Put a dollar value on your Credit Rating

[cthulu2016]

If you have not calculated what you think your credit rating is worth to you you cannot make sensible financial decisions.

A value will be missing from all the equations.

Example A: I was talking to someone who owns a house that is deep underwater. She needs to move. She said that she may end up having to pay the bank $100,000 (from retirement) at settlement.

The alternative would be to walk away from the house. It is legal and it is certainly what the bank would do without hesitation if the roles were reversed. There is no moral or ethical problem with operating under the terms of a contract.

She could keep the $100,000 in her retirement fund and trash her credit rating for seven years. Is seven years of bad credit rating worth $100,00?

Maybe it is. Maybe it isn't. It is worth different amounts to different people in different circumstances. But it must have some money value to balance against the money value of lost money.

Example B: A person owes $50,000 in credit card debt (not unheard of) and has no income. Just servicing the debt costs $1,000/month.

If someone walked up and said, I have a way for you to owe nothing and get the value of a payment to you of $1,000/month but it with give you bad credit for seven years that might sound like a hell of an offer, or a bad offer. That is what declaring bankrupcy would do. Is the credit rating worth more or less than that?

It depends on the person and his or her situation and plans and prospects.

I am not saying that everybody should walk away from their debts. I am just saying that until you somehow put a cash value on your credit rating it is impossible to think about these things the way a bank thinks about these things and make the sort of pragmatic/ruthless decisions a bank would make.

You may value your credit rating at $1 million dllars or at $5 dollars. That is your personal call to make. But it has to have some value.

[closeupready]

1. A bankruptcy stays on your credit record for a long time, but you can still get credit sooner if

someone is willing to lend to you, and some entities will lend even to those with bad credit. It just depends, on a case-by-case basis.

Watching the 60 Minutes segment the other night, I was struck how the homeowners who were underwater were so proud of themselves, even going on national TV to paint themselves so self-righteously. I was not impressed, frankly. It's important to take your commitments seriously, but if circumstances change, you have to be flexible. For example, if it was a matter of life or death, would you die in order to pay your mortgage? How would that make sense?

Paying your mortgage when you are underwater may make you feel good, but it can lead to horrendous financial outcomes for you and your family, unless those circumstances change. (Maybe feeding this pattern of making bad financial decisions, i.e., you took out a mortgage you couldn't afford in the first place, bad decision #1. You are underwater but are unwilling to walk away "on principle", could be yet another bad decision...?)

Some like to be martyrs, but I don't.

[cthulu2016]

2. And in most states you have no commitment to honor.

In most states your contract with the bank says, "If I don't pay this you get the house."

Period. They get the house.

The bank would not get into some nonsense about what "good" people do. The bank will exercise the contract as signed to their maximum benefit.

So humans are often at a disadvantage.

There is a reason that banks were running ads saying, "If you chose to not pay off your mortgage, what message are you sending your children? What will your neighbors think?"

They can pressure people's sense that they are somehow ethically obliged to pay money the contract does not call for.

[closeupready]

3. Yes, running those ads extracts the maximum possible value from a worthless mortgage that is going

going to fail, and when it does, the bank gets the property. So it is certainly in the bank's interests to run those ads.

What can I say. People just aren't very bright. Sucker born every minute, and all that.

But the MSM loves to worship the martyrs out there who will hand over their money foolishly in vain attempts to preserve "character" (which wasn't ever part of the original equation) even as property values continue to sink.

[dmallind]

4. If it was worth it to the buyer to pay $X/mo initially to live there, why not now?

All that "underwater" means is you'll lose $$ if you sell. Completely irrelevant unless you need to sell. If you took out a mortgage paying more per month than you thought living in that house was worth you are a blithering idiot, and would be regardless of current equity. Assuming most people aren't so foolish, an underwater position is utterly meaningless unles you need to sell your house (or if you want a home equity loan I guess but walking away means that option is fucked too so no change/no importance there either).

[closeupready]

6. You didn't watch the 60 Minutes segment, did you?

Obviously, if you can pay the mortgage now like you did before, and it's a home you want to retain possession of, then clearly, none of us here is talking about you. We are talking (with regard to underwater mortgages) about the people who resemble those in that 60 Minutes segment. Or forget 60 Minutes - consider all the news stories recently about people underwater in Phoenix or Las Vegas or Miami or Fresno.

[dmallind]

9. And that would include the need to sell, no? nt

[closeupready]

10. With regard to the 17% of those who are unemployed and don't want to be, and need jobs,

and income, yes. People in their 40's or early 50's. That's a relatively unprecedented percentage of Americans today.

[cthulu2016]

7. I disagree with "completely irrelevant"

Buying a house is not the same as renting a house. An owner gets the utility of the house plus the investment value of the house, or the investment risk of the house.

Hypothetical: You are paying $2,000/month (after all adjustments like mortgage interest deduction on one side and property tax on the other) and you could rent a comparable property for $1,500/month. You are paying the higher amount because you thought the house was a good investment.

Then property turns out not to be a good investment. It is way underwater. Your expectations of investment profit were unfounded.

So you are paying an extra $500/month into an investment that will not even reach break even for years, if ever. (Adjusted for inflatiion).

There is an argument to be made for cutting your losses. And an argument to be made against it.

It is not automatic either way. It depends on the totality of your circumstances.

[dmallind]

8. Very few areas have rents lower than mtg for comparable houses.

I used a random number generator to give me a US zip code. It came up with 17236 Mercersburg PA. The only HOUSE rental I could find was a 1400 sq ft 3/1 semi here $825

http://www.realtor.com/realestateandhomes-detail/5385-Fort-Loudon-Rd_Mercersburg_PA_17236_M41709-74333?source=web

I found this house that is detached, with an extra bath, garage and a similar size for a mtg under $500 with 0 down. Property taxes extra of course. Run about 1% so 1000/12 = $85 a month for $585 total tops

http://www.city-data.com/county/Franklin_County-PA.html

http://www.realtor.com/realestateandhomes-detail/328-S-Park-Ave_Mercersburg_PA_17236_M44116-57936


Try doing the same. Unless you get a Manhattan, SF or such zip you'll get the same results

[RebelOne]

16. I declared a Chapter 14 bankruptcy several years ago

and paid off all my debts through the court. I am now debt free. Sure, you can get credit, but with sky-high interest rates. I am always receiving offers though the mail for car loans and credit cards, but with astronimical interest rates.

[closeupready]

18. Yes, admittedly. But that's how consumer lending works. So,

as long as you were prepared for that...?

[hunter]

5. I won't ever have to pay interest if I can't get a loan...

... right?

So having no credit rating has a value too.

If you don't play you don't pay.

[ejpoeta]

11. actually, they've rigged it so it could hurt you. if you try to rent a place

they check your credit. they check your credit for lots of things now. It is bs. but they do.

[hunter]

17. If they are the sort of landlords who check my credit I probably wouldn't want to live there anyways

[HopeHoops]

12. $1.98 after taxes.

No wait - that's a typical WalMart paycheck.

[ThomWV]

13. It could be argued that having personal credit has no value at all. What can it do but cost you?

Is it so bad for a person to be cut off from incurring debt and having to pay someone else interest? What is it about having personal credit that has value?

[sarcasmo]

14. I am starting to believe this to be true.

No debt can only be a good thing.

[cthulu2016]

15. Unfortunately it affects a lot of things, even applying for a job

And try renting a car without a credit card.

Things like that.

But that's just factors in the equation.

[closeupready]

19. I don't know - do car rental places take secured cards or

prepaid cards? haven't rented a car in years.

[bemildred]

20. I'd have to go negative with it, as in a good credit rating is a bad thing.

Basically a trap that sucks you into debt.

[taught_me_patience]

21. For me, $1.1M

My wife and I used our good credit to secure a business loan that should return $1.1M over the next seven years. If you discount at 6%, then the net present value is $750k. If you're trying to get a business loan, then personal credit is extremely important... personal assets help too.

[cthulu2016]

22. See, you know.

I am sure some read the OP as saying "don't pay debts" when it is really about "don't fill in a numerical variable in an equaition with 'unthinkable' "

Everything should be thought through.

A person in a position to profit from credit-worthiness, like yourself, is right to safe-guard that credit worthiness.