Debt—Conclusion

If you’re catching up, please read these articles first:
Debt—Introduction
Debt—Part 1
Debt—Part 2
Debt—Part 3
Debt—Part 4

We can criticize our debt-bound culture all we want, but do we have a solution?  How do we live in houses or go to college if we can’t have any debt?

Excellent question, it would be unfair of me not to answer.

Let’s forget the obvious answer: we don’t actually need to live in houses or go to college.  The American media has somehow convinced us that college and equity will solve all of our problems and make us live forever.

The better answer: community.

If we work patiently, we can save for anything we want to do.

Before Melissa and I left our former lives in Columbus we saved nearly $11,000 in less than 4 months.  At that rate we could have saved $100,000 in just over 3 years. We say this not to brag, but to provide an example.

Our trick was simple.  We lived on about 50% of our income and we saved or gave away the rest.  We still had plenty of money to have fun, but we didn’t drive new cars or have cable TV.

I realize that we had a lot of advantages.  We had very few attachments and we didn’t make any poor life choices that would have weighed us down.

But if we could do that on our own think of what any of us could do in community with others.

What if two families lived together?  How long would it take to save to buy a house together?

Two families share an apartment, one pays rent while the other saves for a house.

Imagine if we could apply the same principal to 4 families living together.  Even with one member of the community devoted to the home and children, 7 wage earners could buy a large inner city house in a year or less.  (7 wage earners making a meager $30k per year each, with a home supported on $6,500, 40% of the income per month, equals a savings of $10,500 saved each month.  This totals $126,000 saved per year.  Obviously one household of 8 to 16 people could be run on much less than $6,500 per month.)

College tuition would follow much the same principle.  When savings replace debt, the value of money can nearly double.  (Remember when we said a $100k house costs $186,000 when financed?)

There’s nothing that can be done with debt that can’t be done better with savings if we have the patience and perseverance to accomplish it.  Even without 8 people in a home, an individual can accomplish houses, cars and tuition through savings if his or her priorities are right.

From our previous posts on debt we saw a lot of concern for credit scores.  But there are a few things that we should think about.

First, a credit score is only relevant if we intend to borrow money.  Second, if we’re living in community with others rent should never be an issue and if it is then a co-signer is never far away.

A good credit score can be built lots of way without borrowing money.  Simply paying our phone and utility bills on time will increase our credit score.

The fact is simple, debt is a huge hindrance to Christian community.  It’s not a deal breaker, but it says a lot about our priorities and certainly disrupts our spiritual lives.

If we truly rely on God to provide what we need, he will.  Refusing to borrow money enhances our spiritual life and draws us into community with others.

“Dishonest money dwindles away, but he who gathers money little by little makes it grow.” Proverbs 13:11

Comments

Im putting you on a list for suspected commuist party members. Hang out in a post communist country for a while. You’ll think twice about your community stuff.
I want to drink coffee with you guys while wearing flannel but tickets are still way to expensive.

Brad/Melissa,

To build a “good” credit score you do need to “borrow” money.  The traditional FICO score is computed based on a number of factors, but it involves borrowed money.
Paying the phone bill and utilities on time won’t do anything to increase your credit score, but if you don’t pay and the account goes to collections it could begin reporting to the credit bureaus.

Since typically only “credit” based accounts: Credit Cards, Loans, Mortgage’s, etc. report on-time statuses these will be the only accounts that truly play a major role in how your creditworthiness is.

That said, if you fall behind on payments that typically don’t report to the credit bureaus they may begin reporting while in collections.  This can significantly affect your credit because they will be 30 days or more past due. 35% of your FICO score is calculated based on on-time payments. Meaning that your score can drop 100 points or more for a missed payment, depending on your credit to debt ratio which makes up another 30% of your score.

Just to get the whole picture:

35% is On-Time Payments for Accounts which report to the credit bureaus on a monthly basis.
30% is your ratio of debt to credit. If you have a 60 day late utility bill reporting to the credit bureau and no credit issued your score will be very low.
15% is length of credit history - lenders want to see established credit (young accounts >2 years can be hurtful)
10% is type of credit used - do you have lots of revolving accounts (credit cards), or installment accounts (loans and things)
10% is based on inquiries when you seek new credit - If you’re constantly applying for credit your score can take a hit.

If you don’t need to borrow money, certainly your credit score means very little.  Going in to debt is a complex decision and should not be taken lightly. 
I do believe that a debt to increase assets is acceptable. A house, land, or an asset that will appreciate in value over time are some situations where I believe debt is not a negative. 

Buying a car with a loan makes sense as long as the users decpreciates the value of the car over its useful life and is determined to use it for that period of time.  Don’t buy a car on a 5 year loan and sell it in 3. Having a car may not be a requirement of your situation, careful evaluation of your priorities and income is the key.

Revolving credit is hardly ever a good use of funds. That said it can be managed and thus be a useful tool in the hands of a person who is responsible.

Rachel—Yes, communism doesn’t work.  Thank you.  A group of individuals voluntarily working in community, however, would work.  The key is voluntary community for a reason, not government imposed community.

Jeff—You’re right, if people enjoy worldly priorities debt can be a powerful asset in the hands of the minority that can responsibly manage it.  You can buy lots of fun things with it and pay for it as your income increases.

But as a spiritual principle, debt inhibits our ability to live in community and inhibits our ability to respond to God’s call, as we’ve tried to demonstrate with the last four posts of biblical context.  How can we immediately leave our income behind for a different country or region if we have a house and car payment?

In regards to equity, how is paying $186,000 for $100,000 in equity a worthwhile expenditure?  Let alone being tied to one spot and a job for the next 15-25 years.

How is that a better option than saving? (ignoring the fact that debt is based on buying material things for ourselves)

What if your property does not appreciate in value?  What if things like a “mortgage crisis” or recession happen?  That would certainly be unfortunate.

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I would write more, but I’ve got to go buy some shit I don’t need.

Society has convinced everyone that a Credit Score is needed to rent or buy a home or car but it is simply not the case. There was a book that came out a number of years ago called “The Millionaire Next Door.”

It’s a great book on building wealth and the habits of people that have become wealthy. Anyway, the book analyzes Millionaires throughout the country and some of the findings were interesting.

For example, The majority of Millionaires buy cars with cash, Do not own credit cards, and very few have FICO Credit scores. The most interesting thing that I found in the book was that the average Millionaire has an income that is less that $100,00. They know how to save…

The point of my post is that ASSETS speak much louder than a FICO score. Almost every Mortgage company has a Manual Underwriting dept that approves loans based on Assets and Net Value and they don’t even look at credit scores.

One more thought -

“If 10% is good enough for Jesus, than it ought to be enough for Uncle Sam.”