Well said.

I had a severe spending problem while in college and shortly after. My credit cards were the means for me to express my problem, not the problem. Whatever nefarious plan Citibank might've had, a ridiculous notion, I had to volunteer for the part of sucker. I figured this out pretty quickly, but I'd buried myself in to using the card for monthly expenses so that I could use my cash to pay the monthly minimum.

After a decade of digging out, I finally paid the last card off. It didn't require finding someone to blame. I merely had to make one choice over another rather than make all choices, which is a normal sacrifice of financial life for most people. I just sacrificed more after I dug in. When my friends were buying BMWs, I drove a VW. It helped that I could see the absurdity of earning $40,000 per year in DC and buying a BMW. I also liked the VW. But if I'd wanted to buy the BMW, I couldn't.

The problem I think too many people have is they rely on windfalls to pay off debt. Tax time is a positive to these people because it means a (generally large) refund to pay off debt. The wise individuals keep more of their earnings during the year to avoid going into debt. They also have enough sense to avoid the lunacy of "I'd just spend it elsewhere if I kept it during the year."

As Crid recently pointed out, even the poor in this society have TVs and dishwashers. People see it as their right to have a brand new, expensive car -- or maybe just don't do the math. Same went for all the crazy loans that were given out. Did these people not read their loan documents to see what the interest rate would go up to? Did they not do the math? I just don't understand.

How many of the subprime borrowers were 100% truthful in their application regarding income? The currently accepted theory is that lenders suckered borrowers into loans they couldn't pay doesn't add up. There are stupid lenders because every profession has its idiots. But no fool is going to lend several hundred thousand dollars to an individual expecting to get lots of interest payments up front but never see a return of the principal.

The political storyline, including the credit card article, is always that voters are never the irresponsible party, or worse, the liar. I don't like politicians.

And Crid is correct. What we define today as "poor" is significantly different than poor in previous generations. People can't afford a house like they used to. Of course, they used to buy an 800 sq. ft. house. Now anything under 2,000 is considered shameful.

I'd rather listen to a good economist than a good politician.

I'd love to see more economists in politics.

And good point about people lying. But, don't lenders check to verify income? This reminds me of "rent-to-own" appliances, where the poor end up paying for a TV set to the tune of a small car.

Again, I learn a lot from Europe, where they drive tiny cars and live in small spaces, and get one paper napkin, and not a stack, as I see people take here.

As I've said before, due to circumstances that were entirely within my control,but that I let get rapidly out of hand, I was buried under credit card debt about 8 years ago. I finally went to a financial advisor, and hooked up with American Debt Solutions. I was put on a budget, and got control and paid off over $25k worth of debt in about 5 years. Now, I'm more than solvent, I pay way more than the minimum due on my cards (I only use 2 any more, and then, only when I have to, for large purchases; I pay cash for pretty much everything else these days), I pay more than the payment due on my car every month, and I'm striving to stay ahead of the game at all costs. I have 2 daughters that I'm giong to have to put through college, and very limited resources.

When I bought my house in the summer of 2005*, I provided a (truthful) income statement and personal balance sheet, as well as my most recent tax return. I'm self-employed as an independent consultant, so I didn't have pay stubs. My girlfriend provided hers, since she's a teacher, but my income constituted the bulk of our purchasing power. Other than what I provided, no one checked that my statements were factual through bank records, for example.

And the tax return I provided only included a partial, first year of self-employment income. It was considerably lower than what I projected going forward. They relied on my projections. Those projections proved to be accurate, but my lenders got lucky in their trust.

When we bought our house, we bought half of what we could afford because we didn't need more. Enough room to live and let the cats roam. Other than that, I wasn't spending hundreds of thousands of dollars to live in a better neighborhood so the neighbors will think higher of my ability to consume.

* Oh, boy, the timing on that!

Amy -

No, lenders actually weren't required to verify income under declared income rules. I am not certain whether they were legally restricted from doing so, or if competition wouldn't allow it, but the result was that they never did.

The biggest problem though, is that a lot of people took subprime loans, with the intent of selling the property before the rate would hike. Then they got stuck with the "hot potato" and ended up totally screwed. Unfortunately, this has fucked people who had nothing to do with the artificial inflation of the housing markets.

What is really frightening, is the effect this will be having on the rental markets. In spite of losing their homes, the majority of folks who lost, have considerably higher incomes than those in the current rental markets. As many of them move into the rental markets, they are going to drive up the cost of rentals (apparently they already are in some places).

I should add that in the interest in building my credit (I have abysmally bad credit, due to health care issues), I use credit cards for paying bills and groceries. The wonderful thing is, that I use only secured cards, i.e. they are like a debit card. I am careful not to actually spend what I don't already have on account, so it's already paid. Costs about eighteen dollars a month and I am going a long ways toward building decent credit.

At the rate I am going, about the time I have enough saved for a down payment, I will have decent enough credit not to get raped in interest. I will also have the down payment I would need to get a house with the credit that I had eighteen months ago, which will also translate to an improved interest rate.

Hi and good afternoon. I have a few comments to add.

1. It is not a "subprime" problem. Subprime loans were the weakest link and ran into trouble first, but it is spreading up the ladder folks. The next doozies to hit are the "exotic" loans. I/o, Pay option Arms, Stated income, and the NINA and NINJA loans.(Those last two will blow your mind people. No income/ NO asset loans and No Income, No Job/ No asset loans. California is riddled with them all)Those loans are not considered subprime, but Alt-A and Prime. Want to see something scary? Check out MIke Shedlock He has a post up about a securitization done by WAMU that was issued in 2007, average FICO score was 705 and is in deep foreclosure and delinquency doodoo. It is everyone. Prime, subprime and alt-a.

@. Regarding rentals. Many places have declining rents. Shadow inventory is exploding. Lots of people think that they will rent their property out rather than sell, since "they dont want to give it away" and they really believe taht this is just a temporary blip. The market will bounce back soon.( I think 2 years to bottome, 4-5 years sliding along sideways, then 5 years to climb back up) so, lots of SFR on rental, lots of investment condos being rented etc. Places like Phoenix, Miami, Stockton. lots of people refuse to cut their losses now.

This is a large financial event. I am an introverted detached sort, so even though I know I will be hurt in this as well as the dopes, I cant help but think WOW! I get a front row seat pass the friggin popcorn dude!!And Who will be this generations Studs Terkel. Make no mistake this is large and violent financial/credit event

Amy, lenders did not only not have to verify income, in most cases, they didn't want to. The "Stated Income" commonly refered to as "No Doc" loans, mentioned my rsj above, are simply based on what you said your income was. You just filled out an income statement and that was it. But so many people thought they could just lie about it and turn the property around for a profit in a few short months so they thought it was not big deal. RSJ is correct, this problem, caused by a legion of greedy idiots, is going to affect us all.

Guys, greedy idiots are a market that needs to be served, too. Not really, but you know what I mean... Financial market have performed so well and tamed so much bad behavior over the years that I think it's wrong to say the problem is "greed", as if that were something that you'd ever be able to take control of from Washington (or Wall Street) anyway.

If you enjoy financially alarming blog posts, this page can be counted on to deliver one every few days. It's a lot of fun to read anyway, just keep reading previous pages. I have no idea who writes it. Also, this was a fun thing to read from Cosh last month. (Seriously, do you know what "G-7 crosses" are?)

Also- Yesterday I drove to the outlet mall in Camarillo. Ten years ago, those were real outlet stores, some with tremendous bargains. But now it's just a huge mall with completely typical pricing.

Anybody know where in LA to get a good deal on sport coats?

Me, of course. Someplace in Westwood. Gregg super-scored there. Will e-mail you after I ask him the name of the place, if he knows it.

In New York, I love Daffy's and Century 21, although I don't know how their menswear is. Loehmann's just sent me a postcard announcing some huge sale on the 26th. They'll have new stuff, too, I think. And they have a small menswear section where we got Gregg a really nice leather jacket. He looked kind of like he was being brought up before the firing squad while we were looking, but that's his typical shopping mode.

First I'd like to point out that anyone who get an ARM (or any of the other exotic loans) is out of their damn mind. I like gambling (nickel and penny slots) but you never gamble with money you can't lose. My experience (observational only) is that once you start playing with money you can't afford to lose you will almost always lose it, and usually quite quickly.

I finished grad school about a year and a half ago. I had both student loans and car payments. I reported my income correctly to the loan agency, I did not include my wife's income. They gave me the home load. I can state this with absolute certainty that I would have defaulted on the loan if it was only my income.
Part of the problem is that the lender agent makes a higher commission for a larger loan. Now they do not lose that commission if you default as far as I know. Also in the boom market it was great for the lenders when people defaulted cause they could sell the house and always break even plus collect a few months of interest in the process. There are or were predatory practices but that was restricted by the truth in lending laws. They are required to provide you with complete documentation, you are not required to read it just sign that they gave it to you.

As far as credit card debt your spot on. Don't spend more than you make, actually don't spend all you make either. You want a 60" plasma (and many of us do we just won't admit it) place a given amount of your paycheck in an ING (or similar) account. Then when you save up enough buy the TV. Stay away from no interest finance unless you actually need it (had to get a furnace for winter in New England, which we paid of 6 months early) and are absolutely certain you can pay.

"Anybody know where in LA to get a good deal on sport coats?" My wife tries stuff on at local stores and the orders it online or ebay.

I just want to know where all of these lightning-fast lenders were when I was buying my home a few years ago. I had to submit copies of bank statements, 401(k) statements, tax returns...you name it, they asked for it. And I had a steady job and great credit! It's not fair, I tell you, NOT FAIR. (Of course I got a fixed-interest mortgage. ARMs are for suckers.)

I will say that some of the people with massive credit card debt are those who have suffered from genuine tragedies with horrific financial effects - dire illnesses that insurance only covered partially, for example. In addition to the medical spending, costs tend to go up in other areas - you're at the hospital instead of home cooking, so you have to buy food all of the time, or you're not able to shop around for good deals any more when the arm of your jacket falls off and you need a new one, because you have umpteen meetings with doctors to discuss your loved one's condition. I'm not mentioning this as an argument for socialized medicine, though I'm of the belief that we'd be better off with health insurance that worked like car insurance (i.e. you bear more of the cost at the low end, it bears most or all of the cost at the high end) - just saying that it is possible to follow most or all of the rules and still end up maxing out the credit cards. That having been said, no, I do not believe that such people make up all or even most of the significant credit card debtors out there.

> ARMs are for suckers.

Exactly.

You still married?

You ever go for older guys?

Shorter ones?

PS- My TransUnion score is so big it'll make your mouth water....

Single then and now, m'man, but with no desire to move from my income-tax-free state to Cali. :) I do like visiting, though.

I think a lot of the problem is the lenders. My son, in late teens, went to university. He was delighted to discover credit cards (despite parental warnings) and thought he could live off a bank loan. So he got into debt - a few thousand pounds. That's not a huge amount but debt is a steep and slippery slope. At last he go to the stage where he was worried enough to lose sleep over this and has changed his ways.

Yes, he was stupid. But few young people have much financial savvy. The lucky ones have parents who bail them out, and I think the lenders are calculatingly and callously aware of this.

I think the law should be changed to prevent selling credit to people unless they have, say, been employed for a year, or are at least 25 years old, or have an explicit guarantor. The adverts for credit are very persuasive, and the small print is *very* small.

> the small print is *very* small.

Well, yeah, but it's still printed out for you. It's not that credit companies are nice guys, but I'm not sure the law should be changed... Somehow I was raised not to be foolish with credit. I don't know how this happened. There weren't any glorious moments of insight or anything. "Caveat emptor" was served as a conversational side dish with every meal, and it's meant more to me --and afforded more wealth- than any explicit guarantor possibly could have. Many of the challenges we face in life are entirely individual, and the best families pass those off to the new individuals as soon as possible, so they can get practice.

One more thing.

Sometimes an ARM is a good thing. In a high interest rate environment(remember Volcker? remember 18% rates?) the trend for rates is down. That time is when an ARM can make sense.

The past five years have seen the lowest rates that have historically happened so an ARM was dumb. I just about puked when alan greenspan was reccomending them to the masses of people. grrr.

Crid - I bet there was no such thing as credit cards when you were a lad.

And if you don't know how you managed to avoid being foolish with credit, how can you argue that everyone else should do the same? If you did know, you could argue for whatever it was. But all you are saying is that everyone else should be as lucky as you were, or it's their own damn fault.

I am terribly stupid and amidst some personal financial crises I racked up $6K of credit card debt; however, I have never paid less than the minimum payment, plus I am ahead on my Stafford loan payments, and I always make my car payment in full and on time. I would avoid eating rather than being late on any of my bills - they're my responsibility!! So, although I feel stupid because I'm paying credit card interest that I surely could have avoided, my credit is not shot to hell by any means.

I have a (perhaps silly) question though: "I pay more than I owe on my car every month to ramp up my credit rating, which was already good." - if I pay more than the minimum per month, will that actually help my credit rating (more)? And how much more would make a difference? I pay $280 a month for my 08 Yaris. Would bumping that up to $300 actually help? Or would I have to go up to $350? I know this is not an economics or financial advice column, so if I'm annoying and no one has time to answer this, please accept my apologies and know that I'll stick to the topics in the future.

I am terribly stupid

We're all stupid about something, and the key is admitting it, and having enough of a self to be the kind of person who can admit it, and then you can get smart.

Somebody who knows these things told me not to pay more than 30 or 35 percent more but paying more at all is a good idea. The not to pay more thing is about building your credit rating...even if you can pay off the whole thing faster. That's my "I'm not an economist" advice -- so others should feel free to weigh in...as I'm sure you will.

I have really great credit, simply from not buying more than I can pay for. The car thing is a tool to help me get a really low interest rate should I want to buy a house. I'd actually like to cancel some credit cards -- I have two others (Mastercards) besides my United Miles Visa and my debit card. I'd keep one in case something ever happens to my Visa when I'm in Europe, rendering it unusable. Anybody know about whether canceling cards helps or hurts you? Had 'em for a long time, haven't used 'em in years.

> all you are saying is that
> everyone else should be as
> lucky

Never shot heroin or raped anybody, either. My dumb luck?

Amy, in some cases, canceling cards can hurt you. Your FICO scores are based upon several factors - payment history, length of credit history, total debt load vs. income, revolving debt (credit cards) vs. non-revolving debt (student loans, mortgage), total number of open accounts, and your ratio of current total credit indebtedness to total credit availability (your debt load ratio). The available credit on those unused Mastercards is being used to calculate that latter ratio - cancel the cards and your debt load ratio automatically increases. However, if your debt load ratio is already low (e.g., your total debt load is less than 25-30% of your total credit availability) canceling one of the two cards likely won't do much to your FICO scores. Cancel the newer account with the lower available credit balance first, as older accounts hold more weight with credit companies. Then you may want to take the assbackwards step of making a few small purchases on the remaining Mastercard and taking two months to pay them off. By doing this, you remind the Mastercard issuer that you're a good user of credit, and your FICO score automatically increases in month two when you pay off the card and your debt load ratio decreases. The one piece of advice I received from a friend who's a financial planner is to keep your oldest accounts, even if you don't use them very often. The big three credit companies place significant weight on the length of your credit history and holding one or two accounts for more than 20 years is regarded very favorably.

Thanks - that's super-helpful.

I'm with Ms. Gandhi. I would never cancel a credit card unless you're an addict and can't be trusted. You also would do well to maintain a small balance. For example, pay your gas bill with a credit card every month, and take that cash and pay the credit card right before you are charged interest. Don't pay it the very next day. You need to wait a till the end of the month, when it will show up on your credit. Having a 0 balance is actually not a good thing. Being responsible and paying everything in cash actually works against you, credit-wise.

I'd heard that, and it's part of the reason I bought a new car and paid for it over time, but for an amount about 30 percent greater than the required payment each month.

@Crid - there are no huge advertising campaigns designed to sell you heroin or rape as a solution to your problem of how to make that purchase now and not worry about paying it off later. In fact there's considerable advertising against drug abuse and violence. So it's easy to see that a slightly foolish young person who does not know any better can be taken in. Especially if that young person is at the age where they know better than all the adults who advise them against whatever it is they want to do.

Perhaps some people are more susceptible to being taken in than others. Perhaps they're just stupid, perhaps their genes are faulty. For whatever reason we could avoid a lot of heartache, and to my mind the making of immoral earnings by lenders, by a change in the law that would not prevent anyone from getting credit they could afford.

Basically, some people don't understand credit, and it's not right to take advantage of them. The lucky ones learn from their mistakes.

Your header reminded me of this SNL sketch:
http://consumerist.com/consumer/clips/snl-skit-dont-buy-stuff-you-cant-afford-252491.php

Ok ok, all true and correct, but I'm not bright and I'm not lucky. Somebody taught me to stay out of (financial) trouble....

Thanks Mother!

Norman, I don't think it's the LUCKY ones who learn from their mistakes, but those WILLING to learn from their mistakes. Not everyone has the great mom Crid has - some people don't teach their kids anything, and that isn't the fault of the kids. But honestly, the way some people make one dumb financial decision after another, after another, after another - it shows an almost wilful inability to grasp the connection between their actions and the consequences of them.

I think that sometimes a misplaced sense of entitlement is at the root of it. People have this sense that "I'm a good person, so I deserve" this or that, even though there is absolutely no connection whatsoever between whether you are a good person and whether you can afford a given thing. The price of a $10,000 leather sofa has nothing to do with how good a person you are. Those don't get handed out to the nicest, most deserving people, they get handed out to the people with $10,000 to spend on a sofa. It's like people seem to think that having to tell themselves 'no' to something once in a while is admitting to some kind of personal failure.

I don't pretend to be an icon of financial self-discipline. I'm in very healthy shape financially, but I think it's more because there just aren't that many things out there that I really want to spend money on. If I had more money, I'd go more places and spend more time riding my bike (instead of working to earn money) - not buying more stuff. Stuff bugs me - I have to keep stuff clean and keep track of it. Or have it insured. Bleh!

In regards to the No Doc, Stated Income, or whatever-you-call-them loans:

I believe the dishonesty involved here is shared between the borrower and the lender. When I was looking at San Francisco area homes 3-4 years ago, I talked to a couple of mortgage brokers. They basically flat out said "Well, we'll just go Stated Income, and you need to write up a letter telling us that you make $x per year". I was making about one half of "x", and they knew that, as I was entirely upfront. There was strong encouragement on me not only to lie, but specifically what the lie should be and how it should be worded, and assurances that they wouldn't "check up" because of the type of loan.



Thankfully for me, I had the sense to walk away from what both reason and instinct were telling me was a bad deal. I'm still renting - but I'm not broke or saddled with a bad loan.


Of course we all need to be responsible with our money. My only point is that the lenders (more than one I talked to) were EXTREMELY complicit in this.

PJ - I agree with what you say. It's what you don't say that differs - you don't mention lenders.

We already have laws to prevent, say, under-18s from getting credit cards. Why do we have these laws? Do they work? Do they need adjusting?

Well, regarding the under-18s and credit cards, I am not sure what the laws are. I'll take your word for it that you have to be 18 to get a credit card. It probably has something to do with having to reach the age of legal adulthood before being able to enter into legally binding contracts, although 16-year-olds can get jobs, and employment is a contract also.

Regarding lenders who lend money to irresponsible people and are left holding the bag, they will go bankrupt if they do enough of it, as they should.

It used to be that people with bad credit histories couldn't get loans for cars or houses or other things, and the nannies in government complained that lenders were discriminating against poor people. That they weren't loaning them ENOUGH! Now they loan poor people too much.

Let the market work this stuff out. I don't want to see ANY lenders getting bailed out by the government, or any borrowers for that matter.

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