Too Smart For Their Own Good
by: Dave Ozment
I was listening to a Dave Ramsey show podcast and just had to offer up a brief rant about one of the callers. It seems that this couple was calling under the guise of wanting to buy a larger home and did not know if they were ready. That is not such an unusual question and Ramsey certainly has a sound theory on the characteristics that indicate when someone is ‘ready’.
However, as he started to ask questions and the caller started to spin her yarn, the situation – while not necessary bad – was ludicrous.
It turns out the husband had previously moved, or essentially refinanced, their mortgage onto four credit cards. The balance at the time was only $40,000 – I say only because we are talking about a mortgage. The idea was to move from a 9% interest rate to a set of 0% credit cards.
On paper, the move makes sense because 0 interest is better than 9%, but it’s less than a good idea in the real world because, well there’s a number of reasons, but chief amongst them is that credit card companies to not make for the most trusted of business partners.
And alas, that was the situation these financial Einstein’s were facing. It seems that no matter what verbal agreements or small print they may have consumed, the credit cards were jacking up the rates. Hands were wrought and legal action threatened and the credit cards relented and backed out the increased interest payments but the snake had struck and the fallacy had been revealed.
But, as if that were not enough, the story really became exasperating as even more details were revealed. It turns out the credit card saga had been a long running situation. So long that the remaining balance on all the cards was now down to $4000.
Hey, that’s cool, we’re almost there, 6 more months of payments was the caller’s estimate. While that seems long relative to the balance, it’s still a cool thought that we only have half a year before we’re free and clear – including the house!
“Then you can start saving for your emergency fund”, advised Ramsey to which the caller replied. “Oh, we already have $23,000 saved in the bank.”
…the sounds you hear is that of thousands of hands simultaneously meeting foreheads…
To the very rational advice of “PAY OFF THE FREAK”N CARDS NOW” (paraphrased and emphasis added), the caller expressed fear of needing the money “in case something happened to the car”.
Are you %&#* kidding me? What could possibly happen to your car that $19,000 cannot handle?
So let’s break this down. The lure of 0% interest on a loan distracted these folks into refinancing their house onto credit cards rather than with a bank, wrangling monthly payments and minimum account activity on FOUR credit cards rather than set up a single auto draft, wrestling with credit card companies to the point of threatening legal action to preserve the low rate, and then unnecessarily sustaining this horrific situation for months and months and months while amassing a $23,000 balance in savings – a total representing over half the original credit card balance!
This is just evidence that some times, some people will over think their situation. Getting out of debt may not be easy, but it is not complicated. Shuffling rates and jockeying balances, and diversifying focus quickly becomes a high level of activity masking a low level of progress.
Find your goal and attack your goal. The rest is noise and can only detract your focus.
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They had moved their mortgage on credit cards? This is the most crazy idea that i have ever heard. I understand that different people have different views about how to manage their finances and what works best for them, but credit cards are the most expensive forms of credit available. Having said that perhaps they couldn’t get a bank loan due to poor credit ratings, but even so they are completely at the mercy of credit card companies if they bump up the rates. The next thing they’ll be doing is remortgaging via a PAY DAY loan at 25%!!
Ha, I think you’re on to something… for it is a slippery slope onto which they pitched camp. Mortgage terms are written in stone as compared to the fluid terms of credit cards… and the hoops these folks had to manuever were indeed crazy, especially when all the while they had the money to 0 the balance with a stroke of the pen.
Thanks,
Dave
All the more reason to never ever carry a credit card balance! I purposefully go out of my way to use my cash back credit card but I just set it to auto pay the balance in full from my checking account every month.
.-= Credit Card Chaser´s last blog ..Credit Cards & Bankruptcy: A Visual Tragedy =-.
Hey Joel, thanks for commenting… I think paying off the balance each month is a positive step. I’d personally like to move away from CCs altogether but I’m not there yet. Perhaps one day, but in the meantime, I agree with paying them off each month.
Dave
Dave, it’s not a contradiction, and not at all complicated. As I said, we pay ourselves first. Our retirement savings and liquid savings are shaved right off the top before we see a dime in what we consider spendable income. All money after that, that wasn’t applied to bills (utilities, food, etc) went straight to the credit cards to pay off the diverted mortgage. Bonuses and any other ‘found’ money went toward those credit cards as well. So while we were paying 0% interest on the credit card/mortgage balance, we were making 5-12% on different investments, from savings, to CDs, to bonds and stock funds. It’s a strategy that’s worked for us, and left us with 2 paid off homes and a very healthy nest egg for our retirement.
What you don’t seem to understand is that when a person takes this type of financial strategy, if they have the funds available to pay off the debt, that puts them in the driver’s seat. At no time were we at the mercy of the credit card companies. If they had tried to change the rules of the game, we would have paid off the debt. We had all the power, they none. However, these folks that called in to Dave Ramsey evidently don’t understand that. I agree with you that it’s a waste of their time and emotional energy to try to negotiate with the credit card companies as they have the funds to pay off the balance. But I disagree that the initial strategy was a poor choice.
Please keep in mind that Dave Ramsey’s schtick is to help folks who aren’t particularly financially sophisticated, and for many of those folks credit cards are a huge liability. So Dave never advocates credit card use, and probably flipped over these people doing what they did. But in my case, it’s a ‘been there done that’ type thing, and it put a considerable amount of money in my bank account that would otherwise have gone to the mortgage holder.
Hopefully the take-away here is that savings and retirement funds are in no way ‘spare money’. It is money with a purpose, and it needs to be given priority.
Hey Lara, thanks for furthering the discussion. Not everyone takes well to my not agreeing fully with them, but I appreciate your willingness to exchange ideas.
I get the mechanics of your plan. I agree with the concept of paying ones self first and the importance of savings and investing and scraping ‘found money’ for debt service. I think we’re in more agreement on the fundamentals than we may want to allow. The difference, in my mind, is in how we each define and execute on those terms or principles but that mostly puts us to different paths to a similar destination.
For example, I’d calibrate my savings dollars differently in the face of debt – I’d still aspire to both but in the moment may place one priority above another. Another example is in the power you have over the credit cards. I understand your position there and agree that you’ve down sized the risk inherent to dealing with cards by having the available cash on hand to payoff the balance with a pen’s stroke. My approach is similar but my tact varies slightly. Rather than ‘feel’ power because I have a super-sized savings balance, I’d prefer to ‘execute’ power by becoming completely debt free – see, similar but different!
Those are subtle differences in the application or definition of important terms. In the moment, that would make our plans look quite different, but in aggregate, we’re charting similar paths – yours probably with a little more risk and a little more return and mine more boring and less ‘sophisticated’ – but neither putting us in the poor house or involving a dependence on social security.
Thanks again Lara!
Dave
We did this years ago and it saved us tens of thousands of dollars in interest, not to mention that we’d moved the debt from a collateralized to an uncollaterized loan. We paid off the balance on our 2 mortgages (2 houses) by opening credit cards that offered 0% financing for 9 months to a year. We hit the payments with every spare dime we had, and moved the remaining balances to new cards when necessary. During this time we had hundreds of thousands of dollars in our retirement accounts, and the same in liquid assets and stock funds. The idea is to pay yourself first, via savings. We paid off the cards in about 4 years, effectively taking 6.75% mortgages down to 0% loans.
Yes, it was a great way to save a lot of money, and I wouldn’t do it any differently if I had it to do over again.
To each their own Lara, but I think some folks try to out smart a situation when the simpliest path is often the least risky, least sexy, least “brilliant” but most sound. Credit card companies have testified in open court and to congress some of the baloney tactics they use to abuse their customers. As a result, I’d rather not make them a pillar in my financial plan, especially if I have the cash on hand to sever the ties.
I also note a contradiction on your contrary stance…. “we hit the payments with every spare dime we had” and “hundreds of thousands of dollars…. in liquid assets…” are not congruent statements in my mind. “Spare money” may be a subjective phrase but I have found that the degree to which we liberalize the term is in proportion to the degree to which we are disconnecting the details and justifying our own way of doing things.
But you knew my thoughts going in and I appreciate you comments and challenges as a means to continue the discussion. I appreciate you reading along and I trust with one article or another we’ll engage a topic about which we do agree. In the meantime, thanks for helping to keep me honest!
Dave
Hi
This situation is totally insane. I just about stayed with them until the fact that they had the money to pay of fthe cards anyway! Sometimes people would be better off spending time thinking about their life and career than spending every last second thinking about saving money.
Thanks Neil…. I can see your thinking… not too dissimilar from Lara. The math does suggest a course of action… 0% interest is better than paying 4-5-6% interest and equally so, paying 0% on money while it is earning interest is a valid plan on paper…. but it rarely takes into account the risks involved.
I’ll take a paid off mortgage any day and with the discipline to pay myself a house payment each month… I’ll be wealthly and risk free in no time.
Thanks for commenting!
Dave