

Therefore out of the 4 types of debt I listed, a Home Mortgage is the only form of debt I consider acceptable.

Home Mortgage
At any point when things change in your financial situation you can sell your house and be out of debt immediately. Now we all know it might take a few bumps (like it may take your house a few months to be sold). But that is why I recommend a fully funded emergency fund of 3-6 months expenses. It is smart to have it for this very reason.

Car Loans
Car Loans are NOT acceptable. Your car depreciates in value so fast and it breaks my heart when people get stuck financially and need to sell their car but they can only sell it for like $15,000 when their loan is still outstanding for $25,000. You still have to sell it because $10,000 of debt is still better than $25,000 but it is just a bad situation...stay away.

What I personally do, and what I recommend is to find a beater car (couple thousand bucks) that is in good mechanical shape (ugly physical shape) and drive that while making a car payment to yourself. Put aside $300-350 a month but put it in a money market to buy your next car, in cash. Keep making payments to yourself and at some point put it in a mutual fund. After years of making payments to yourself, there will be a break even point where due to compound interest you will never have to make a car payment again!

Credit Cards
These are NEVER acceptable. They do not even come close to the rule that I have of being able to sell it immediately and be out of debt. I do not feel that I need to go real in depth but Credit Card companies are making MAJOR money; it is or will be coming from you if you play around these things.

Student Loan
I know that I am going to get push back on this. The common response is, "Education is important. Some people can't afford college, so are you saying they should not go to school just because they can't afford it." My response to this is no AND yes. First of all, education is SO IMPORTANT. But it is not valuable because you need a diploma, you need to actually learn and apply it there. And I do think that an education is VERY important, but like I said before the only acceptable form of debt is when you can sell what you went into debt for and be out of debt immediately; it needs to retain a monetary value (not sentimental value, not emotional value, not enjoyment value). Student Loans do not fall into the category of being able to sell it and be out of debt.

But I DO want kids to go to school. If asked, my advice would be to work, work, work your tail off. Work for a couple years and save up every penny you can, go to a state school. You will most definitely not take school for granted at that point. My buddy, Casey, worked his way through school and graduated from Clemson University in Engineering. He did not incur a penny of debt and graduated with a degree. It is never okay to use money that you do not have. That seems very basic to me but something that we rationalize so well. By the way, you know what we do when we rationalize, we tell rational-lies.

Yes I know that student loans generally have lower interest rates and yes I know they have things like you don't have to pay until you graduate. But it is still the emotional response of being in bondage and I will choose freedom 100% of the time.

So when you tell me the perks of debt (like in Student Loans) what I essentially hear is, "Come be in slavery, we have all types of perks like water, food, sheets, good hours, a nice master and it is much better than the other type of slavery." I will never be willing choose or say it is okay to be in this. I cannot make people's decisions for them, but there are too many Americans that have the walls closing in because of their money and we have to open our eyes that we are allowing it to happen. It is so important because it affects everything else in their life, to the point that they may not be able to do what God wants them to do because they have put them into a place of bondage.

Too many people are stuck in a trap and doing a job they don't want to be doing. Instead of doing something that makes them come alive and what God designed them to do.

In John Eldredge's book, Wild at Heart, there is a quote that holds very true.

"Don't ask yourself what the world needs. Ask yourself what makes you come alive, and go do that, because what the world needs is people who have come alive."

FICO Score Decoded

I had a friend ask me a really good question recently that I wanted to put on here to show my thoughts on it. He asked, "Which is better on a credit score - a credit card with zero balance, or no credit card at all?"

Before I answer this question I have to lead into it so you know where I am coming from. I am not a big fan of encouraging people to make efforts to make their credit score as high as possible. I do think it is important to make all payments you have so that your credit will be intact and in good shape because it is your electronic reputation. As long as you do that, you do not have to worry about your credit score.

The only thing that a credit score gives you is the ability to borrow MORE money. So essentially what you are saying when you want to raise your credit score is, "I want the ability to borrow more money." I don't like the idea of borrowing money period so I usually advise people accordingly to not bend over backwards to get their credit score higher.

FICO scores are calculated based on your rating in five general categories.

Components of the FICO score are:
Payment history - 35%
Amounts owed - 30%
Length of credit history - 15%
New credit - 10%
Types of credit used - 10%

80% of your FICO score is to get in debt, stay in debt, and make payments for a long time. That is the way to improve your credit score, but also the way to be in slavery and have no freedom with your money. So I advise people don't even play that game. The only thing you need a credit score is for more debt anyways. Everyone in America is so worried about their credit score; yet most of America is living paycheck to paycheck. I want to steer people away from playing the credit score game because I really do think those two issues are connected.

But to conclude to an answer I say don't mess with it at all. If you are not planning on using the card, then don't get the card. It really doesn't affect your "credit score" that much if you had a card with zero balance as opposed to no credit card at all.