Ellen May, $57,000 in Credit Card Debt

Ellen May, mother of two, owes $57,000 on five credit cards

between herself and her husband Ben. They got there by making the minimum payments each month. Over the last several years Ben and Ellen have watched their savings account dwindle down to about $250. It was their intent to save enough money and then pay down those credit cards at one time. Then disaster struck.

The one payment that started it wasn’t late, but the creditor mistakenly posted it as being late and because of “universal default”, a software system that allows creditors to share your credit information in real time, all the interest rates on their joint credit accounts jumped to 29%, 22%, 29%, 19% and 31% overnight! Their minimum payments nearly tripled.

They cannot really account for the loss of savings, they just know they don’t buy frivolous things, they might eat out at restaurants once in a while, but for the most part, they watch what they spend. So how could this be happening to them? Theirs is a typical example of how good credit lures unsuspecting, good hard working people into a false sense of security. The good credit they have today is able to do only one thing, get them into more debt. It crept up so slowly for the Mays that they didn’t see it coming until it was too late. Now their personal credit is suffering and limiting their ability to try something even crazier, borrow their way out of their current debt. After discussing the matter with a local attorney, they discovered this was “good fortune” for them.

Their attorney explained that no matter what they do, the same habits of using their employment income to pay their credit card bills would not help them anymore. Their attorney explained how to analyze their situation just like a business would, by asking the question, “What are the risks of paying and what are the risks of not paying?” He helped them to reduce everything down to two separate calculations or balance sheets. They realized instantly that their risk to creditors was far less by NOT paying any more on their credit accounts.

At first they were shocked, then embarrassed. But after their attorney explained how these creditors make money no matter if they receive payments or not, non-payment was easier to accept. He explained how settlement and bankruptcy were nothing more than long term payment plans that would do nothing but further destroy their credit, fail to deal with harassing phone calls and exhaust all their cash and income. And better still, how the Consumer Credit Protection Act imposes civil and criminal penalties on employers who penalize employees for having debt problems. What’s more is that this federal law also prohibits creditors from taking all but a very small amount of money from any debtor, making it even illegal in some states to garnish wages.

Then he gave them a written plan of how to manage their current income, legally avoid paying creditors and re-structure their cash, property and assets so they could legally avoid being attached by creditors. He gave them a short procedure to follow and one phrase to say on the phone in response to any collection calls. This stopped all collection calls.

The plan was something they had never even considered before, but it was a road map to the financial freedom they had only dreamed of before. Within ten months, they were able to have an accountant verify their increased net worth, legally and ethically never having paid another single cent to their creditors; and best of all, learned how to obtain credit with no more personal liability. Now they use credit very much like top rated businesses, to invest and buy assets. They then use the income from their investments to buy the vacations and toys they don’t necessarily need, but that enrich their lives.

Ellen says, “If I’ve learned one thing from all of this, it’s that the same habits that got us into debt, would have never gotten us out of debt. We’re not super rich today, but we have more money than we need every month and our net worth increases quarterly without personal risk.” Ben adds, “We now have more options for our children’s college education and expect to be able to not only take care of ourselves during retirement, but leave our children a sizeable asset base.”

How Do Banks Make Their Money?

You would be very surprised to discover that the bank made its money literally at the moment your account was opened. In fact, the bank did something known as originate the money in your credit account. Yes, the money came from nowhere, not another account or another bank; it was originated or created because of the bank’s license to create money. The other word for it is counterfeit. A Federal Reserve Note is not a U.S. Dollar. It doesn’t stop there.

Let’s assume what I just explained is not true or that it can never be proven. The credit account opened for your use was assigned or transferred into a group of similar accounts, other customers with a similar credit score, and it was “securitized”. Securitize is the process prescribed by the Securities and Exchange Commission that allows companies to create a security and offer it to the public for purchase as an investment. In this example of credit card accounts, this investment is known as “asset backed securities”. Your credit account, or your labor, is taken as the asset of the bank. It is their asset and your liability. You can call your broker today and purchase some, just like stocks and bonds.

So while the credit account or receivable has a significant value to the bank, even if you never pay a dime into it, even if you use all the credit money and never make a payment, its value doesn’t change, or I should say it changes but is not diminished. You see, either the creditor’s continued profit is sustained because you are paying, and because investors are buying a share of it, or because the bank can convert the account into a judgment lien and retain the value of the account just the same. To a bank, a judgment lien is cash. But this is not the end of how the bank makes more money from the account.

Because it did not receive your payments, and obtained a judgment lien, the uncollected balance is claimed as a deduction against its taxable income. For investors, this is known as cash flow. In other words, the banks are able to create several sources of cash flow from a credit account that is not receiving payments. Let me ask you one more question and just let you think about it for as long as you want. Since the credit account is an asset, whether because you pay every month, or investors buy a share in it, or it becomes a judgment lien or is claimed as a deduction against taxable income, is it also insured?

My point is that the banks make their money from day one, don’t be concerned about them. If you borrowed from your mom, pay her back by all means and she really did lend you her own money. If you borrowed from the bank, pay it back if you want, or if you are able, or only if it suits your needs or personal beliefs.

Remember that the longer you can use someone else’s money, the greater it will benefit you. If you had borrowed $20 in 2004, that might have been enough to fill your gas tank. Two years later, it could fill only half your tank. How many of you can relate to this? The price of gas did not really increase, in fact the value of the gas did not increase, but the value of the currency declined substantially, so it takes more units of currency to buy the same quantity as time continues.

What does this say about the money you put into your savings account? Every year it’s worth less and less, even though the same quantity is there. So where does this “money” go? The question is, “Where does the value of this money go?” If you worked 40 hours for $400 and put that in your savings account ten years ago, each year that amount would have depreciated in value by the rate of inflation, and I’m not talking about the published rate. The real rate of inflation is about three times what they publish. Its spending power in ten years would be about $250. Who or what took the value of your $150, of your 15 hours of labor? Somebody was and is stealing from you and you never saw it and you can’t do anything about it. The cause is inflation and the perpetrator is the banking system, yes; the very same credit providers that sent you that first credit card in the mail.

I Don't Have Any Debts... Do I?

Don’t gamble, think again. I am not advocating the non-payment of your personal debts, which would ruin your credit history. I’m saying that today you know exactly which debts you have, but you cannot really factor in that unexpected lawsuit. What I’m saying that with this new understanding, it would be a good idea to begin migrating from the use of personal credit where you’re accepting personal liability for everything you do, to the use of business credit where your corporation accepts liability for all of your worthwhile investments and expenses and borrowing. I’m trying to tell you that you’re standing on the train tracks, jump off now.

Let me describe a possible situation. Someone spent years in college to become a professional in some vocation. He pays all of his bills, saves and invests his money for the future. Like most of us he has customers, business associates, neighbors, friends, relatives, he drives a car and, he meets new people on occasion. What if a neighbor decides to sue him because his dog barks too loud? What if he is sued by envious associates or even worse, dissatisfied customers? Most of us might think that would be okay because we have professional liability insurance and home owners insurance and insurance against unexpected lawsuits? What? You never heard of insurance against unexpected lawsuits?

Normally, you would defend yourself and depend on your attorney to do a good job of it and at the least expense. That way, your insurance carrier would be happy and maybe agree to continue carrying your policy, even if the premiums increase a little. So why would anyone sue anyone else? It’s the principle right? Please, it’s the money, absolutely. Yeah, okay, there is a principal somewhere, but it’s really all about the money they believe that you have and that they can take. You are insured right? You are a professional with a business and/or employment income right? Of course you have money to take, that’s what everyone understands whether you do or not.

But what if you already had a judgment lien against you that this next creditor would have to wait behind, and wait and wait and wait until you decide he didn’t have to wait anymore? Would it matter if you won or lost this unexpected lawsuit? Maybe it would, but maybe not. If it didn’t matter, how much in attorney fees do you think you’d have to pay? Would you need to pay an attorney to defend yourself, to defend your money, if there was no money to take? What kind of insurance rates could you get if you were judgment proof? Have you ever asked what the premiums would cost to insure something that cannot be taken or that has no value?

What would your credit history look like? Let’s say that everyone’s credit history was available for everyone else to see, hypothetically. You pay your bills, never late, have lots of credit, but in order to make yourself judgment proof and save lots of money in potential legal fees and insurance premiums, you have this whopping judgment lien for about a quarter of a million dollars on your credit file as well. How would you explain this if asked? It depends who is asking right? If it’s your close friend who is concerned about your well-being, you might explain that you created this lien as a type of insurance plan against unexpected creditors, to lower your potential expenses of legal fees and possibly even lower your liability insurance premiums. You would explain that the trade-off is a lower personal credit score, but that you don’t really care because now you are using a corporation and its credit history to invest your money and make wise purchases. Would your friend ask who he could talk with to have this done for him?

What if it’s not a friend who is asking, what if it’s another creditor? This creditor could easily see that you are judgment proof, probably with little or no discussion. Why would he go to the expense of trying to sue you?

But what about the house you put in your name before you completed this process? If you sold the house at this point, with that judgment lien, the title company would tell you that at the closing, they would need to pay off that judgment lien and then you could take the balance if there was any money left. So you get the money, but it goes to your corporation. The only problem with this is that you will lose your protection and need to replace that judgment lien. This is only an example of how a liability you do not yet see can develop into something that is very expensive and lasts a long time. You should be able to imagine other variations on this theme.

What about the debts of which you are already aware? What if you reach a point where you either cannot pay or decide that there is no economical benefit for you to continue making payments on your personal debt? How is the creditor paid, or how does the creditor recover, assuming we’re talking about a bank? Let’s continue to examine this in terms of how creditors make their money.

What About My Credit Score?

Recently I was doing my typical research and applying for a mortgage just to test out the process. I don’t use personal credit so my score is very low; in fact some lenders want to assign me a score. My wife’s is similar but for some unknown reason her score is significantly higher, even though we have the same buying habits, we don’t use credit. To make my point about the use of credit cards or personal credit and how people are encouraged to rely on it, the mortgage broker looked at my credit file and then my wife’s and suggested that my wife apply for the mortgage instead since her score was higher. I asked how that made sense since she had no employment income or any other source of income and since I earned all the money for our household. He actually could not answer me, except to say her score was higher.

So this is where we are, because you have good credit, you’re eligible for more debt. And because you want to maintain good credit, you at least make your monthly minimum payments timely. This of course leads to what, more credit. The cycle continues until one day the truth of compound interest punches you in the face. This is not a problem if the debt you incur is paying you. For example, if the thing you purchased with the debt is paying you enough money to pay the debt each month and leave you something extra. For most people, it’s the opposite. They are paying the debt with their labor, time, and with a limited source of income. The more debt they acquire in this example, the more income they need from an outside source. This has a ceiling as we all know.

It is so important to understand the difference between the personal liability you have with your personal credit file and the absence of liability you have with a properly organized business. Many of you have a great credit score, many of you actually pay money to receive regular reports of your score and in fact, many of you are actually proud of your credit score. Your credit score is attached to everything you own, your identity, even your self esteem. If you have a problem in one aspect of your life, it carries over to other aspects just because of the credit file. For example, your insurance rates might be higher because of a few late credit card payments last year. If you are late on a payment for example, something known as “universal default” allows all of your creditors to see the late payment and raise your interest rates. Because of your use and reliance on personal credit, you open the door for the entire world to learn about your financial situation. Your credit file is easily accessible to merchants, the government and even private investigators. If you have collection problems, those can result in the publishing of your financial situation in the public records. Your personal credit history is a leash; it is your ball and chain, it is your parents telling you how you should behave. You cannot walk away from your personal credit file; it will follow you for life.

If you are serious about acquiring wealth and improving the quality of life for your family and yourself, you must understand the benefits of not accepting personal liability for your efforts to invest and improve your financial situation. I am talking about the difference between personal credit and business credit. I am talking about the difference between high school and a college graduate program. I am talking about wise and intelligent planning and deliberate effort to increase your net worth and refusing to accept the personal liability for it. Why would you stand on train tracks with your eyes closed just because everyone else appears to be doing the same?

You would not of course and you might be surprised to discover that those who you think are standing on the train tracks may actually not. Why not join this exclusive membership of people who figured out these secrets for themselves?

It’s time to break the expensive and self-defeating habit of relying on your personal credit and graduate to a bigger world of financial statements, business credit and business thinking. It’s time to dump those ideas you just accepted at face value because someone put a credit card in your mailbox before you even understood what the abbreviation “FICO” stood for. It is time to move on to using tools that can truly serve your best interests in a way that sets you free from those who would benefit by retaining control over you.