RateWatch #423 Credit

September 4, 2004 by Dick Lepre

What's Happening

The BLS Employment Situation Report showed 144,000 new jobs in August and an upward revision to +73,000 from July.  The unemployment rate was 5.4%.  Average Hourly Wage was +0.3% and the Average Work Week was flat at 33.8 hours.  The picture remains constant:
an economy in slow, steady growth.  No Boom, no bust, just slow, steady growth.  Treasuries are off in price (higher in yield). 

A detailed look at the employment report shows modest growth across every sector except retail trade.

As we have pointed out in the past, there is almost no connection between the president and jobs. Since this is an election year, jobs are an issue. The low unemployment rate offers something for Bush. Also, we have had 12 consecutive months of jobs growth. The slow growth offers something for Kerry who points to the net jobs loss from the start of the Bush administration.  I think that when the smoke is cleared, this report is positive for Bush at the present time.  If someone believes that the President is responsible for jobs then they are more into perception than reality.  If perception is what counts than +120,000 sounds good. If the number had been +20,000 or -20,000 it would have been a different story.

Jobs are not created (or lost) by the President but by the marketplace. Jobs are, in essence, like
any other commodity. There is a supply - the work force - and a demand. The demand for jobs varies according to the demand for the products and services of businesses.

Businesses and, consequently, job creation run in cycles. These cycles are not some unseen or
metaphysical force. They are a result of the nature of the way businesses work. Opportunity
knocks, business builds, jobs get created, supply exceeds demand, business contracts, jobs are lost. It's that simple.

We are likely at the start of a short-term (10-12 weeks) bearish tech for Treasuries. This will take
us until mid to late November. At that time we will start a secular (10-14 month) bullish market for
Treasuries (lower rates).

Since it is Labor Day weekend, I shall honor it like any good American by slacking off and running
this old favorite on credit.

How to Start Using Credit Cards Correctly

A long time ago - when I was graduating from college, even before I actually started my first job - I was sent applications for credit cards.  They were very easy to get.  They still are. Young folks getting their first jobs are introduced to the world of credit cards.  Credit cards are a modern necessity but for some they become a serious problem .  Credit card debt can destroy young people's lives.

This section is for people getting started in the credit world.

If you want to become a homeowner you need to have credit cards work for you.  It is OK to get credit cards.  It is OK to use them. The purpose in using them should be to establish a credit history. What is not OK is carrying any sizable credit card debt.

Let's say that you want to buy a new TV for $700. Do not do it unless you have the $700 set aside for the purchase.  If you are not the best in the self-control department, perform this drill: 
buy the TV on your credit card only when you have the money in your checking account.  When you leave the store (OK you can take the TV home first but you can't plug it in yet) write a check to the credit card company for the amount that was billed. 

Go home, take the TV out of the box, plug it in and Scotch tape the envelope with the check to the top of the TV. Mail it (the check not the TV) to them when you receive the credit card statement. You will have accomplished two things: 
1) established credit usage and
2) not run up any debt.

Obey the following rules when using credit cards:
- use them infrequently
- do not buy anything that you do not have the money in hand to pay for
- pay off all of your credit card debt when you receive the statements.

At present, I use credit cards only when
1) shopping online 
2) buying "big ticket" stuff because BofA gives me 1% back and I pay the bill immediately
3) in an emergency.

It is only in the last few years that I have broken down and used them to pay for gasoline.  It is a lot easier to stick the card in the pump than to deal with the attendants at gas stations.

If you want a DVD and do not have the cash then you cannot afford it.  Wait until you have the cash and pay cash for it. 

If you feel that you need to get away for the weekend and do not have the money - stay home and watch TV.  Watch cartoons on Saturday and football on Sunday. 

Don't go to restaurants and put it on your credit card - pay cash. If you don't have that kind of cash - eat at McDonalds. If you cannot afford that then you really are in trouble.

Have some understanding with your spouse about that what will be spent for birthdays and the anniversary will be limited to cash-on-hand. Mutually agree that you love each other but that your love would be enhanced if you could buy your own house some day.  If you are not married then be grateful that you do not have this problem.

Avoid getting a lot of credit cards.  When the kindly woman at the cash register at Macy's asks you if you want to apply for a credit card and tells you that you will get 5% off whatever you buy that day - resist.  She is working for Satan. She represents the forces of evil even though she looks innocent. She is out to destroy your credit.  She probably owns apartment buildings and wants to make sure that you become a permanent renter.

Do not succumb to the concept that we live in a "credit card economy" and that using credit cards helps the economy.  I suppose that in the 1970's people bought cocaine and cocaine dealers made money and that gave the economy a boost.  In the long run neither drugs nor credit card debt really helps the economy.  Those who are ruined by them become economically marginalized. 

The Credit Industry

If you look on-line you will see that there are thousands of listings for credit cards, debt
consolidation, credit repair, debt counseling and bankruptcy.  The credit card industry has
spawned other new industries.

What Should You Put on Your Credit Cards?

On-line shopping, emergencies: tow trucks, bail.  Use them also as a "deposit" when traveling.  You need them to make hotel reservations and to rent a car.

Debt Consolidation

I typed "debt consolidation" into Google and it said "3,860,000 pages found".

I typed "+"debt consolidation" +bankruptcy" and it said "949,000 pages found".

Feeling frisky I typed "+"debt consolidation" +bankruptcy +suicide"
and it said "2,150 pages found".

Draw your own conclusions.

The Plastic House

In the past few years we have seen a mutant form of the plastic monster.  It is the 125% LTV mortgage.  The  proposition is simple enough - pay off all of your credit cards by getting a second mortgage on your home.  The interest is probably less that you are now paying and it may be tax deductible.

These are ill-advised.  The wrong people get them. People who have problems meeting their credit card debt now tie this debt to their home and can charge more stuff. 

Let me draw an analogy.  Around the year 1900 the German pharmaceutical firm Bayer (the aspirin people) marketed a cure for morphine addiction. This wonderful product was sold under the trade-mark "heroin". The 125% LTV loan may likely do to your finances what heroin does
for your body.  Seems like a good idea at the time - feels good at first but it's nasty and hard to get rid of.  It is no more a cure for credit card debt than heroin was for morphine addiction.

If you are in this credit card abyss you need to work very hard to get out of it.  You need to stop charging and seriously do all that you can to maximize your income. You need to pay off the credit cards with the highest rates first.  If you work overtime or get a second job do not reward yourself for it. You have already spent the money that you are working so hard for.  If your debts are so large that you cannot possible pay them off with a 3-year austerity program you need to consider a bankruptcy. This will have a negative effect on you creditworthiness for years to come but you may be able to regain control of your life and do away with the hideous effects of being a captive of the P-Monster.

If you decide to get a "cash out" refinancing or a second mortgage to pay off existing credit card debt you must do yourself the favor of seriously reducing the balances.  Do not close the accounts.  That can have an adverse effect on your credit score.

Living With Plastic

Credit cards are a necessity.  Get them.  Use them wisely.  Make them work for you by enhancing your credit history.  Don't charge anything that you do not have the cash to pay for.  Pay all credit card debt off immediately unless there is an emergency.

Not Just Plastic - Other Credit

I have seen many young people who could not qualify for a home loan because they had two car loans. If you cannot afford to pay cash for a car, keep the payment low.  As a rough guide, if more that 15% of your gross income is spoken for by debt you may not qualify for a home loan.

There is "smart" debt.  If you take out student loans and get through medical school that is smart
debt. If you buy a car which you need to get to work or use for work that is smart debt.

For the More Sophisticated

Please understand that most (maybe all) of the advice above is for beginners.  Folks who have
well-established credit may seen the picture differently.  They may "put everything" on credit
cards for the purpose of accounting or to get some subsidiary benefit such as airline miles or cash.
If your approach to credit is that sophisticated, feel free to pass this along to people who need it.

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