Showing posts with label Credit. Show all posts
Showing posts with label Credit. Show all posts

Wednesday, June 14, 2017

When the lender is a slave to the borrower

You've probably heard Dave Ramsey say this many times before, "The borrower is a slave to the lender." The quote was taken from the scriptures. That's exactly what I had in mind when I decided to lend my sister $14,000 last summer. Finally, I can 'enslave' my annoying sister, who spends most of her free time bashing Obama on Facebook. At least that's what I thought.

She and her husband, Abe were looking to buy a property near Texas Tech University in Lubbock where my nieces currently attend college. By buying the property, they were hoping to save money on room and board costs. But they were short of the 20% down payment required to avoid PMI (private mortgage insurance).

Love-hate relationship with my sister

No, I'm not really a big fan of Obama. I didn't vote for him in 2008. Yet I told her I did, just to piss her off. You see, my sister hates the former president, and she's not shy expressing it on social media. What crosses the line is when she continues to do so, three months into Trump's presidency. That's when I finally unfollowed her.

My sister and I have very little in common. She lives in the heartland, I live on the east coast. She's a republican, I'm a registered democrat. She's also a huge fan of G. W. Bush, which is not surprising because they live in Midland, Texas-- the hometown of the Bushes.

Almost every other summer, our families would meet in Orlando and discussions always end up revolving around politics. The last meet turned ugly when she lost her cool--  I told her that the younger Bush is the worst president the U.S. ever had (again, just to piss her off) and that the only thing that I admire about him is his shoe-dodging skills. That was the day I learned that my shoe dodging skills weren't as good.

So, it came as a surprise when I received a phone call from her, last summer, asking if she could borrow money.

How she negotiated the deal

The conversation went something like this (names were changed to protect those involved):

Sister: "Mark, can I ask you something? We are planning to buy a house in Lubbock and we're looking to put down $30,000, which is 20% down.  Your nieces will both attend college there. But I'm not really borrowing the whole amount."

Me: "Umm.. how much are you borrowing then?"

Sister: "Maybe, $10,000? Abe was thinking of applying for a personal loan but the 7 percent interest is too steep. Instead of paying enormous interest, we can just pay you more than the borrowed money. I really hate using our credit. Our three rental houses are paid off, though our residential house, not yet fully paid but interest rate on that house was less than 3 percent. "

At this point, I was thinking that investing in real-estate supposed to provide you with increased cash flow. It's clearly not the case for them.

The bright side is that they must have an excellent FICO score judging from the interest rate on their existing mortgage.

Sister: "The dormitory is so small plus they will have to share with other kids.  School officials don't  want them to rent outside, other than if we have our own house there. Abe thinks it is not wise to throw $9,000 away."

Apparently, she thinks it's wiser to borrow from me, her brother 8 years her junior. Perhaps she's right because I end up lending her the money anyway, without publishing her real name in this blog for the whole world to see.

The conversation continued partly in Taglish, which is a mixture of Tagalog (Filipino) and English languages:

Sister: "Baka naman, may extra ka diyan? I'll make a promissory note. I'm sorry that I'm asking you. We have not found a house yet but every time we buy a house, we put at least 20 percent down."

Sister: "I will pay in full within one year and may give extra for interest."

Me: "OK, call me again later tonight."

I end up writing her a $14,000 check. That's the maximum amount that you can give to an individual in one year without having to pay a gift tax. Except that this is not exactly a gift, she offered to pay me $500 in interest or about 3.5%. In contrast, my savings account is offering next to zero.

Her promissory note

Loaning money to family or friends is often a bad idea

I was reluctant to lend her the money at first, not because I didn't like her or because we disagreed over politics. Lending to family or friends is never a good idea. The relationship almost always ends up strained, or worst, destroyed. But when the one who is asking is your beloved sister, it is easier said than done.

Almost all of us have had bad experiences with loaning people we have good relationships with at some point in our lives. When I was 19,  I sold my Hypercolor T-shirt to someone whom I thought was my friend. He promised to pay me back on payday. Payday came, and went, he was nowhere to be found. It became clear that he has been avoiding me. I'm glad I lost that %$#%# friend of mine, but I regret losing my shirt, literally speaking.

In the end, I've set the bad experience aside and relented to her request for the following reasons: (1) that's what my late mom would do, (2) she's my sister-- blood is thicker than water, (3) I have extra cash sitting in the bank.

One year later, when the loan matures

She called me up with a barrage of excuses, which I'm sure was genuine. But this time, the conversation was one-way. I barely said anything.

Sister: "Mark, I'm sorry I can't pay you in full. We have so many expenses. We just had our air-conditioner unit system changed last September. One of our rentals got vacant for 5 months. We have so many expenses. We're scared we may not have enough money to pay for 5 property taxes. We were planning to take a loan to pay you immediately 'coz we said we pay it all this June. Kaya lang baka malaki yung interest."

Me (thinking): I'd sell all your rentals, if I were you.

Sister: "But if you need it quick tell us. I really appreciate your understanding. We have money in stocks and retirement. But we don't want to take it out because of the huge penalty."

Me (thinking): Yeah right, like I didn't know.

Sister: "Instead, I will send the $5,000 tomorrow. I'll send another $5,000 in 3 months. And $4,500 before the end of the year."

Me: "That's fine. I understand." (hanged-up the phone)

Now she's dictating the terms of the loan. I stayed quiet. I was disappointed that she didn't keep her word. But I wasn't in the mood to negotiate. I don't need the money yet anyway.
What am I supposed to do, sue my own sister? Easier said than done.

I'd rather obey the new contract and be her slave.

Wednesday, April 26, 2017

Awesome credit-- you must have it!

You've probably heard this line a hundred times at the cash register before, "Would you like to apply for a store credit card? You'll save 10 percent on today's purchase".

That was the offer that I accepted from a BestBuy store clerk sometime in the late 90s, just a few months after I started working here in the states. I remember walking out of the store smiling. It was the first time I've ever brought something out of a store without having to pay in cash.

I probably saved about $4 as the purchase was less than 50 bucks. But since the item was not of significant value, I totally forgot about the purchase; more so, paying the credit card bill. It was a bizarre case of amnesia, reminiscent of Jason Bourne but minus the fast-paced action and bone-breaking stunts.

What turned out to be thrilling was the part where I eye-balled my credit report, one year later. By then, it was too late. My FICO score plummeted to the 500-600 range, which was poor by any standard-- all due to that single transaction.

Fortunately, I wasn't really in need of any loan at the time. I already took out a loan for my car and was years away from buying a house. Otherwise, I would have been hit by a significantly higher than average interest rates that could have amounted to tens of thousands of dollars.

I was young, fresh off the boat, and stupid.

If you're a 20 something millionaire-wanna-be who wants to avoid the costly mistakes that I've made about money; give your future-self a favor--- subscribe to this blog by entering your email above.

Thank goodness, we have FICO scores

FICO stands for Fair Isaac Corporation-- the company that buddies Bill Fair and Earl Isaac founded in 1956. Now, it is the most widely accepted measure of creditworthiness.

The score range from 300 to 850. A score of 760 or higher usually gets you the best deal on interest rates. Conversely, a lower score will make it harder for you to get a loan, land a job or qualify for the best terms on a wide variety of consumer contracts.

American creditors and consumers have no idea how lucky (or unlucky) they are that they have no less than 3 credit bureaus keeping a tally of credit scores: TransUnion, Equifax, and Experian. Each of these agencies is required by law to provide consumers with a free copy of their credit report at least once a year.

Where I grew up, credit investigations go something like this.  First, you apply for a loan in person at a local bank. The next day, the bank sends a 6' tall hulking guy with 17" arms (intimidating by Filipino standards) in a motorcycle to your neighborhood. He knocks on your door, all smiles, so you don't have any choice but to send him in. You engage in small talk, as he scans the surroundings of your home for potential collateral targets (ala Ah'nold 'The Terminator' style). If you don't happen to be there that day, he'll talk to your next door neighbor. The next thing your know, everybody in the neighborhood knows that you're trying to finance a brand-new Toyota Corolla.

What affects your credit score

According to Equifax, here are the factors that affect your scores. Some will affect your score much seriously than others.

High impact

Credit Card Usage shows how much you spend on your credit cards as a percentage of your total available balances (your credit limits) for all of your credit cards. A high percentage could indicate that you don’t have your spending under control and could be a greater risk for defaulting on your payments. Try to keep your credit card usage under 30%.

Payment History plays a critical part in determining your score. Making your payments on time shows potential lenders how reliable you are in paying back what you owe. Be sure to make all of your payments on time (even if it’s just the minimum payment due), and remember that other types of credit payments such as those for student loans and auto loans affect your score.

Derogatory Marks are indications of poor behavior in the past when it comes to being responsible about credit. These include accounts in collection, liens, and bankruptcies—things potential creditors are definitely wary about. Sometimes things like this happen and they’re beyond your control but if you can, by all means do your best to keep these things from happening. No matter the reason, these negative marks will likely stay on your credit report for seven years or more.

Medium impact

Age of Credit is the average amount of time you’ve had all of your open credit accounts. It measures the longevity of your credit history. Opening several accounts in a short period of time may indicate a great level of risk, so avoid opening lots of credit accounts unless you really need them. Be sure, also, to keep your old accounts open with a good payment history for each.

Low impact

Total Accounts is the number of accounts you have, which may be an indicator of how credit worthy lenders think you are. Don’t go crazy and open a lot of accounts, though, because the average age of credit is more significant than number of accounts when calculating your credit score.

Credit Inquiries is a count of all hard credit inquiries placed on your credit report. What makes an inquiry “hard” is when you authorize a lender to get your credit report for their benefit, so they can evaluate you when you apply for a credit card, a loan, or other form of credit. If you get your credit report yourself or go through an agent such as Turbo to get it for you on your behalf, it’s called a soft inquiry and it does not affect your credit score.

How I repaired my credit

First, I contacted the collection agency in the report and paid off the balance. I wish I could dispute it, but I really owed the money. I had to pay Caesar what is due Caesar. That's what my bible tells me.

Secondly, I took out a secured credit card with First Premier Bank. With secured credit cards, I had to put up a $500 security deposit in order to open an account. The amount served as a collateral for my credit limit. I used the card regularly and paid it off  in full. I used it solely for my gasoline purchases because the cost is very predictable. In this way, the credit is not fully utilized.

Once my credit improved, I've applied for a real credit card--- it was a Bank of America credit card with no annual fee. I've been using the same card ever since.

Five years later, I opened 2 additional cards. It was with American Express and Chase. I used both regularly but I never exceeded more than 30% of the limit.

I paid my bills on time. I paid my bills in full every time.

Now, I have exceptional credit scores. The results can speak for themselves:


Readers, what is your FICO score?
Write your comment below.