Dave, I would like to reply to your answers (sorry I had to # them I have no idea how to break quotes up to reply). 1. I am basically going to repeat myself on this one, but an interest rate of 23% (in my opinion) meaning overconsumption is taking place. Living above ones means, unless he/she is making a return of 30-40% elsewhere. I am not pointing fingers here the 23% could very well be a rough patch in this person's life, start up of a new business (which I don't recommend) or some other method, but it is debt...which I advocate avoiding unless truly necessary. 2. It doesn't necessarily raise your score. It really depends on other factors based on an individual's report. If this person has many installment loans or assets that are being secured it could very well drop it. When I purchased my home my score took a huge dive, when many others bought a home their score increased significantly so it really depends on other factors. So a HELOC is not always an instant score boost. 3. I never, never, never recommend an individual starting a new business to secure any of their personal assets. Never. Only 18% of new businesses succeed and putting your home up for collateral is too big of a risk. As for 0% BT offers, which I am a fan of...can't hate getting borrowed money for free. One doesn't need an HELOC to make this work. If it an investment opportunity (much like creditworks) then this is totally different because he is dealing with a multitude of credit options and needs a central location. 4. Why pay any interest? Tax deductible or not. If someone takes out an HELOC at 7% and can deduct a third of that, there is still 66% that is not deductible and must come out of the person's pocket. 5. I am not against borrowing for cars, homes, college. I understand that most people don't have a huge amount of savings set aside and financing makes it easier (myself included). But why, put an additional risk to your home especially with homes so overpriced. I am afraid when homes drop that many people are going to be very surprised that they are overextended on their mortgage and home equity lines by a significant amount...meaning a home that has equity now, may have zero equity later. And it is coming. What happens then? For some a home equity loan (or second mortgage) is worth it. To me the benefits do not outweigh the risk involved. I believe you have made some very good points, but I just wanted to give another view on why it may not work for everyone. Best wishes. Dani
About that proverbial emergency fund: It makes sense to have a cash reserve for cash expenses, like rent or mortgage payments. Taking cash advances to pay those expenses would expose one to high APR's on cash advances. But for most other expenses, including emergency expenses, available credit on a credit card will do just as well. It's no problem to pay down a card, save on interest, and then use that same card to pay for groceries or auto repairs or whatever. Groceries when income is interrupted, or auto repairs in an emergency. So you may need a 3 month emergency fund, but only for 3 months worth of cash expenses, those that can't be paid with credit cards.
1* CW is correct about it regarding borrowing or loans You are right concerning the insurance issue. That's why score based insurance rates are a scam. Borrowing money and purchasing insurance are not one in the same. 2*Screwy thinking causes screwed consumers! 3* Another example of the insurance fico con game! 4*Don't know about that but I think you came up with a goodie with this one! L B 59
You are right, but in my case I already have a townhouse and a car and I have no interest in motorcycles. My checking account is FREE and I don't need overdraft protection. FICO can kiss my a--. We do depend on the credit bureaus to keep accurate info, but the more credit you have the better position you are in to deal with creditors, don't be in a position to need credit, be in a position to use it. www.creditsense.com
Thanks for the kind words creditworks. I agree with JohnM on Fico scores. Right now, Farm Bureau Bank has a no-fee business LOC that is prime for life--IFF one has a 780 FICO. There are MANY examples of you being elligible for uniquely good deals if that crazy score is high enough. Plus it does help on insurance and other matters. Dani, thanks for info about what brought you here, and for your thoughtful answers to my answers. Your underlying rationale seems to be that putting one's home at risk should be avoided if at all possible, and that debt not used for producitve investments should be avoided. I can certainly respect that position--it is very similiar to the position my extremely reponsible parents have. I am a 33 year-old professor, and so have contact with many 20-somethings, UG and grad students. In my experience, very few people your age think the way you do about this, for better or for use (and I'll assert that it's usually for worse!) "If this person has many installment loans or assets that are being secured it could very well drop it. When I purchased my home my score took a huge dive, when many others bought a home their score increased significantly so it really depends on other factors. So a HELOC is not always an instant score boost." Interesting...you're the first person I've encountered who saw a score drop upon buying their home. I wonder what possible rationale there would be there. Secured debt shouldn't increase credit risk generally , since it has assets to back it. I would like to learn more about when this happens. My conjecture is that perhaps your having an uncommon # of assets and secured debtes for someone with a relatively short credit history might give you an unusual profile. I have seen the "1 in 5" number for small business sucesses discredited elsewhere...do you recall where that 18% figure is from offhand? I am skeptical. In my judgement, it generally matters much more how a HELOC is used (utilization levels, debt/income, other resources, LTV on house, etc.) than what it is used for. Example: If I want startup business capital, and I don't borrow more than I know my "day job" can pay back on a HELOC, then the added risk may be trivial and the benefits considerable. Not to mention the FICO benefits (for ALMOST anyone) over turning to something like credit cards. "If it an investment opportunity (much like creditworks) then this is totally different because he is dealing with a multitude of credit options and needs a central location." Ah, perhaps we are more in agreement than I thought, at least on this. I agree 100% that using a HELOC to fund general consumption/std of living is a bad idea. But then, I believe using CCs to fund this can be almost as bad--it's the living above one's means that's the key objection I have. The possible emerging real estate bubble is indeed an issue. OTHO, I can't forsee widespread recalls downward on currently issues HELOCs/mortgages. Thanks again for your thoughts. If you're inclined, it would be wonderful to get your different perspective (young, financially accomplished and sophisticated, but conservative) on fatwallet's finance forums http://www.fatwallet.com/forums/categories.cfm?NoCookie=Yes&catid=52 . We have more than our share of unsophisticated, very aggressive folks there. Doc, The reason I wondered was because you'd answered the thread AFTER my original post. Not that it matters at all..thanks for the reply! In one sense, we are also conservative as you are. We make around 110K a year, but we have never had an auto loan, and indeed only had one $3,000 car until last month. Much more important, having gotten somewhat used to living modestly as grad students, we live on about 1/3-1/4 our income, and have 401ks to borrow from and rental property to sell in a prolonged crisis--which is why we don't worry about extra "saving" for an emergency fund. We have the big HELOC sitting there for this purpose, and use the extra savings every month to buy more cash-flow positive rental units. For us, credit is financial power, not enslavement or a way to live above our means. Were circumstances different, I'm sure I'd be more conservative with debt, just as we are with consumption.
The 18% number for # of successful businesses is the # that the Labor Department reports. To be truthful it is incorrect because in the # of non-successful businesses it also includes businesses closed. Well, people can close businesses for several reasons - retirement, selling of business, maybe the person has taken ill, etc. So these businesses truly did not fail, just closed. The true # (and I am not sure what it is) is probably considerably higher...maybe high 20s, lower 30s.
