credit score

In Parts I & II of this series, I explained how a seasoned financial consultant like myself managed to get into credit card debt, and how I made the difficult decision to sell our dream home to resolve that growing financial crisis. In this final part, I’ll finish the story and then discuss some of the lessons learned along the way.

When you’re in the rapids and headed for a waterfall like I was, it’s time to steer for shore and get out of the water. That’s what I did by liquidating the equity in my property. And while it was incredibly difficult to get over my psychological resistance to selling that home, in hindsight it was a smart financial move. I sold into a steadily rising market at a healthy net profit, sufficient to pay off the credit card debt and still leave working capital and some emergency cash reserves.

As I noted earlier, I had been using credit cards as a shock absorber to support my sagging budget, and I did this in order to conserve liquid cash. During the period when I was building unsecured debt, I never had to dip into my long-term retirement accounts, because I never spent down all of my non-retirement cash.

I kept my eye on the ball and never let the situation get out of hand. I made sure I had sufficient reserves to implement my own debt settlement program if I had to. I certainly did cut it close, however.

For the year or so prior to making the decision to sell our home, the juggling act grew to absurd proportions. I was carrying balances on 17 different credit cards, structured in a way to minimize interest expenses. This doesn’t count regular bills like the mortgage, utilities, cable, telephone, car, home and auto maintenance, or medical expenses.

Needless to say, it was intensely stressful to keep so many plates spinning in the air at the same time. I had to keep spreadsheets so I would never miss a minimum payment. I couldn’t skip a beat or the whole row of plates would come crashing down.

One concern I had at the back of my mind was timing. Making a decision to sell a home you truly love is difficult enough. But then you have to implement the decision at the right time. I acted when I knew market prices in my neighborhood were rising at a faster clip than surrounding zip codes. So I can’t deny a bit of luck being on my side. Then again, I had only gone forward with buying this home back in 2010 after I had assured myself it would be a rock solid financial investment. They say that “fortune favors the bold,” but I believe fortune also favors those who are prepared for it and have done their homework.

Timing was relevant in other ways too. I checked my credit score every 3-6 months, to see whether my increasing use of credit was bringing down my score. I was well over 800 FICO when I bought the house. Sure enough, I watched the score come down as my credit utilization went up. Over time, my score dropped below 800, into the 770s, then 760s, then 750s. All this with never having missed a single payment.

What worried me was triggering a credit utilization threshold that would prompt my creditors to reevaluate my tradelines with them. Once that process kicks in, slow motion disaster is the usual outcome. One creditor lowers your open credit to limit their risk, which makes your usage ratio even worse, taking another notch off your score. Other creditors follow along, and soon you are maxed-out where before you had open credit. Game over.

That didn’t happen to me, but I got perilously close. I know because I finally got a glimpse of my true FICO score. I mean the score that creditors actually see, not the puffed up one they sell you at the bureaus. It was buried in a disclosure from a major creditor who turned me down for a $10,000 line of credit and offered me a $4,000 limit instead.

The disclosure letter gave my score as 722. (The most common figure cited for a “prime” credit rating is 720. If you’re over that bar, lenders will trip over themselves to get your business. Below that, not so much!) That’s how close I got to seeing my generous credit limits lowered on my existing accounts, two points from the edge.

By the time we finished preparing the house for sale in mid-2014, our credit card debt had grown to $63,000. After closing escrow and paying off those accounts one by one, I waited about a month and then ran my credit again. The score Experian gave me was above 800 again, where I had been in the 750s and dropping. I don’t know where my true score stands today, but I don’t care because I won’t be applying for any financing in the near future.

Let me tell you: It feels amazing to go from owing almost $500k on a mortgage, plus $63k of credit card debt, to having no mortgage and no credit card debt less than one month later. I had gotten so used to carrying credit card balances, it actually felt strange to not have those bills anymore. Yet given what I do for a living, I was annoyed at having to carry any credit card debt in the first place, so I considered it my professional duty to extricate myself from that situation and then write about it. Hence this article series.

I wrote about my analysis above, the Ben Franklin approach, the three-year rule, and how I concluded that selling the house was the right decision. I also want to make clear how I evaluated the various debt relief options available to me.

Debt roll-up didn’t make much sense for my situation. I didn’t have reliable income figures from month to month, so planning for overpaying the minimums consistently enough to do a roll-up strategy was not realistic.

Bankruptcy was off the table for me, but not for any emotional reasons. I had too much equity in my property to file Chapter 7 without a forced liquidation anyway, and I would have negotiated settlements long before considering a 5-year Chapter 13 bankruptcy.

You may be wondering. Why didn’t I just quit paying my credit cards and settle my debts later? This is an important question, especially for me. I’ve been teaching people how to settle their debts for 18 years, settlement works like magic when the situation warrants that approach.

The bottom line is you should only do debt settlement if you have to. I knew if I sold the property at the right price, I’d have enough to simply pay off my debts in full. That was the ethical thing to do and the correct business decision as well. There is a time when letting go of your credit score is the right thing to do. But in my case, I wanted to keep my financing options open for business reasons. When I looked at all the factors, it made the most sense to free up the cash that was locked up in the property, pay off the debts, get ship-shape again, and then focus on doing what I do best — providing life-changing information to struggling Americans trying to make ends meet.

So where did we land after selling our dream home? I’ve always loved the mountains of Southern California, and did my share of day hiking in the San Gabriels and Cuyamaca Mountains. One of the things I loved the most about our “dream home” was its amazing view of the mountains. I figured if I actually went to live in the mountains instead of just looking at them, then I’d be happy about the move instead of depressed at having to leave such a nice home. So we moved to the small mountain town of Idyllwild, nestled about a mile high in the San Jacinto Mountains.

With the help of yet another crackerjack realtor, we secured a nice home under a long-term lease agreement. We wanted to “try before we buy” in this small mountain community, so a lease made perfect sense for our situation. Home ownership can indeed be a wonderful thing, provided the financial winds are in your favor. But it can also be a huge burden when the numbers are working against you. So we were looking for a breather, a time without a mortgage or the responsibility of home ownership.

After getting past the move itself, I had expected to feel something of a letdown. I figured I’d feel a sense of loss at having to give up the house. Instead, I felt liberated. The mortgage debt was paid off and the credit card debt was GONE! I had 17 fewer bills each month to worry about. No more worrying about covering the next property tax installment. And I had found a nice place to live in the mountains where I had always wanted to be. Not so bad.

Through this process I’ve gained invaluable experience about making tough financial decisions, and I felt a need to share that story with my readers. As a debt coach who regularly encourages clients to make such decisions, I had to step up and take the exact same advice I’d have given a client facing my situation.

But … this is not just about selling a dream home!

There are many types of tough decisions you might have to face in your financial future. The decision to file bankruptcy is a difficult one for most people. I often see clients who have ruled out bankruptcy purely for emotional reasons, rather than sound financial arithmetic. If your “tough decision” means filing Chapter 7 bankruptcy to solve your problem, then so be it! Life will go on. Millions of people have survived bankruptcy and have done just fine afterwards, and you will too.

If you can’t do Chapter 7 bankruptcy and would have to file under Chapter 13, then you’d be facing a totally different decision. Chapter 7 wipes out unsecured debt and provides a fresh start within months, with the only cost outlay being the case fees (usually in the range of $1,500 to $2,500). Chapter 13, on the other hand, requires a repayment over 3 to 5 years, at a monthly figure determined by the court. Facing the prospect of being in a long-term bankruptcy case, one should consider debt settlement as an alternative. Again, a tough decision all the way around, but one that must be made with almost Spock-like detachment!

To take a different example, perhaps the problem is the recreational vehicle sitting out in your side yard, little used but a sentimental favorite. You’ve had some good weekends on the road and camping in your RV, and you hate to give it up. But the payments are $740/month and you are coming up short by more than that every month after getting hit with a pay cut at work. What to do? How about a voluntary turn-in, so they don’t have to repossess the vehicle or sue you to recover it? That’s a tough decision for sure, but emotion has no place in that decision. Let the numbers dictate the solution, and the answer becomes obvious.

I could go on describing various hypothetical scenarios for tough financial decisions, but I trust that the above is enough to give readers an appreciation for the approach I’ve been arguing for throughout this series.

A few final thoughts on lessons learned:

1. Nothing lasts forever, including income sources. Give some consideration to how you would handle a gap in income of 3 months, 6 months, and 12 months.

2. Home ownership is not always better than renting. It may or may not be better, depending on your financial situation. Run your figures to see what your home is actually costing you year-over-year, then compare to renting.

3. Life is about a lot more than income and net worth, whether or not you own a home, etc. Apply the three-year rule and see how you feel about a particular decision.

4. Evaluate your financial affairs from the perspective that your assets should be working for you (that is, to generate income and support), rather than you always working to support your assets.

5. All problems are relative. There are young soldiers back from Iraq and Afghanistan who are missing two, three, even all four limbs. They are learning to do kayaking and skiing and other sports using prosthetic limbs. Compared to those brave young men and women, I have no problems I care to complain about, financial or otherwise. How about you?

6. Do your research. There are no magic bullets, but there certainly are a lot of scams in the debt relief world.

I’ll close with a personal note. Before publication, I shared this article with a good friend, and he expressed some concern I might be revealing too much about my personal financial status. “People want their debt coaches to be financially stable,” he reminded me.

I thought about it, and concluded this was precisely the point of the article. I had applied my own methods and made the adjustments dictated by my own financial self-analysis. The result was a return to long-term stability and a lot less day-to-day stress.

In the end, it comes down to honesty. When you are facing a tough financial decision, the path to a solution begins with an honest look at your situation. You have to face reality, and that is simply not possible until you strip away all forms of emotional pretense and denial.

In this article I’ve tried to use myself as an example, to show how I got in trouble when I ignored this principle of objectivity, and how I was able to turn things around when I finally faced facts and took my own advice. I hope the example was of value to you if you needed a nudge in the right direction. To those seeking reliable debt relief information, please refer to my website at zipdebt.com for resources, ideas, and program information.

I have an important rule for making financial decisions:

Set your emotions aside and let the numbers do the talking.

It’s a rule I emphasize over and over with my coaching clients. Emotions and financial math do not mix. They are mutually exclusive domains. You need to bundle up all your feelings, anxiety, attachments, desires and fears, and mentally stuff them into a suitcase outside the door of your office. Then analyze the situation mathematically.

Numbers don’t lie. Two plus two will always equal four, and five minus eight will always equal negative three. Numbers don’t care how you feel about them and neither do dollar bills. If you are emotionally attached to an unsustainable situation and you do not accept that reality, you will be blind to opportunities and solutions for solving the problem.

As I mentioned in Part I above, I was in the rapids and headed for financial doom. What do you do when there’s a deadly waterfall ahead? Get out of the water, of course!

In my case, getting out of the water meant cashing in the equity in my property. Yet I could not bring myself to think in terms of selling my dream home. My pride and ego were in the way, big time. I had made the exact same mistake I warn my clients against. Talk about being the plumber with the leaky faucet at home! I allowed emotions and sentiment to cloud my business judgment.

After running losses for two consecutive years, I became “house poor” by 2013, yet I still failed to take action. In fact, I didn’t actually make the decision to sell our home until April 2014, a year longer than I should have waited. That’s because my emotions kept getting in the way. My stubborn refusal to consider selling this property was rooted in pride. And when I looked deeper, I realized that it was also insecurity about the future.

Where do you go after selling your dream home? How would I ever replace the unique privacy and serenity offered by this particular residence? How could I ever duplicate that feeling of expansive joy at the incredible views of the mountains? I got depressed even thinking about it. Had I worked this hard all these years, scrimping, saving and sacrificing to buy a nice home, only to have to sell it so quickly?

I let my emotions get the better of me. I delayed the decision and continued to wait for things to turn around. Well, they didn’t.

The essential problem for my business is that the rate of defaulted debt was three or four times higher at the peak than it is today. The banks wrote off hundreds of billions of dollars in those years, and then battened down the hatches. Lending standards became much tighter and default rates declined, reaching 15-year lows.

When there are 75% fewer people needing help with their credit card debts, it stands to reason that income tied to this pool of debt will decline by a similar measure.

Of course, it’s easy to do this analysis looking through the rear view mirror. At the time, no one predicted such a precipitous decline in charge-off accounts. It was a unique time in financial history. Who knew what the future might bring?

Meanwhile, back at our dream house, I had been keeping my eye on real estate values. After purchasing the property for $654,000, market conditions continued to worsen at first, and on the public valuation websites, our home was valued as low as $598,000 at one point.

It wasn’t long, however, before prices started to turn up once more. Even though I knew it was an artificial price, I was elated when I checked the values one day and saw that our home was “in the money” again. After that, it wasn’t long before properties in our neighborhood started selling for prices above $700,000.

Before I go on, I want to underscore an important point. It’s true that I was building a ton of credit card debt, but I did this while I had a positive net worth position.

It’s one thing to owe more than $60,000 of credit card debt when you have no income and your house is upside down. You should talk to a bankruptcy attorney in that case! It’s another matter to owe $60k when you do still have some income (even though not enough), and you have more than six figures of equity in your home.

My credit card debt was underpinned by a non-liquid asset in the form of real estate.

I also still had some reserve cash in the bank against emergencies, although I constantly raided that reserve to pay bills, until it became a shadow of its former self.

By the time 2014 rolled around, I had already endured three consecutive down years in the business cycle, and the coming year wasn’t looking any better. In the rapids, waterfall not so far ahead. How to steer to shore?

There seemed no alternative. I had to start thinking about selling the house. I did what I advise clients to do when they are wrestling with a tough financial decision. I checked my emotions outside the door and did the math dispassionately.

Fortunately, real estate prices in Southern California had continued to increase at a healthy pace. I made some reasonable assumptions about the selling price and transaction costs to arrive at a likely net amount after paying off the mortgage.

The numbers talked to me, and the answer stared me in the face. If I could get a decent market price for my property, I’d turn a nice profit and walk away with enough cash to pay off our mounting credit card debt and still leave enough to have working capital again, capital I needed for business development and renewed marketing efforts.

Then my heart sank when I thought about what it would take to arrive at that outcome. And that was only one side of the equation. I also had to consider what the next act would be for our family. Where would we move to? Where would we be comfortable after this?

I like to think outside the box, to be as creative as possible when thinking things through. So I decided to let myself go and get as radical as possible. Perhaps I should just cash out the house and retire to an RV lifestyle!

My wife and I seriously discussed this for a while, even to the point of going to a RV show to view a few of the models. I must say, some of them seem great! But we weren’t quite ready to shoehorn ourselves from a large ranch home into a small “rolling motel room.” Not yet anyway.

No question about it though. Making the decision to sell our beautiful dream home was one of the toughest financial calls I’ve ever had to make. But I kept focusing on the relentless mathematical reality of my situation, and I let the numbers lead me to the solution.

I also went back to the very basics, the old Ben Franklin analysis. You know the drill. Take a piece of paper and draw a line down the middle. On one side list all the reasons in favor of taking some action or making a decision. On the other side list all the reasons against. Then compare the two lists. The answer is usually obvious.

In my case most of the reasons in favor of trying to keep the property fell under the category of emotion or sentiment, while most of the reasons in the “sell” column were grounded in solid financial reasoning. The Ben Franklin analysis was a no-brainer. Ben said, “Time to sell the house.”

Another technique I applied was the three-year rule. Unless you are faint of heart, this is a very useful thought exercise. Pretend you will be dead three years from now. It doesn’t matter the reason. You’ve been granted knowledge of your expiration date and in three years your time is up.

Now think about this important decision you’re wrestling over, whatever it may be. Does it matter that you hang on in order to have things your way, and stress out for the next three years, which is all the time you have left? Would you still make the same decision either way?

Or would you sit down and write out a bucket list, all the things you’ve wanted to do in life but never did. Maybe you never found the time. Perhaps you were just too busy. But now time is of the essence. Would that list include striving to maintain the exact same situation you are currently in? Even if that means stress and worry until the end of your life?

Changes the viewpoint a bit, no?

We are all taught that home ownership is part of the American dream and that it’s a smart investment. But it’s difficult to account for factors that aren’t financial. I’m talking about stress, as well as the demands on time and resources involved in maintaining a property.

If you think about it, working to maintain an expensive home is a decision to work for your assets, instead of putting your assets to work for you.

I applied all these filters to my situation and the only logical conclusion was to sell the house. I wrestled with this, let the emotions out of the bag, dealt with them, and pulled the trigger. That is, I met with a realtor.

Now, when you decide to sell a house, make sure you choose the right real estate broker! I’m a big fan of the do-it-yourself approach when it comes to settling credit card debts, but selling a house is another story entirely. Just getting the place ready and waiting for a good offer was stressful enough. There’s no way I was going to add the burden of marketing and promoting the place, showing it myself, and so on. There is also legal liability involved, and the paperwork is onerous, at least here in California.

Choosing the right price for our property proved to be an interesting exercise, one that required all my experience as a negotiator. I set the price high, not “crazy” high, but high enough to send a message to the neighborhood and to the realtor community. I chose $799,000 as my listing price. This figure was well over what any comparable homes in our development had sold for in the past year or more, but still under the psychological $800k barrier.

I decided to set the price a little high simply because market conditions warranted it. We were in a mode of rising prices generally. Plus my location was a fairly hot area, where home prices for nice mini-estates were still within reach of retirees.

Emotions did come into it in this sense. We had fallen in love with the place four years earlier, and we knew in our hearts that someone else would come along and fall in love with the place too. That instinct turned out to be exactly correct.

At first we found resistance to our price point. At a broker’s walkthrough of our property, the opinions were nearly unanimous. Nice view, but without all the latest upgrades it’s priced too high at $799,000. One chap suggested it should be lowered to $769,000. I’m glad I didn’t choose him for my real estate agent! “That was last year’s price,” my realtor told him. (I like my realtor a lot.)

I stuck to my guns and went with the $799,000 listing price, and our broker supported that decision. Three weeks later we had an offer, under our asking price but still reasonable. After a few rounds of negotiating, we arrived at a package of selling price and closing adjustments that netted to $790,000.

That figure was fine with us, a very fair price for a home with a “million dollar view.” We actually did believe it would be worth a million someday soon, but couldn’t afford to hang on long enough to find out. So we passed the property on to a lovely retired couple who had fallen in love with the place just like we did.

Escrow was a stressful process, to say the least, and ours ran to almost three months duration. But close it did, and the property changed hands in November 2014, just a little over four years from our original purchase date.

The attentive reader may have noticed I’ve said little about the other side of the equation. Selling a home involves moving and relocating elsewhere. Where do you go after selling your dream home that won’t feel like a step down?

… continue to Part 3