Paying Down Debt Won’t Automatically Boost Your FICO Score

Realizing my finances were a mess was the easy part.  How to pay down — and ultimately pay off — those credit cards was the hard part.

The banking community doesn’t make it easy to figure out the correct way to proceed.  The easy step is to simply pay off a credit card and close it.

But if you do that, Fair Isaac & Co. — the people behind the FICO score — will give you a low score because the ratio of what you owe to what you could charge would be too high.

You want a high FICO score, because FICO scores are used by everyone from banks deciding whether to give you a loan to insurance companies to rental agencies

Here’s a simple example:  Assume you have three credit cards:

  • Card A has a $10,000 credit limit and a $9,000 balance.
  • Card B has a $10,000 limit and a $7,500 balance, and
  • Card C has a $10,000 limit and a $5,000 balance.

Overall, you have a $30,000 credit limit and a combined $21,500 balance.  Your debt ratio — the amount you owe divided by your total credit limit–  is 71.67%.

Suppose you pay off and close the card with the $5,000 balance.  Then you owe $14,500 and have a $20,000 credit limit.  Divide $14,500 by $20,000 and you have a debt ratio of 82.5%.  The way Fair Isaac looks at things, you’re more risky now that you owe $5,000 less.  So you’ll have a lower credit score.

That makes no sense, but that’s the way it is.

The smarter way to play the system is to pay off that $5,000 balance, but keep the card open.  If you do that, you then have a 55% debt ratio.

But if you pay the $5,000 balance  card off and don’t charge something, the bank will after a few months close your account.  So you’ll be right back where you were with an 82.5% debt ratio.  (We’re ignoring the fact that you paid down your other cards a bit.)

Here’s Lesson No. 1:  If you pay off a card, then charge something once every few months.  Just make sure you pay it off so you don’t end up paying interest.

Or, if you get one of those low-rate balance transfer offers, accept it, applying the amount you transfer to your highest rate card. We’ll talk about balance transfer offers in a future post.

When dealing with credit card companies in particular, we are like “sheep in the midst of wolves.” So as our Lord said, we need to be “shrewd as serpents and innocent as doves.”


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Most Americans Live in Poverty At Least Once

The likelihood of experiencing relative poverty at least once in their lifetime is surprisingly high for most Americans.

Between the ages of 25 and 60, 61.8% of the American population will experience a year below the 20th percentile of the income distribution, and 42.1% will experience a year below the 10th percentile.

“The numbers we found are higher than those we originally expected to find,” says Mark Rank, a professor of social welfare at Washington University in St. Louis.

Rank and Thomas Hirschl, professor of development sociology at Cornell University, are coauthors of the 2014 book Chasing the American Dream: Understanding What Shapes Our Fortunes that analyzes social mobility at the lower end of America’s economic spectrum. Their latest findings appear in the journal PLOS ONE.

“Our previous work has shown that the typical American has a 1-in-9 chance of joining the wealthiest 1 percent of the income distribution for at least one year in her or his working life,” Rank says. “We knew that there would be a large number of Americans on the other end of the spectrum, but this research shows specifically how wide that income gap really is.”

Income gap

Instead of using the generally accepted measure of the U.S. federal poverty line, Rank and Hirschl focused on a relative measurement for this study.

“Our use of relative poverty addresses a gap within the research literature—a gap that has arguably become more important to investigate given the emphasis upon income inequality,” Rank writes in the study. “Whereas the logic of absolute poverty is derived from a needs standard, relative poverty measures relative depravation, a concept that has greater salience in the context of rising inequality.”

In order to assess the life course dynamics of relative poverty over time, Rank and Hirschl used the Panel Study of Income Dynamics (PSID). The PSID began in 1968 as an annual panel survey (biennial after 1997) and is nationally representative of the non-immigrant U.S. population.

In addition to the figures on the number of Americans falling below the 20th percentile, Rank and Hirschl also found that 24.95 of the population will encounter five or more years of poverty, and 11.4% will experience five or more years of extreme poverty.

“Relative poverty is an economic condition that will strike the majority of Americans,” Rank says.

Those who were younger, non-white, female, not married, with 12 years or less of education, and who have a work disability were significantly more likely to encounter a year of poverty or extreme poverty.

“Just as there is a great deal of fluidity at the top of the income distribution—70 percent of the American population will experience at least one year in the top 20th percentile of the income distribution—so too is there substantial fluidity at the bottom of the income distribution,” Rank writes in the paper. “Taken together, these findings indicate that across the American life course there is a large amount of income volatility.

“Rather than a rigid class structure, the top and bottom ends of the income distribution are fairly porous. This finding provides an interesting and important caveat to the overall story of rising levels of income inequality across the past 40 years.”

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My Strategy for Paying Off My Credit Cards

There are a couple of effective strategies to pay down debt quickly.  All involve paying more than the minimum payment.

One is to list all your debts and pay off the smallest amount first, then the next largest amount, and then the next largest amount.  It has the psychological benefit of letting you see the number of debts disappear quickly.  The is called the debt snowball.

The debt rolldown is some what different.  Again, you list all your debts.  But here you pay off the highest interest rate debt first, followed by the second highest, etc.   All other things being equal, the rolldown should let you pay off your debts quicker and save you more interest expense.

But over the years, I had accepted several lifetime balance transfer offers.  On just one card, for instance, two different rates applied — 27.64% and 3.99%.  On another card, three different rates applied:  7.90% ($2671), 5.49% ($1659)  and 5.99% (5,000).

That meant that highest rate card might differ from month to month.  When I began, the highest rate card had a 27.64% interest rate.  But after nine months of payments, that 27.64% balance had been paid off.  What was left was a promotional balance transfer with a rate of 3.99%.

It would make no sense to make big payments on a balance with a 3.99% interest rate while making a minimal payment on a card with a 16.24% interest rate.

My goal was always to make an extra payment — around $650 a month extra — on the highest interest rate balance, regardless of what card that balance was on.  As one high rate balance was paid off, I would then shift to the next highest balance.

To manage this, I created a spreadsheet with the following columns:

  • Card name
  • Highest current rate on that card
  • Credit Limit for that card
  • Current balance on that card
  • Interest paid on an annual basis

Interest paid on an annual basis is calculated simply by multiplying the highest current rate on that card by the current balance.

Each month I would review all credit card statements as they came in, entering the new current balance and verifying the interest rate that applied to that balance.

I would then use the spreadsheet’s sort function to put the highest interest rate at the top of my page.  It wasn’t strictly necessary to do so, but since I had eight cards with balances, it made it easy to see what the highest rate card was.

Each spreadsheet column was totaled.

I then created two additional calculations:

  • Current balance to maximum credit.  This is a simple calculation:  divide the total current balance by the total of the maximum credit column.  It will give you a percentage figure.  When I began, the ratio was about 85%.  As I write this, it’s now down to 69.95%.
  • Effective annual interest rate.  This, too, is a simple calculation:  divide the total annual interest paid by the total current balance for all cards.  When I began, the total interest I was paying was about 18% of my balance.  A year later, the effective annual interest rate is 9.34%.

I decided my focus would be on that effective annual interest rate.  My goal was to drive it as low as possible.

The first card I tackled was a card with a 27+% rate.  But when I closely examined the statement, I noticed that it had a substantial balance transfer with a 3.99% rate for life.

So I focused on paying that card down.  On all other cards I made the minimum payment.  After several months, the 27+% portion of the card was paid off.  Now, I was being charged 3.99% on about $13,000.

So that card went to the bottom of my spreadsheet, something that’s easy to do by using the spreadsheet’s sort feature.  I simply highlight the interest rate column and sort all cards so that the highest rate card is at the top of the page and the lowest rate card is at the bottom.

In essence, what I set out to do was apply the “credit card rolldown” principle to a situation where the interest rates on various cards changes from month-to-month.

I then turned to the next credit card, which has a 16.24% rate, a rate that doesn’t change.  Every month, I pay $765 on this card.  Sometimes, if the checking account is flush, I make an extra payment.  This card will be paid off in about five months.

I expect to get a balance transfer offer the very next month for this card.  If the rate is acceptably low — perhaps 0% or 1.99% —  I’ll use it to pay off the 15.24% American Express card.  We’ll talk about balance transfer deals in the next chapter.

That will eliminate all my super-high-rate cards.  The next card will be one with a 10.25% annual interest rate and a $65,000 balance.  I’m currently paying $888 a month, the minimum payment, on this card.  I’ll continue paying $888 a month — plus what I had been paying on the two highest rate cards, less whatever I’m paying on the balance transfer.  For example:

  • On the highest rate card (Card A) I was paying $765 a month.
  • On the card I paid off with a balance transfer (Card B), I had been paying $105 a month.
  • The two together total $870 a month.
  • But as a result of the balance transfer of $4,500 to pay off the 15.24% card, I’ll repay that card $450 a month.  That will leave $430 to apply to the next highest rate card (Card C), on which the interest rate is 10.25%.
  • So, the amount I will apply to Card C will be $1318 — the total of $888 that I’ve been paying  plus $430 from the two highest rate cards.

When Card C is paid off, I’ll turn to Card D, which has a 9.24% interest rate, applying exactly the same approach.  Except Card D will have an even higher payment each month, because in addition to Card D’s minimum payment, I’ll also pay what I had been paying on all higher rate cards.

My spreadsheet was necessary in order to identify which card had the highest rate.  But if your cards have the same rate — no promotional rates, balance transfer rates, etc. — there’s a dandy calculator at that will show how quickly your debt will be paid off.

In addition to the calculator, which is good to use once a year, I’ll continue to use my spreadsheet because that will show me both the effective interest rate and my debt ratio.

Dinkytown tells me that if I simply continue to make minimum payments, it’ll take 17 years and $60,443 in interest before all the debt has been paid off.

But using the debt rolldown approach, it will take less than five years to become debt free — and total interest paid will be just $26,306.


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What I’m Reading

Books (reviews will be coming):

12 Things Mentally Strong People Don’t Do, by Amy Morin

The Seven Deadly Sins, by Kevin Vost

Blog Posts:

Brent Seales’ Research Team Reveals Biblical Text from Damaged Scroll.  You don’t have to be a believer to be in awe of what technology has accomplished.

Three Words That Can Change Your Life.  Msgr Charles Koch on three words describe the well-being he has discovered in his physical, emotional, and spiritual life.

All Have Fallen Short of the Glory of God — A Reflection on the Need to Remember Heroes Are Still Human.  In the wake of the controversy involving Bill Cosby as well as statues of Confederate generals, this is a post worth reading.

The Marks of the Church: The Church is Apostolic.  A reflection by Donald Cardinal Wuerl on the marks of the church.

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2. What Leads to Conversion

I wasn’t the first person to come to a serious realization that the path they were on was wrong.  The classic example is St. Augustine, who lived a “wild and crazy” life before he converted to Christianity.

Even earlier was the prodigal son, who lived the high life until he fell so far that he — a good, devout Jew — hired himself out to tend pigs.  His job, the ultimate humiliation, was to care for animals that he was forbidden to eat.

Colleen Carroll Campbell, in her book, My Sisters the Saints, recounts her own conversion experience.  A cradle Catholic, she was practicing her faith — barely — while attending a Catholic college.

One fall day, sitting on the sill of her window, with her legs dangling out into a warm air, she has a sudden awakening:  The life she was leading —  a lot of boozing, loose connections, etc. — wasn’t the life she should be leading.  Almost immediately, she began a serious return to the Catholic faith.

For Teresa Tomeo, it was the sudden realization that her marriage was in shambles and her media career was a mess.

For Sharon Heidland, college brought a boy friend and lots of parties.  And a realization: “After getting a taste of having everything the world says you should have to be happy, but finding my heart utterly empty, I began to deeply yearn for something more. The partying, boyfriends, school and sports didn’t fill me. When I was truly honest with myself, I had to admit that I was shattered within.”

So it was with me, as I contemplated the fact I owed credit card companies $160,000 and way paying $25,000-plus just in interest to them every year.

I began to pray about this, and the more I prayed, the more I realized the Confraternity of Penitents was right:  I had to begin immediately to pay down that debt.

That thought was enough to fill me with despair.  The Great Recession had brought a lot of difficulty for my business, and my real estate investments had become a great cash-sucking void.

That was enough to bring me to constant criticism of myself.  I was a long-time financial journalist:  How could I have gotten myself into this mess?  For 15 years, I had been adding to my bookshelf a series of books warning about the dangers of credit card debt.   I had, I realized, read them just as I read the newspaper:  Casually, not acting on them.

I didn’t just owe credit card companies.  I also owe a couple of people who had provided services that I had put off paying.  Jesus warned us about that — he specifically told us not to let the sun set before we paid our day laborer.

Plainly, I was in a mess.  Praying in church I began to see the way out.  I realized that those finance books on debt were misleading.  They talked about giving up a latte a day, and using that money to pay off debts.  That wouldn’t do the job at all.

I came to understand that, at least for a time, when Jesus said to “take up your cross daily and follow me,” my cross was going to be paying off those debts.

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What We’re Reading

Here are several blog posts that I found interesting this week.  I’m sharing them in the thought you might benefit from them, too.

Is Religion Evil?  Secularism’s  Pride and Irrational Prejudice

Here’s a response from Strange Notions to what passes for common wisdom in many circles (most located in certain cities on the East and Left Coasts) is that religion, in general, is a bad thing, and that in the hands of “fundamentalists,” the Ku Klux Klan, neo-Nazis, and ultra-super-radical-Islamic terrorists, it is inevitably evil. Eliminating religion, it is then suggested or even openly argued, is a sure way to rid the world of evil. The term “religion,” it should be noted, almost always refers to Christianity (or a form of pseudo-Christianity) and then, in some cases, to Islam.

Don’t Just Declutter. De-Own.  from Becoming Minimalist

To Die of Joy.  If we truly understood what the Mass is, that’s what we’d do.  From The Cloistered Heart.

Do Less and Live More.  From Becoming Minimalist.

Why Complaining Doesn’t Get You What You Want.  From Storyline Blog.

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We’re Having Steak Tonight!

Why’s that a big deal, you ask?

Because in 29 years of marriage, we almost never have meat on Fridays.  My wife and I decided long, long ago to follow the traditional practice of going meatless on Fridays.

That’s what canon law says we should do:

Canon 1251
Abstinence from meat, or from some other food as determined by the Episcopal Conference, is to be observed on all Fridays, unless a solemnity should fall on a Friday. Abstinence and fasting are to be observed on Ash Wednesday and Good Friday.

Most bishops conferences, including the U.S., have given us the option to do some other symbolic penance — like work in a soup kitchen, or not drink alcohol, or something else.

But we chose to stick with the traditional way of remembering our Lord’s sacrifice on the cross — not eating meat on Friday.

Earlier this year I proposed that we follow the liturgical calendar just a bit, and, on a solemnity (which to the church is like a Sunday, when fasting and abstinence never apply) to have a steak dinner with all the trimmings.

Today’s the Solemnity of the Sacred Heart of Jesus.  So we’re having steak.

We celebrate when the church celebrates, and do penance when the church does penance.

But it’s more than that: I’ve come to the conclusion that Al Kresta, of Ave Maria Radio, is correct:   “Build the church, bless the nation.”

With Christianity under assault, not just from atheists and ISIS but, arguably, our own government — as exemplified by the Obama Administration’s stubborn insistence that Catholic organizations must pay for abortions and contraception through ObamaCare — I think it’s essential that we begin to reassert our Catholic identity.   Not just by supporting other who lobby and argue on our behalf in court, but openly and quietly in our everyday lives.

One way, it seems to me, is to adjust our meal plans to reflect the church’s liturgical calendar, and that means celebrating at the dinner table the big days on the church calendar.

Another is to always wear a visible cross or other religious medal.  This gives courage to other Christians to witness to their faith, too — there’s strength in numbers, as the saying goes:  Muslim women wear hijabs, or headscarves; Muslim men often wear white caps; Jewish women often wear a necklace with the Star of David, while some Jewish men routinely wear a yarmulke, or skullcap

Christians — especially Catholic Christians — should be as willing to assert their religious identity as are Jews and Muslims.

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The Day God Spoke to Me About Debt

Over the course of our lives, we’re likely to have several (many?) conversion experiences.  This is the story of one.

I was sitting in Mass.  Truthfully, I wasn’t really focused on what the lector was reading.  I was just there.

Then, one phrase ricocheted through the air and into my brain: “Owe nothing to any man, but to love one another.”  (Romans 13:8)

The phrase startled me.  And it condemned me, because I owed a great deal to others.  To be sure, I could say I was a small businessman, and I could rationalize that the debt was necessary to be able to provide service to my customers.

Many businesspeople carry a certain level of debt.  Retailers often borrow money to acquire inventory.  As they sell their inventory, they pay it back.

But my debt was different.  I had come to view it as permanent capital.  Now, there is some debt that is virtually permanent capital.  Walt Disney Co. and Coca-Cola Co. have both issued 100-year bonds.

But I’m not Walt Disney Co.  It’s unlikely I’ll still be alive in 30 years.  But Disney could, theoretically, be around in 1000 years.

When Disney issued its 100 year bonds, it paid 7.75% interest.  My debt wasn’t bonds but credit cards, and they carried interest rates that ranged from 3.99% to 24.25%.  At the time I heard that reading, I had more than $160,000 in credit card debt and was paying an average interest rate of 18%.  Like I said, I’m not Walt Disney Co. or Coca-Cola.

Small businesspeople tend to manage their businesses in a way that keeps their net worth growing.  I had justified this credit card debt for years on the theory that it enabled me to invest in my business and in the stock market.

When I heard that reading, the scales fell from my eyes.  I thought seriously about the issue and quickly realized that this wasn’t a smart investment or business strategy.

To begin with, there wasn’t any way I could expect to earn 18% year after year in the stock market; on average, the stock market has gone up about 7.7% a year since 1926.  Second, I was buying life insurance so that my wife could pay off those credit cards when I died.  So the real cost was 21.6%.

And then there was the small factor that I was discerning whether to join the Confraternity of Penitents, a private association of lay Catholic faithful.  One of the Confraternity’s rules is simple and to the point:  “Those living this life must at once begin to pay up their debts.”

So, whether from a strictly financial view — it’s dumb to be paying 18% interest a year when the average stock market return is about 7% — or from a religious standpoint, it was crystal clear to me that God was saying I should get rid of that debt as quickly as possible.

Why would God say that?  Because Jesus came to give us freedom, to free us from whatever enslaves us.  And, as I then realized, I was in fact enslaved to the credit card companies.  My $160,000 debt was generating interest for the credit card companies in excess of $25,600 a year.

To put that $25,600 into perspective, that’s equivalent to paying someone $12.30 an hour, 40 hours a week, every week of the year.  There’s an awful lot of people in the U.S. who make less every year than I was paying to Chase, Bank of America and other credit providers.

At the time I had this revelation, I owed about $160,000 and had an average interest cost of 18% a year.  Today, about a year later, I owe $125,000 and have an average interest cost of 9.35%.

I’m committed to paying that down as quickly as possible, and I’ll share that journey with you in the weeks to come.



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I Didn’t Realize It Would Be This Hard

On Monday, I went to my cardiologist.  After an exam, he had good news:  “You’re practically perfect,” he said, beaming.  I beamed too:  “My wife might disagree with you, at least some times.”

Then he added:  “But I do have a homework assignment for you:  Get rid of some of that ‘tire’ around your middle.”

“But, Doc,” I replied, “I’ve been trying.  I’ve been exercising 30-40 minutes a day, three or four days a week, on an elliptical machine.”

“Perfect,” he replied.

“And I normally keep my calories below 1610, which is why MyFitnessPal says I should be at.”

He beamed even larger.  “Well, set a new limit of 1400.  Do that and maintain your exercise plan and I guarantee you’ll lose.”

Since exercising enabled me to maintain my weight, but not to see a drop, I had to think that my doctor might be onto something.

The idea is backed up by Whitney Hetzel at 9KidFitness, who writes about the Rule of 70 (70% of weight loss comes from what we eat, 30% comes from exercise).

So I went home and went over the last week of meals, snacks, etc., on . Would I have to give up steak?  Wine?

Then I remembered I usually have four Oreos right around 3 p.m.  I checked the calorie database and found each Oreo is 55 calories.  Four cookies time 55 calories equals 220 calories, and — voila! — the problem is solved.  Just give up those four Oreos at 3 p.m. and watch that “tire” melt away.  What could be easier?

That was Monday.  I skipped the Oreos on Monday.  Tuesday at 2:45 it began:  I had a headache.  I was tired.  And all I could think about was those four Oreos that I wasn’t going to eat.  This continued until dinner.

Wednesday was a bit easier, but I still really wanted those four Oreos.  And here I am, on Thursday, writing about it.  I still really, really want those four Oreos.

I assume this craving will get easier.  But maybe not: Connecticut College students and a professor of psychology have found “America’s favorite cookie” is just as addictive as cocaine – at least for lab rats.

But maybe, in the meantime, I should join Oreos Anonymous, a 12-step program to break the Oreo addiction:  “I’m Joel, and I’m an Oreo addict.”



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And They Say the Church is Dying!

Since 2005, the number of Catholics worldwide has increased from 1,115 million to 1,254 million, an increase of 139 million faithful. During the last two years, the presence of baptised Catholics in the world has increased from 17.3% to 17.7%.

There has been a 34% increase in Catholics in Africa, which has experienced a population increase of 1.9% between 2005 and 2013. The increase of Catholics in Asia (3.2% in 2013, compared to 2.9% in 2005) has been higher than that of population growth in Asia. In America Catholics continue to represent 63% of a growing population. In Europe, where the population is stagnant, there has been a slight increase in the number of baptised faithful in recent years. The percentage of baptised Catholics in Oceania remains stable although in a declining population.

From 2012 to 2013 the number of bishops has increased by 40 from 5,133 to 5,173. In North America and Oceania there has been a reduction of 6 and 5 bishops respectively, in contrast to an increase of 23 in the rest of the American continent, 5 in Africa, 14 in Asia and 9 in Europe.

The number of priests, diocesan and religious, increased from 414,313 in 2012 to 415,348 in 2013.

Candidates to the priesthood – diocesan and religious – dropped from 120,616 in 2011 to 118,251 in 2013 (-2%). An increase of 1.5% is recorded in Africa, compared to a decrease of 0.5% in Asia, 3.6% in Europe and 5.2% in North America.

The number of permanent deacons continues to grow well, passing from 33,391 in 2005 to 43,000 in 2013. They are present in North America and Europe in particular (96.7%), with the remaining 2.4% distributed between Africa, Asia and Oceania.

The number of professed religious other than priests has grown by 1%, from 54,708 in 2005 to 55,000 in 2013. They have increased in number in Africa by 6% and Asia by 30%, and decreased in America (2,8%), Europe (10.9%) and Oceania (2%). The significant reduction in women religious is affirmed: currently 693,575 compared to 760,529 in 2005: -18.3% in Europe, -17.1 % in Oceania, and -15.5 in America. However, an increase of 18% in Africa and 10% in Asia is recorded.–Vatican Information Service

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