If I were to borrow money from a bank to invest in a property, I would incur a debt. Is this debt considered to be a good debt or bad debt? Well that really depends on who is paying off the debt. Based on the Rich Dad’s series by Robert Kiyosaki, a good debt is a debt where someone else is paying off for me while a bad debt is a debt where I need to pay off myself.
For example, if I were to rent out my property to someone, then I would be collecting rental income. This collected rental income could be used to pay off my mortgage loan. In this sense, I was the one who had borrowed the money but my tenant would be the one paying off my debt. However, if I had failed to rent out my property to anyone, then I would not be having any rental income. In other words, I would need to pay off the mortgage loan myself. Then this mortgage loan would be considered to be a bad debt.
If my property were rented out, then the debt would be a good debt. If my property failed to rent out, then the debt would be a bad debt. Depending on whether I had any tenant, my debt could be switching to and from bad debt to good debt in a given period of time. Thus, a good debt may not stay as a good debt indefinitely while a bad debt may not stay as a bad debt forever.
With this new understanding, there are two things that I can do to strengthen and protect my financial position.
Firstly, I can identify all my bad debts and try to convert them into good debts. For example, if I were to own a car but I rarely used it. I could rent it out to earn rental income. This rental income would be used for covering my car loan. In this way, I had converted a bad debt to a good debt.
If I failed to find someone to rent my car, I would try to settle my bad debt as soon as possible. Using the previous example, my car loan is a bad debt because every month I would need to service the loan repayment. Since I rarely used the car, then it may make sense for me to sell it off and pay off my bad debt.
Secondly, I need to do proper financial planning for all my good debts since there is a danger of a good debt becoming bad debt at any point of time. Based on what is learned from the Rich Dad’s series by Robert Kiyosaki, it is important to get into good debts to accumulate wealth. But how many or how much good debt should I be taking on?
For example, if I were to borrow from a bank to invest in a property, I would incur a debt. Since my property was rental out and the monthly rental income was more than the monthly mortgage loan repayment, then my debt was essentially a good debt.
Assuming I bought a property valued at $200K and I had loaned at 80% of the valuation price, then my good debt would be $160K. Now there were two possible scenarios that could change my good debt into bad debt.
The first scenario is that my tenant did not continue to lease my property and thus there were no more rental income. Without anymore rental incomes, then my debt would become bad debt. And suddenly, I would need to service my mortgage loan all by myself.
As a precaution based on my financial education, it is necessary for me to set aside 3 to 6 months of expenditure including mortgage loan repayment. If such a scenario were to happen, I would be able survive for at least 3 to 6 months. This period should be long enough for me to find new tenant or sell off my property.
The second scenario is that the valuation price of my property drop to $100K. Assuming that the bank only allowed me to borrow at a maximum limit of 80% of the valuation price, then I could only borrow $80k. Thus, the bank would have to force me to top up the difference of $80k. If I had failed to do so, then it would be considered to be a default on mortgage loan. The bank would have the right to sell off my property to reclaim the loss.
If I had more than one property, then I would be a much worst financial situation when the second scenario occurred. This is where financial education can plays an important part as highlighted by the Rich Dad Series by Robert Kiyosaki. With my financial education, I could determine how many and how much debts that I could take on without running into the risk of becoming bankrupt if the situation were to turn against me. That is I would not be overstretching myself with too many good debts. I would borrow within a reasonably safe limit.
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As soon as word got out, it didn’t take long for lawmakers to seize upon the highest credit card rate around — an offer being tested by First Premier Bank, a subprime card issuer, with a mind-boggling APR of 79.99 percent.
Moreover, much to the disdain of House Democrats pushing for a rate cap, the action by First Premier takes advantage of an apparently unforeseen loophole in credit card reform laws set to take full effect in February.
The First Premier card normally offers a minimum of $256 in fees for the first year for a credit line of $250. When the Credit CARD Act of 2009 becomes enforceable Feb. 22, the cap on such fees will be 25 percent of a card’s credit line. In recently mailed notices for its pre-approved card, First Premier offers a fee matching that same limit – $75 in the first year for a credit line of $300.
Along with the fee, a 79.99 percent interest rate is offered.
Reform laws do not set caps on interest rates. It only places restrictions on when and how rates should be imposed, but no limits.
First Premier has said that the offer is being tested, and does not know if it will be continued. First Premier said it needed to “price our product based on the risk associated with this market” in a statement to the Associated Press.
Rep. Dennis Cardoza, D-California, today lashed out at First Premier’s card offer in a letter to Pres. Barack Obama and California Senators Barbara Boxer and Dianne Feinstein.
Cardoza is asking them to support a bill sponsored by Rep. Louise Slaughter, D-New York, chairwoman of the House Committee on Rules. Slaughter and Rep. John Tierney, D-Massachusetts, that would cap credit card interest rates at 16 percent, and penalty fees at $15.
“First Premier Bank, a subprime credit card issuer, is skirting new regulations intended to curb abusive practices in the industry,” Cardoza said. “It’s a strategy other subprime card issuers could start adopting to get around the new rules.”
First Premier’s website says that credit cards are serviced by Premier Bankcard. The company, based in Sioux Falls, South Dakota, says Premier Bankcard is the 10th largest issuer of MasterCard and Visa cards in the country, with more than 3.5 million customers.
“Our representatives have done a lot to take care of Wall Street, how about doing something to help real people. Almost everyone has a horror story regarding credit card companies, and it’s time to protect consumers from this immoral and predatory industry,” wrote Cardoza.
Under the bill introduced by Slaughter and Tierney, the Truth in Lending Act would be amended to create a “National Consumer Usury Rate,” which provides that the annual percentage rate (APR) “for an extension of credit or outstanding balance on any credit card account may not exceed 16 percent.”
The bill allows the Federal Reserve to make adjustments to the maximum APR in the cap when it is “in the public interest and economic conditions warrant.”
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Lawmakers to Obama: 79.99% Credit Card Calls for Rate Action
NEW YORK — It’s no mistake. This credit card’s interest rate is 79.9 percent.
The bloated APR is how First Premier Bank, a subprime credit card issuer, is skirting new regulations intended to curb abusive practices in the industry. It’s a strategy other subprime card issuers could start adopting to get around the new rules.
Typically, the First Premier card comes with a minimum of $256 in fees in the first year for a credit line of $250. Starting in February, however, a new law will cap such fees at 25 percent of a card’s credit line.
In a recent mailing for a preapproved card, First Premier lowers fees to just that limit — $75 in the first year for a credit line of $300. But the new law doesn’t set a cap on interest rates. Hence the 79.9 APR, up from the previous 9.9 percent.
“It’s the highest on the market. It’s the highest we’ve ever seen,” said Anuj Shahani, an analyst with Synovate, a research firm that tracks credit card mailings.
The terms are eyebrow raising, but First Premier targets people with bad credit who likely can’t get approved for cards elsewhere. It’s a group that tends to lean heavily on credit too, meaning they’ll likely incur steep financing charges.
So for a $300 balance, a cardholder would pay $20 a month in interest.
First Premier said the 79.9 APR offer is a test and that it’s too early to tell whether it will be continued, according to an e-mailed statement. To comply with the new law, the bank said it will no longer offer the card that has $256 in first-year fees as of Feb. 21, 2010. However, customers will still be able to use their existing cards.
According to First Premier’s Web site, the credit cards are issued by its sister organization Premier Bankcard. The company, based in Sioux Falls, S.D., says Premier Bankcard is the 10th largest issuer of MasterCard and Visa cards in the country, with more than 3.5 million customers.
In a mailing sent to prospective customers in October with the revamped terms, First Premier writes “…you might have less-than-perfect credit and we’re OK with that.” The letter notes that an online application or phone call is still required, but guarantees a 60-second status confirmation.
The letter also states there are no hidden fees that aren’t disclosed in the attached form. That’s where the 79.9 percent interest rate and $75 annual fee are listed. There’s also $29 penalty if you pay late or go over your credit limit. The credit limit is $300.
The bank did not say how many people were offered the 79.9 APR card, but noted that it needed to “price our product based on the risk associated with this market.”
Even if First Premier doesn’t stick with the 79.9 APR, it will likely hike rates considerably from the current 9.9 percent to offset the lower fees, said Shahani of Synovate.
The revamped terms may not be the only changes; First Premier also appears to be moving away from the riskiest borrowers.
The bank typically mails offers to subprime households, meaning those with credit scores below 700. In the third quarter, however, 84 percent of its offers were sent to subprime households, down from 91 percent the same period last year, according to Synovate.
First Premier could be cleaning up its credit card portfolio since the new regulations will limit its ability to raise interest rates. That could mean First Premier won’t issue cards as liberally to those with bad credit.
As harsh as First Premier’s terms seem, that could be a blow to those who rely on the card, said Odysseas Papadimitriou, CEO of CardHub.com.
“Even when the cost of credit is astronomical, for people in true emergencies, it’s much better than not having access to credit,” said Papadimitriou.
Until Feb. 21, First Premier is still offering its even-higher-fee card online. So the price for credit the bank charges is at least $256 in first-year fees.
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First Premier Bank Charges 80% Credit Card Interest
NEW YORK (CNNMoney.com) — Rising unemployment is pushing strapped U.S. borrowers over the edge, with delinquencies and balances on delinquent credit cards surging — that’s according to an industry report. Here’s your step-by-step guide on what to do if you can’t afford your credit card payments.
1. Contact your lender
Let’s say you’ve lost your job, or are looking at a steep medical bill, and worried you won’t be able to make your credit card payment.
Make sure you call your lender and explain the situation. The sooner you contact them, the more willing they may be to work with you.
More and more credit card companies are willing to negotiate. Realize that they’re not being charitable — they’re just trying to get what they can out of you.
So, what can you ask for? If you can make some sort of monthly payment, ask your issuer to lower your rate and possibly waive your fees. Also ask to work out a payment plan.
If the first person you speak with can’t help lower your rate or make adjustments to your account, ask to speak with a supervisor. Persistence may be necessary to find the person who can or will help you.
Document all conversations, including the name and title of the person you spoke with, date, time and results.
Go to helpwithmycredit.org — a Web site operated by credit card companies for more information on dealing with debt issues.
2. Get your debt forgiven
Increasingly, credit card issuers are accepting dimes, if not pennies, on the dollar as payment in full. But if you’re striving to get a debt forgiven, don’t expect a sweetheart deal.
Generally you have to meet certain criteria. For example, most cardholders have to be delinquent for at least 90 days and — usually — your credit report needs to show that missing payments isn’t a common occurrence. But that doesn’t mean that once your debt is settled, there are no consequences.
Closing an account due to settlement is bad for your credit score and will affect your score for several years. If the forgiven debt is more than $600, you must pay income taxes on that amount.
If you’re looking for guidance on negotiating with your credit card company, go to the National Foundation for Credit Counselors at NFCC.org.
Don’t waste your time with third party debt settlement companies. These companies charge you fees for a service you can do yourself — for free.
3. Prioritize your payments
If you’re having trouble making your monthly bills, it’s time to prioritize.
First, look at your immediate needs. Pay your mortgage or rent bill, keep making payments to your utility company and keep food on your table.
Then start to think about paying down your credit card balances. Find out which card has the highest interest rate and pay that one off quickly while making modest payments to your other credit cards.
Remember that credit card debt is unsecured debt — meaning that there’s not much that the credit card company can take away from you if you’re delinquent. You should always strive to pay off your debts. And stop using your credit cards until you pay off your current balances.
– CNN’s Jen Haley contributed to this article.
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Struggling with credit card debt?
Garry Marr, Financial Post
It was a stinging rebuke. I took it on the chin last weekend as I waited in line for a ride with my child at an amusement park in Toronto.
 ”My dad has a BlackBerry,” the little monster gloated in front of my own boy as he looked at my bottom-of-the-line cellphone.
 I hate having a cellphone but my spouse says it is a must in case of emergencies. (I’m not sure how my mother ever got a hold of my father in emergencies back in the 1970s. He didn’t even have a walkie-talkie).
I tried to explain to the young lad that I spend as little money as possible on my cellphone, opting for a $50 piece of junk that lets me pay per call — something I don’t do much of usually.
“Don’t you know you can get a BlackBerry for free,” he said, looking at me as if I am the dumbest adult on the planet.
Of course, I don’t expect a child to understand that signing up for a “free” cellphone means a commitment to three years of payments that could easily add up to more than five times the cost of the phone that you got for “free.”
Adults understand the deal. They just don’t care. Everybody wants a free BlackBerry or next-to-nothing iPhone today if they can pay for it tomorrow.
The enormous debt levels in Canada, now 140% of personal disposable income, do not even include all the financial commitments and contracts we have from cellphones to car leases, says Doug Porter, deputy chief economist with Bank of Montreal.
“Most of the traditional measures are the classic borrowing on credit cards, consumer loans and mortgages,” says Mr. Porter. “In the early 1990s, debt was underestimated because it did not take into account the leasing of cars.”
Terry Leon, chief executive of Leon’s Furniture Ltd., proudly claims his company pioneered the whole “do not pay until” programs, which allow consumers to walk out of stores without putting up one cent.
“We are going on as long as 100 weeks in honour of our 100th anniversary,” says Mr. Leon, referring to the fact consumers can now buy something in his store and not pay for almost two years.
There is a difference from most debt with his store because Leon’s does not charge interest. That $1,500 couch is the same price whether you pay for it in full the day you buy it or wait the full 100 weeks before making your full payment.
On its anniversary, more than half of Leon’s customers decided not to pay that day. That’s not hard to understand. Why would you empty your pockets when you don’t have to?
Credit, or temptation, is still everywhere. Even after what has been described as one of worst recessions in history, I’m still being offered financing for everything from fixing my smile to buying a new television set.
I get an offer for a new credit card about once a week and the list of things I can charge on that credit card expands every day. If I was worried about that monthly cellphone commitment, all I have to do it is tack it on my credit card.
I was incredulous when a friend told me he was able to gamble on horses at the racetrack with his credit card. “It just comes up as a charge like it would if I bought something at the Bay,” he told me.
Not that I doubt my friend, but I went online to see if I could set up a gambling account with my credit card. It takes about three clicks, once you plug in all your information.
Scott Hannah is president of the Vancouver-based Credit Counselling Society, a non-profit group that helps consumers find their way out of debt. He notes a strong surge in demand for its services. “Compared to a year ago, the demand for our services is up 118% from last September,” says Mr. Hannah.
With debt levels as high as they are today, consumers have little cushion to deal with any downturn in the economy. “They just can’t handle any bumps in the road,” says Mr. Hannah.
Those bumps hurt a lot more when you have no cushion or savings.
If you’re going to be in debt, why not look for the best deal? The Financial Consumer Agency of Canada has a great website (fcac-acfc.gc.ca) that compares credit card benefits.
Credit:
Debt becomes us
