Can I pay $8 to end this thread? ;-)
-Mark Bole
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Admittedly some kinds of debt are bad. But to say that it depends on what you buy is as silly as saying that having debt (with a younger folks exception) is tantamount to living outside one's means. This was pointed out to me when I was obtaining opinions from this group on getting a HELOC.
If I have $30k left on my mortgage and I buy a car for $30k with cash, then I have good debt. But if I pay off the mortgage and get a loan for $30k on the car, then it's bad debt? What's the difference (all else being equal)?
In the same vein, if I'm "older" and I pay cash for a $100,000 house and have no other assets, why am I suddenly living outside my means by having a $100,000 mortgage on the same house and $100,000 in savings?
-Will
william dot trice at ngc dot com
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snip; please look back
But when people apply this, they have to weigh it against the myfico.com guidance that opening new credit accounts may in some instances lower one's score. More emphasis should be placed on the reality that a certain range of numerical values in credit score is judged the same in the mortgage industry. Credit scoring is advertised to be a fuzzy science, and it's treated as such. That's life, so no big deal, at least AFAIC. Plus do not forget that the automated nature of credit scoring will tend to reduce discrimination on the basis of race, gender, etc. Lastly, the other two parameters (capacity and collateral) for judging one's suitability for a mortgage need to be given attention equal to that of credit score.
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Bread we've had this conversation before, and I suspect we'll just have to disagree.
For background, I've been in the personal finance area for almost 4 decades and have never met a successful person who would agree with you. (By successful person, I mean someone with a minimum net worth of $2 million today excluding residential real estate, inherited money and married money.)
I'll offer you this: Since we're always quoting Warren Buffet, fire off an email to him and ask what kinds of personal debt he carries that he could recommend. If he disagrees with me, I'll listen to what you have to say.
I do enjoy your other posts.
-HW "Skip" Weldon Columbia, SC
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"John A. Weeks III" wrote Elle wrote
Serious question: Why do so many people think that a person with no loans outstanding has no FICO score? I am assuming loans here do not include that provided for 30 days or so by credit card companies to customers who pay the balance in full every month. A person who pays their CC balance every month and their utilities on time and has done so for a certain number of years should have a FICO score.
Not sure about the rest of your points. Kinda sounds like semantics. Creditworthiness means... ? Perhaps different things to you, the banks, me. Either way, assets are taken into account under the three Cs guideline.
snip because I think the three Cs responds. Plus again, this is not an exact science. Also, those with no credit score can do as you mentioned: Seek a manual underwriter. Though I am not sure this gives better rates today. Automated underwriting has become so common that its expense is low and, from my reading, it would seem its pretty reliable. If reliability can be measured.
FWIW, somehow it seems to me as well that there is some kind of commercialized push to get people to take on debt (with crappy interest rates) to boost their score. Nonsense. Given only the two viewpoints, I favor yours (and Skip's and several others' here). Namely, keep one's nose clean (debt wise), pay one's bills in a timely fashion, have I guess maybe at most two credit cards (paying off balances in full each month)*, give it all a few years, and one should have a fine credit score. Live within one's means.
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"Thumper" wrote
Seems like apples (cell phone deposit) and oranges (home loan) to me. What are we talking about here for a down payment for a cell phone, a few hundred bucks, tops? What does the company use to make its decision? Maybe it does not use FICO because this costs money.
Plenty of businesses demand a down payment/deposit regardless of one's credit score, especially when the DP is peanuts.
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That is not a useful definition. If my net worth never decreases, how can you possibly claim that I am not living with my means?
I totally agree. Businesses and governments use debt all the time, in fact couldn't exist without it. Besides, too many people earn their living off of the debt industry for it to ever go away -- and I'm not talking just about the loan broker, I'm talking about the teller at the bank, or the software programmer who builds the web site where you view your credit card statement. Advising people to avoid debt is just about as un-American as telling people to drive less, or commit fewer crimes
-- the ripple effects would cause our economy would go into a tailspin! (said only slightly tongue-in-cheek)
That's meaningless as a statistical sample, starting with the fact that it's a self-selecting group. Beyond that, if your clients are truly self-made multi-millionaires (excluding entertainers, lawyers, or doctors), lack of "personal" debt is most likely a result, not the cause. I'll wager these people made money in one of two ways: either through business, where I'm sure they took on debt (either directly, or through investors and partners), or else through some combination of living a long time in good health, passive investments at above-average risk, no dependents, and parsimony. (I will concede that being parsimonious includes paying little or no loan interest).
The converse is definitely not true: even using your definitions, simply living within one's means is *not* sufficient to become successful. There are probably at least ten thousand times the number of people in this category as there are successful clients of yours.
(I also have a nit to pick with your definition of successful: are you saying that if I own a $2 million home, it's not part of my net worth, but if I sell it, bank the proceeds, and lease an apartment, now it suddenly is? If so, that's got to be the easiest road to success I ever heard of.)
I posted this once before a year or two ago, but it bears reading again:
"How to Become As Rich As Bill Gates"
-Mark Bole
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BRK-A Shows $35.57B in cash, but $36.18B in debt. There must be a reason Buffet doesn't zero out the debt.
My outstanding mortgage is less than a year's gross pay, and the interest burden less than 5% gross pay. By aggressively saving, I've just past the point where total savings are about 11X the outstanding mortgage, i.e. by paying it off, we'd have 10X annual income in the investments. I don't subscribe to the 'good vs bad' choice of words, maybe because Kiyosaki promotes that phrase if he didn't coin it outright, but I do think there's responsible use, and a time to not aggressively pay it down. Skip, would you really look over my shoulder and suggest I need to knock off the loan to be in better shape?
To Mark's point, my wife and I are both employed in good positions, married and had a child pretty late in life, relatively speaking. And I think the thread has gone way off topic, have we even heard back from the OP?
Joe
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"Mark Bole" wrote
I do agree it is American to tell people to take on debt. Use your house as an Automatic Teller Machine and all, sure. This is not something to celebrate. From the little guy to big banking houses, debt is why our economy currently is in a tailspin. Or do you dispute there has been a credit crisis at all levels lately?
Seventy-three percent of this country has no bachelor's degree. Those that do have one are still typically math and financially illiterate. Taking on no debt is the best prescription the majority can get for living a stress-free life.
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Are you honestly saying that you've never met a $2M+ net worth (with your caveats) that believes some kinds of debt are just fine? Have you actually met any of these people? If so, did you ask them their thoughts on this?
I would love to take a survey of aquaintances on this, but it might be a little awkward when determining which fall into your net worth category...
-Will
william dot trice at ngc dot com
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Yeah-but... If other people don't run up debts, then how is the bank going to pay me interest on my savings account?
And, if everybody else gets a university degree, then how I am I going to rise above the herd by getting one myself?
And, if they all work to become literate (in both text and numbers), then how am I going to be (and look) more cool and together than them?
And, if everybody else started exercising and eating properly (and keeping their weight under control), then how am I going to continue being more attractive than them?
Etc, etc...
It is feared that in the US, the distribution of wealth is shifting to be more concentrated, not less. People are getting more educated, but there will always be those who do not graduate high school, and those who do, but do not go on to college. This thread talked more about credit cars use than mortgages. In the 'old days' mortgages were kept at the bank writing them and provided income to the bank and the source of funds to pay interest on deposits. I don't see that going away anytime soon.
Joe
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"joetaxpayer" wrote
Post-o, or maybe I am misunderstanding your words? I thought the credit crisis's origin was based in part in banks selling their mortgages (or repackaging them), and then their being sold again, until multiple layers existed, ostensibly to cover the risk of owning mortgages.
Coffee's-for-closers: There is an argument that strong economies need (1) a certain fraction of working class folks; (2) a certain amount of debt; and so on. But I hope you are not saying that where we are now is a good thing. Banks can pay you interest without others going bankrupt (devaluing neighborhoods where maybe you own homes).
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My (poorly worded) point is there will always be a source of revenue for banks to pay on their deposits. Collateralization certainly played a role in the current crisis, but not every bank sells their mortgages. For my current house, in it 12 years, I've only dealt with two banks, both of which were committed to keeping the notes in house. The current one saw me through 2 refinances done at no cost. This would not have happened the way it did had my loan been collateralized (sold into a pool). You may tell me my experience is rare, that X% of loans are not held. Ok, that may be, but I think the rate has bottomed out, that fewer loans, not more, will be sold. Way off original OP's topic, but the in-house mortgage was part of what I felt was sound planning.
Joe
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Correction: the mortgages were sub-prime ones. Repackaging and selling mortgages has been around for decades without any damage to the economy. The problem started when banks lent money to people who they knew wouldn't be able to afford them in a few years and people borrowed money for goods that they knew they couldn't afford then and accepted the terms of a contract that would postpone the effects of their poor decision.
What baffles me in this whole story is not so much people stupid enough to borrow beyond their means to keep up with the Joneses, a plague that's always been and will always be around, but that banks actually lent them money without any solid asset.
Of course, we all got to pay what those stupid lenders and stupid borrowers deserved...
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