Mistake No. 1: Using 18% to 24% credit cards to finance items that are gone or worn out before you pay off the debt
Solano Real Estate Scene: 5 financial mistakes to avoid
Food, entertainment, clothes and vacations are a few things people pay for with their credit cards. If you charge $5,000 on your 18% card and pay the minimum required payment of $105 per month, it will take 84 months to pay off the debt for a total of $8,820.
Mistake No. 2: Paying late charges and penalties because of sloppiness and disorganized bookkeeping
Credit card companies do not report you to the credit bureau unless you are a full 30 days behind on your payments. However, all of them charge late fees after the 10- or 15-day grace period and actually make a ton of money off consumers from late fees. An extra $25 to $50 might not sound like a lot but to pay this extra money adds up and increases the credit card company’s rate of return dramatically.
I was an expert in the 1980s at paying late fees on everything from the DMV to property taxes. I remember paying my property tax bill Dec. 11 once and had to pay a 10% penalty for being one day past the deadline. This late fee was like borrowing money at 10% interest per day, or 3,650% per year interest.
Mistake No. 3: Failure to communicate with your creditors
The IRS and the Franchise Tax Board love communication and will work with people if they know you are trying in good faith to rectify your debt or file your delinquent tax return. If a person fails to file a tax return, the IRS and the FTB will charge significant penalties and just assume you have no deductions. They will take your W-2 forms or 1099s and come after you for the money they believe you owe. The IRS and the FTB will work out a payment plan for people who communicate but will aggressively pursue people who procrastinate and hope it somehow goes away.
Collection agencies report to the credit bureaus and a vast majority of collections are for small debts below $1,000 that only went to the collection agency because the original creditor did not hear from their client. This can be a FICO score killer and it is often over a very small phone bill or a utility bill that the person forgot about when they moved.
Mistake No. 4: Buying new or used cars with zero down at a high interest rate because of poor credit scores
Record numbers of Americans are delinquent today on their car loans and most of these delinquent folks owe more on the car than its value. Turning the car in to the finance company does not solve the problem unless there is a bankruptcy. In California, the creditor can come after the borrower for the deficiency balance after the repossession. This means that this mistake will haunt the consumer for years after the car is gone.
Mistake No. 5: Living a lifestyle based on the idea your income will always increase each year or spending money dependent on huge overtime and bonus pay that could be here today and gone tomorrow
I was guilty of this when I was in my 20s. I started in the finance business at $450 per month in 1978 and by 1980 was making $2,500 per month and $5,000 per month by 1985. I used credit based on the idea my income would continue to double every five years until I had one terrible year in 1987 where I made less than I did in 1984. We had to sell our house in Pacifica, pay off all our debt and start over in 1989. I learned a painful and valuable lesson and my mission over the past 30 years is to share that lesson with my kids, employees, clients and all my middle-class friends and readers.