Master Your Debt E-Book

Jordan E. Goodman

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 340

Veröffentlichungsjahr: 2010

Beschreibung

Strategies and tools to live debt free The world of borrowing and debt management has changed dramatically, leaving people confused about how best to secure their financial future. This book is the only guide with detailed advice to help you become debt free or master the debt you have, based on the latest laws and new government programs and policies implemented under the Obama administration. Is the information and advice on debt management different than in years past? Definitely. In this savvy, engaging guide, bestselling financial expert Jordan Goodman will tell you how to * Win the mortgage game: avoid foreclosure, obtain the best refi, and modify your mortgage even if it is "under water" * Clean up your credit report and dramatically boost your credit score * Negotiate new terms and payments for burdensome medical bills, student loans, and credit cards * Protect yourself from the devastation of identity theft * Master the new credit card rules, and avoid the rate and fee traps * Learn a revolutionary strategy that will help you become mortgage free in 5 to 7 years, change the way you pay all your bills, and save hundreds of thousands of dollars Master Your Debt recommends many pioneering strategies as it lays out an innovative plan for achieving the elusive goal of financial success. The book is filled with helpful web sites, toll free numbers, associations and government agencies, and vetted companies and services to help you implement this advice. In today's volatile economy, getting out of debt is the key to surviving and thriving, and author Jordan Goodman provides you with the strategies and tools to live debt free.

Leseprobe

Table of Contents

Title Page

Copyright Page

Dedication

Acknowledgements

Introduction

I Hear What You Are Saying

You Have Power

There Are New Answers for a New Era

A Word about My Favorite Secret

How to Approach This Book

CHAPTER 1 - How Did We Get Here? And Where Are We?

A Long Time Coming

A New Era

Other Kinds of Loans

CHAPTER 2 - Find Out Where You Stand

First, Determine Your Net Worth

Analyze Your Cash Flow

Do a Risk Test

Analyze Your Debts

Are You in Trouble?

CHAPTER 3 - Other People Are Grading You, Too

How Credit Reports Work

Check Your Credit Reports

What to Look For

It’s Your Score That Really Counts

How to See Your Scores

Do You Have a Good Grade?

You Can Improve Your Credit Score

CHAPTER 4 - Avoiding a Modern-Day Identity Crisis

Learn the Basics

Then What?

Prevention Is Easier Than Cleaning Up Later

About Fraud Alerts and Credit Freezes

You May Already Be a Victim

CHAPTER 5 - Win the New Mortgage Game

How to Shop for a Mortgage

The ArcLoan—One Variable-Rate Loan That I Like

Should You Refinance?

Home Equity Lines

Reverse Mortgages

Shared Equity Arrangements

Paying Off Your Mortgage Early

CHAPTER 6 - Mortgage Free in Five to Seven Years

Why It Works

It’s Not for Everyone

Do It Right

Broaden Your Scope

CHAPTER 7 - Credit Cards: Just Because It’s Called MasterCard Doesn’t Mean It’s ...

A Look at the Landscape

Finding the Best Card(s) for You

How Many Cards Should You Have?

A Debit Card Is Not a Substitute for a Credit Card

All That Fine Print

The List of Shame

And Now, On to the Good Stuff

How to Wipe Out Your Balances Once and for All

CHAPTER 8 - Car Deals: Making Sure You’re in the Driver’s Seat

But First, Do You Really Need a Car?

Shop Before You Shop

Make the Most of Incentives

Should You Use a Buyer’s Agent, Broker, or Buying Service?

How to Pay for Your Car

Getting the Best Loan

Fixing the Loan You’ve Got

CHAPTER 9 - An Education in College Costs

Baby Steps: Save, Save, Save

High School: Learn How the Financial Aid Game Works

Senior Year of High School: Tough Decisions

After College: The Bills Come Due

New Options from Uncle Sam

CHAPTER 10 - Don’t Let Bad Luck Derail Your Finances

Doing Debt Triage: How Much Trouble Are You In?

Prioritizing Your Bills

Finding Cash: Desperate Times, Desperate Measures

Working with Creditors

Student Loan Troubles

Call-In Credit Counseling

How to Choose a Credit Counseling Agency

The Debt Management Plan

Those Pesky (or Worse) Collection Agents

Saving Your Home by Fixing Your Loan

Get the Right Kind of Help

Foreclosure: The Last Resort

Staying Healthy without Making Your Bank Account Sick

CHAPTER 11 - Surviving Bankruptcy

There Are Two Forms of Consumer Bankruptcy

The Chapter 7 Means Test

Get Help

Before You File

What about Your House?

What Happens When You File

Life after Bankruptcy

Rebuilding Your Credit Score

CHAPTER 12 - Debt Strategies for Every Age

In Your Teens and 20s: Clean Living

The 30s and 40s: Building Wealth, Getting Squeezed

In Your 50s: Countdown to Retirement

The 60s and Beyond: Early Retirement

Over 75: The Second Half of Retirement

CHAPTER 13 - Permanent Mastery, Going Forward

Attitude Is All

Polish Your Skills

Guiding Principles

APPENDIX - Resources

About the Author

Index

Copyright © 2010 by Amherst Enterprises Ltd. and Lynn Sonberg Book Associates.

All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada.

No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, [phone], fax [phone], or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, [phone], fax [phone], or online at www.wiley.com/go/permissions.

Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.

For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at [phone], outside the United States at [phone] or fax [phone].

Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. For more information about Wiley products, visit our web site at www.wiley.com.

Library of Congress Cataloging-in-Publication Data:

Goodman, Jordan Elliot.

Master your debt : slash your monthly payments and become debt free / Jordan E. Goodman with Bill Westrom.

p. cm.

“A Lynn Sonberg book.”

Includes index.

eISBN : 978-0-470-59586-2

1. Finance, Personal. 2. Debt. 3. Consumer credit. I. Westrom, Bill. II. Title.

HG179.G6754 2010

332.024’02—dc22

2009041476

To my mother, Norma Bromberg Goodman, who first nurtured my interest in personal finance and who has always supported with love and enthusiasm everything I do.

Acknowledgments

Master Your Debt would not have been possible without the generous and skillful contributions and extremely hard work of many talented people.

Foremost among these contributors is the team of Lynn Sonberg and Roger Cooper, who worked with me to hone the original idea of the book into its final form. Lynn skillfully guided the work from the original proposal through the research, writing, and editing process, always staying on top of the many details and maintaining a high standard for accuracy and clarity in the work. Roger was instrumental in framing the book’s direction.

The writing and research team also did a remarkable job of combining skillful writing with exhaustive research on many topics related to debt and credit. Linda Stern used her many years of experience covering these topics at Reuters to write most of the text, weaving in many real-life case studies with all the explanations of the massive changes occurring almost daily in the debt and credit world. Bill Westrom of Truth in Equity (www.truthinequity.com), America’s leading expert on mortgage and debt acceleration techniques, generously gave his knowledge, time, and resources to make sure that the sections on acceleration strategies that are so novel and powerful are as clearly and accurately explained as possible.

The team at John Wiley & Sons was also instrumental in making this project a reality. Executive Editor Debra Englander immediately embraced the concept of explaining how Americans need guidance in navigating the new and changing world of debt that is affecting them in their everyday lives. Kelly O’Connor edited the manuscript with great care and skill. Joan O’Neill, the publisher of the Professional and Trade Division at John Wiley, was extremely supportive of the book from conception through publication. Paul Dinovo created the eye-catching cover design. Senior Production Editor Stacey Fischkelta was responsible for overseeing the production of the book. The staff of Cape Cod Compositors, Inc., undertook the meticulous job of copyediting the manuscript. Herman Estevez skillfully took the photograph for the back cover.

My hope is that you, the reader of Master Your Debt, will use the knowledge you gain from this book to maximize the opportunities and avoid the pitfalls that this new era of debt brings to consumers in America. By combining the knowledge you glean from this book with all of the resources that I put at your disposal, you should be able to maintain the best credit rating possible, get the best deals available for all the kinds of loans you take on, and pay your debts off years sooner than you ever thought possible!

Jordan E. Goodman January 1, 2010

INTRODUCTION

Master or Victim? You Decide

Forget what you think you know about using other people’s money. The game has completely changed.

The world of debt—everything from credit cards to mortgages and student loans—is completely different than it was just a few years ago, in the middle of the current decade. In this book I want to share the many secrets of debt management I’ve discovered that can help consumers all along the credit spectrum. I’ve studied the latest products and the newest rules, and also have some good information about the kinds of loans and credit card deals we can expect to see in the future. I want to share that with everyone, but mostly, I want everyone who reads this book to understand this: You can master debt and make it work for you. You can win the debt game.

The financial marketplace is always evolving, but recent developments have been especially dramatic—a sea change brought about by a credit crisis, a deep recession, and a new administration. Many loan products that were prevalent don’t even exist now, and there are new ones taking their place. Those easy zero percent interest credit card deals have dried up, as have the most exotic mortgages and the “Bad credit? No problem!” attitudes of many car dealers. Private Student lenders have left the business in droves and may disappear altogether.

Now there is a different debt industry to take the place of the one that used to exist. There are new credit card rules, new student loan plans, and new mortgage modification programs. It’s a whole new ball game.

So, yes—forget what you used to know. The financial marketplace that we are dealing with going forward is not the one we had. Like every other wrenching economic shift, this change will produce new winners and new debt-destroyed victims.

More than ever before, the winners will be those people who are proactive about taking control of their financial destiny. Savvy consumers understand that the business of debt thrives on their remaining uneducated and passive. Those people who learn the new rules, find the new products, and make the right moves will become debt masters: They will be able to borrow money when they need it, pay it off cheaply and quickly, and sleep well at night.

That’s why I wanted to write this book and put it in your hands as quickly as possible. I have spent my entire professional life offering specific, actionable, impartial advice to financial consumers, starting with my 18 years at Money magazine. I have learned whom to trust, whom not to trust, and how to tell the difference. This may be the first book you see that includes details of the new government mortgage and credit card programs, and I rushed to complete it so you could use it as you begin to master your debt in this new era.

In it are the strategies, resources, and techniques that will make you a debt master. It is replete with the latest rules and regulations out of Washington and the newest products from Wall Street and your neighborhood mortgage broker. It includes products and strategies that are so new, most people have never even heard of them. And it also includes the wisdom I’ve picked up in over 30 years of observing the marketplace and how it works.

I Hear What You Are Saying

I travel—a lot. As a financial journalist and educator, I speak to all sorts of groups; I appear on television, the radio, and on my own MoneyAnswers web site, and I get a steady stream of feedback from consumers who have questions about their finances.

And what I have been hearing is this: anger, worry, and confusion.

• In Cincinnati, I spoke to Julian, a homeowner who was trying to refinance his home. With good credit scores and a steady job, he wasn’t expecting any problems. But in six months there were four foreclosures on his street, and Julian’s home, which had been valued at $300,000 just six months earlier, was now appraised at $55,000. That’s $245,000 in equity up in smoke—and forget about the refi.

• In Virginia, I spoke with Chris. He had put almost $100,000 of home repairs and renovations on credit cards charging him around 4 percent interest. He had been paying his bills automatically, online and on time, without reading them carefully. So he failed to notice that his card issuers yanked his borrowing power and raised his interest rates all the way up to 26 percent. Now he is struggling just to stay even.

• In New York, I talked to Phyllis and Greg. They seem to be living the American dream: They have their own graphic arts business and two great kids. But they have so much student debt they don’t think they’ll ever be able to buy a home. And they are flying without a health insurance safety net, living in fear of the medical emergency that will make their whole carefully calculated plan tumble down.

Those are just three stories among many, but they summarize the prevailing mood: People feel like they did everything they were supposed to; they played by the rules, and they have still gotten the short end of the financial stick. They are getting beaten up by factors over which they have no control, and they don’t know what to do.

You Have Power

Bankers and other professionals like you to feel powerless. They love dealing with customers who are uneducated about the details of their business. They like to bully you into feeling too dumb or hopeless to ask questions.

That’s nonsense. Financial consumers today have more power and more information at their fingertips than they ever have had in the history of American capitalism. Online brokers, online financial calculators, self-managed retirement accounts, and books like this all put the power in your hands to manage your own finances and wrest control from the banker bullies. They still compete for your dollar, and they can no longer count on winning it by keeping you in the dark about how the system works.

Use your power. Educate yourself about the new ways of the debt world, and your choices in it. Demand satisfaction and decent treatment from your lenders, and use the new products and resources at your disposal to put your debt and your cash to work for you. Read, study, and ask questions until you are satisfied that you understand the right answers for you.

You have the power to come out on top, if only you know how to use it. Regardless of your starting point, you can become a debt master.

There Are New Answers for a New Era

The old rules and ways of managing money and debt won’t work, but there are new ones that will. In this book, you will learn about new products and services like these:

• Truth in Equity, a company that can show you how to pay off your mortgage in five to seven years without making higher mortgage payments.

• Healthcare Advocates, a firm that will negotiate with your doctors and hospitals to cut your medical costs down to affordable levels.

• Credit Karma, a company that will let you monitor your credit score for free, and teach you how to improve it.

• Income-based repayment, new plans from the Department of Education that will keep your student loans affordable while you pursue volunteer work, push through unemployment, or enter a low-paying career.

And so on. I’ve scoured the Web, I’ve worked my sources, and I’ve networked with hundreds of financial professionals and organizations to pull out the best and the brightest strategies for the new era of debt.

Know this: You can get out of debt. You can pay less than you thought possible for leverage or debt. You can get credit card companies to pay you, instead of the other way around. You can burn your mortgage before you send your kids to college, and keep their borrowing to a minimum once they get there. I’ll show you how to take it one step at a time.

A Word about My Favorite Secret

One of the strategies revealed in this book is called “equity acceleration.” This is not the biweekly mortgage payment plans you might have read about years ago. This is a new way of managing your family money that could help you to get completely debt free in less than a decade and change the way you manage your money forever.

It is so innovative that I asked its chief proponent, Bill Westrom of Truth in Equity, to help me with that chapter of the book. I’ll say no more about it now—check out Chapter 6!

How to Approach This Book

Consider this book the first tool to use in your debt mastery program. You can use it in the way that works best for you.

If you want to rebuild your debt life and use of credit from start to finish, you should read the book from start to finish; I’ve arranged the chapters so that the first part of the book creates the foundation for the rest of the book.

If you already feel like you are drowning in debt, go directly to Chapter 10, where I’ve located most of the emergency advice that is in this book. There you will find advice on how to dig out, which bills to pay, and how to hold on to your home. After you’ve looked that over, you can return to Chapter 1 and read the rest of the book in order.

If there’s one kind of debt that’s at the top of your to-do list now, you can go directly to the chapter that deals with those particular issues. There are, for example, chapters about student loans, car loans, and mortgages.

Here’s an overview of how the book is organized.

Chapter 1: How Did We Get Here? And Where Are We? This chapter includes an overview of the credit crisis that hit late in this decade, as well as a survey of the current debt landscape.

Chapter 2: Find Out Where You Stand. You can’t dig out of debt until you know where you are. Here are worksheets and exercises to get you started on a whole new debt plan.

Chapter 3: Other People Are Grading You, Too. Credit reports and scores aren’t what they used to be. How to keep your file clean, build a top credit score, and avoid the scammers hiding in this business.

Chapter 4: Avoiding a Modern-Day Identity Crisis. Protecting your good name means protecting your credit. Identity fraud has grown exponentially, but this chapter reveals how to make sure it doesn’t happen to you.

Chapter 5: Win the New Mortgage Game. Forget the crazy mortgages of the previous decade. This chapter shows how to secure the money you need for your home, get a good refi, burn a bad mortgage, and get out from under years of payments sooner than you ever thought possible.

Chapter 6: Mortgage Free in Five to Seven Years. This revolutionary strategy may change the way you pay every bill for the rest of your life, and put hundreds of thousands of extra dollars in your pocket.

Chapter 7: Credit Cards: Just Because It’s Called MasterCard Doesn’t Mean It’s the Boss of You. All that you need to know now about credit cards. How to get the best deals without falling into the rate traps. New rules from Washington.

Chapter 8: Car Deals: Making Sure You’re in the Driver’s Seat. Zero percent car loans aren’t so easy to find anymore, and they often cost more than they are worth, anyway. How to get the best bottom-line deal on your car, and how to pay for it. Chapter 9: An Education in College Costs. The entire student loan landscape is dramatically different today. How to get the money you need for college, when and how to borrow, and how to pay it off so student debt doesn’t destroy your future. Chapter 10: Don’t Let Bad Luck Derail Your Finances. This is the chapter for anyone who’s in debt trouble. Don’t worry, take action. This is where you will find the groups that can help, the negotiations that can make a difference, and the strategies that will get you out of debt quickly and cleanly. What to do about a health emergency, how to reduce your medical debts, and how to modify your mortgage and avoid foreclosure.

Chapter 11: Surviving Bankruptcy. A clean guide through the worst-case scenarios, and even they aren’t as bad as you think. How to manage bankruptcy or foreclosure and come out whole on the other side.

Chapter 12: Debt Strategies for Every Age. What works when you’re 15 years old isn’t a good idea at 50, and vice versa. A handy checklist for debt mastery at any age.

Chapter 13: Permanent Mastery, Going Forward. The rules of the road for the future. How to manage debt and money when the financial marketplace changes again. You know it will.

Appendix: Resources.

I’d like to say something about the extensive resource list at the end of the book.

One of the most important skills involved in managing money is knowing whom to listen to. Unfortunately, there are fewer and fewer really strong, really dedicated, and really independent financial advisers out there for everyday consumers. Too many so-called experts are simply selling products. Others are nonprofit and may have their hearts in the right place, but they are being starved of necessary funds. It’s harder to find solid sources of good information.

Consumer education has been my calling for my entire professional life. But I don’t claim to know everything, and I don’t claim to have been able to fit everything I do know into this handy little book. So, I have included a generous list of good resources in most chapters and at the end of the book.

These are resources that offer solid information or services that can help you find the answers you need, do the math, and plot the strategies that you will need going forward. I have worked very hard to screen the organizations and experts that I recommend, and I have faith in their expertise, their dedication, and their ability to supplement the information in this book and help you on the road to debt mastery.

CHAPTER1

How Did We Get Here? And Where Are We?

We haven’t ever been here before. The debt landscape has changed dramatically and irrevocably, and the ways in which we borrowed, spent, and repaid debts before are relics of the past.

The cash-back credit card offers that used to crowd our mailboxes have dried up.

There’s no such thing as a “No down payment? No problem!” mortgage.

Those tempting teaser rates are long gone, replaced by “gotcha” interest costs so high you’d think the Mob was involved.

It’s sometimes impossible to borrow money at any price—for college, a car, or a home renovation. And you need to submit a credit card at the front desk before a doctor will even see you now.

It may seem like credit has dried up altogether, just when you need it the most.

What hasn’t disappeared is the debt. American consumers are on the hook for close to $3 trillion, not counting their mortgages, according to the Federal Reserve. The average credit card holder is juggling almost $11,000 in debt on close to 13 cards. Roughly one of every three homeowners is underwater, meaning that they owe more on their homes than the homes are worth.

And paybacks are rough. As banks and other lenders began pulling back on credit, they tightened terms and squeezed indebted consumers. Interest rates skyrocketed, and so did minimum monthly payments on everything from credit cards to mortgages.

Middle-class people who were barely making it aren’t making it anymore. Those in the worst situations are trapped in houses they can’t afford to pay for and are unable to sell. Others are selling homes at bargain-basement prices and downsizing. Or sending their kids to community colleges instead of the private colleges they were aiming for. Or working nights and weekends and skipping lunch to make the payments on their MasterCard and Visa bills.

And yet, all is far from lost. If there were no good news, there would be no reason for this book. I’d just crawl back into bed and call it a day—or a decade.

But there is good news. In the first place, the dialing back of debt in the United States was necessary. As a society, we got overextended. Now, there’s a renewed feeling of responsibility in the air as banks and consumers ratchet back to a more sustainable and stable way of doing business. The federal government has stepped in, over and over again, to tighten standards of behavior for creditors and to protect the borrowing public. There are more ways to protect your home, your family, and your credit score than there were a year or two ago.

And, as has always happened in U.S. economic history, the marketplace is adapting to the new era with new products and services for consumers. Some of them are shoddy, or worse. But many offer new and innovative ways to manage debt.

That’s why we’re here. With the right information and the right techniques, you can take charge of your debts, blow them away, and prosper. You can negotiate with your credit card issuer, rework your mortgage, and improve your credit score so you qualify for the lowest-cost, best deals out there.

You can pay off your mortgage years—and thousands of dollars—early. You can still find credit card issuers that pay you back. You can get more cash out of your child’s first-choice school that you don’t have to pay back.

I will show you how.

But first, it’s instructive to see how we got here.

A Long Time Coming

Americans have had a long love affair with debt, but it really rose to prominence in the 1980s and 1990s. The deregulation of financial institutions meant that there were many more lenders competing for borrowers and that they faced fewer rules about their interest rates and practices.

More debt became securitized—bundled up and resold to investors. Mortgage-backed securities were the most common of these arrangements, and they resulted in mortgage-backed mutual funds for investors and a big, steady stream of cash for mortgage lenders. As everything from auto loans to credit cards got securitized, that meant more money coming back to banks and other issuers so they could quickly turn around and lend it to new borrowers. This also served to separate the lenders from the ultimate holders of the debt: Banks that issued mortgages weren’t holding on to them; they were selling them off as fast as they could issue them.

At the same time, the credit scoring business was growing up. This gave lenders quick numerical answers to their questions about the creditworthiness of customers. Instead of poring over credit reports for hours, they could get a score in moments that would qualify a borrower as a good prospect.

Here’s what happened when all of that came together: Lenders that issued mortgages, car loans, student loans, and even credit card accounts were able to make money fast by qualifying a borrower, collecting a fee (or, more typically, a lot of fees), and then selling the loan off to someone else. The lenders didn’t even really care whether the borrower made good on the loan; they only cared about the borrower looking good enough to qualify in the first place.

As interest rates fell in the 1990s, refinancing became another popular way for lenders to make money, over and over again, from the same homeowners. They encouraged people to do cash-out refinance deals—borrow against the swelling equity in their homes to pay off other debts, improve their homes, send their kids to college, and do anything else that struck their fancy.

By 2005, the country was in the midst of a housing bubble, and would-be homeowners were told they should do whatever it took to buy a house before it was too late and they couldn’t afford it any more. Some lenders simply allowed themselves to be pressured by brokers, real estate agents, homeowners, and their own bosses to make more and more loans. But some particularly unethical predatory lenders went out of their way to push cash-out refinance deals on unqualified, unsuspecting, and naive (often elderly) homeowners who gave up good, small, inexpensive loans for subprime deals that turned out to be disasters.

The creative folks in the mortgage and real estate industries did what they could to invent new mortgages that would allow more and more borrowers to qualify. There were new mortgages that required no down payment and no demonstrable income from borrowers. They started with teaser rates, tiny monthly payments and a feeling of euphoria. But they held deadly traps, like interest rates that reset at levels that doubled and tripled monthly payments, and amortization schedules calculated so that the balance of the loans grew over time instead of shrinking.

While that was happening, everything from college to cars was becoming less and less affordable. College costs were rising precipitously, and neither household income nor government aid programs were growing quite as fast. Lenders rushed into that void, too—creating a student loan industry that was predatory in its own way. At its worst, it was found to be kicking money back to schools that were recommending costly private loans to students who had been told that no price was too high for a good education. Those loans carried an implicit college seal of approval that made students and their parents think they were good deals.

As cars became unaffordable, dealers and manufacturers cooked up auto loans that stretched longer than the useful lives of the sport utility vehicles they were paying for. It became possible to get a seven-year car loan, and it was not unusual for car owners to trade in their cars before their loans were paid off. They were adding the balances of their old loans to their new car loans.

Credit cards became as common as head colds, and issuers who could now qualify borrowers and process payments for pennies went crazy promoting the cards. Every store and affinity group, from sports clubs to hamburger joints, had its own card. To encourage consumers to use the cards for even the tiniest pack-of-gum type purchases, issuers started promoting the cards with big cash-back bonuses for money charged at gas stations, convenience stores, and groceries. Then they started piling on the fees. Issuers that used to depend on interest income and fees from merchants discovered they could really cash in if they charged consumers for being late, for going over their credit limits, for getting cash advances, and for anything else they could think of.

Borrowers did their part, buying into more and more debt for any and every reason, and thinking it was all okay. By 2006, the United States had a negative savings rate for the entire year. That means—and it bears repeating—that as a nation, on average, all Americans were spending more than they made, borrowing to make up the difference. Consumer debt quintupled between 1980 and 2001, and then practically doubled again to $2.6 trillion in 2008.

Pop! It had to happen. The credit spree that had taken decades to build came to a crashing halt in 2007. It started when the lowest tier of mortgage borrowers—those folks who’d been talked into crazy mortgages—stopped being able to keep up with the rising monthly payments. The investors who held big portfolios of weak loans didn’t have the cash to float new loans. The bankers stopped making money. Housing prices started to fall, and people weren’t able to refinance, pull money out of their homes, or even get new loans for new homes. Prices fell further. The banks, worried about where the next shoe was going to drop, started pulling back on consumer debt. They cut credit lines on home equity lines and on credit cards. Consumers lost their borrowing ability and their breathing room. Stocks got slammed, and it all started spiraling downward. Joblessness, bankruptcies, delinquencies, and interest rates were on the rise, and spirits, paychecks, and economic activity dropped.

The government stepped in, on almost a dozen different occasions. In the fall of 2007, President George W. Bush created the Hope Now Alliance, a union of mortgage investors (including giants Fannie Mae and Freddie Mac), the Federal Housing Administration, mortgage lenders, and trade groups. The group was to provide free counseling and voluntary workout assistance to troubled borrowers. In September 2007, Congress passed, and President Bush signed, the College Cost Reduction and Access Act, which cut interest rates on federal college loans and eased repayment options for struggling graduates.

Early in 2008, Congress enacted the Economic Stimulus Act of 2008, legislation that put an additional $600 into the hands of most taxpayers quickly. That wasn’t enough, though, to address the systemic problems that worsened throughout the year. In July 2008, under President Bush, Congress passed the Housing and Economic Recovery Act of 2008, designed to ease credit in the mortgage markets and make more cash available to support refinance loans for subprime borrowers. The Higher Education Opportunity Act was passed by Congress and signed by President Bush in the summer of 2008. In February 2009, President Barack Obama and Congress approved the American Recovery and Reinvestment Act of 2009. This was a grab bag of provisions, including money for students, car buyers, and homeowners. In March 2009, the Obama administration unveiled a comprehensive mortgage relief plan called “Making Home Affordable.” In subsequent months, it refined and amended that program. Later in 2009, Congress passed, and President Obama signed, a comprehensive credit card reform bill.

A New Era

Now we are digesting all of this. As a nation, we are moving out of recession and into a new economic era. We are adjusting to the new benefits, rules, and programs that came out of that mountain of legislation. As consumers, we are learning to take advantage of the new programs while learning to live without the easy money that used to be all around us. That’s not so bad—the money really wasn’t that easy after all.

In the following pages, I’ll take you through all that is new about managing debt in the United States, circa 2010 and beyond. We’ll discuss every unique type of debt, from credit cards to mortgages, in great detail. I’ll show you where the traps are hidden and where the great new opportunities lie.

For starters, here is a quick overview of the major types of debts that most Americans deal with, along with the recent changes and trends in each area.

• Mortgages. The biggest and most important debt for most Americans, mortgages have changed dramatically, and changed again. Now we are in an era when mortgages are moving back to more traditional forms—plain-vanilla, 30-year fixed-rate mortgages dominate the marketplace. There are still some variable-rate mortgages.

Mortgages are secured loans—they are backed by the property on which they are written.

There are two new government-backed programs for mortgage holders who are in trouble. One allows homeowners to refinance their homes, even if the homes are worth less than their loans. A second one encourages mortgage lenders to modify mortgages for troubled borrowers by lowering interest rates and payments.

• Home equity lines of credit (HELOCs). These lines of credit are backed by your home, and give you a lot of control over your money. You can use them to fund renovations, buy cars, pay bills, and more, and repay them on your own schedule, as long as you are making monthly minimum payments as big as your monthly interest costs. Disciplined homeowners can really make their HELOCs work for them by using the equity accelerator technique described later in this book. You can use a HELOC to burn your mortgage faster than you ever thought possible.

Bankers tend to like home equity lines, too; they don’t typically resell them, so the loans stay in bank portfolios, producing cash flow. There are still many HELOCs on the market, and competition from lenders wanting to place HELOCs with homeowners.

• Reverse mortgages. These products put money in the hands of elderly homeowners in exchange for repayment when the home is sold. They used to be prohibitively expensive, and they still can carry some high fees, but they have been improving. They work best in very specialized situations. An older person who is not well and doesn’t want to leave home can use a reverse mortgage to pay for care. A reverse mortgage typically reduces the amount of equity that heirs inherit.

• Credit cards. It’s almost impossible to live without credit cards now, but they have gotten more complicated than ever. Consumers who carry credit card debt balances—about half of all cardholders—are at the mercy of card issuers that have been jacking up rates and fees as aggressively and unconscionably as I’ve seen in my decades-long career.

New government rules slated to go into effect in 2010 will limit issuers’ ability to retroactively raise rates and trap consumers into late payment charges. Many in the industry say issuers will stop offering generous cash-back deals and start charging annual fees. Those moves may make it harder for the half of consumers who pay off their bills every month to really profit from credit card use, but there is still enough competition in that space to make me think you’ll have some good choices for a while.

• Car loans. The typical car loan has gotten longer and costlier over the years, but troubled automakers are making amends with price cuts that may outweigh the zero percent financing offers that used to rule. Washington has been offering its own incentives; in 2009 it offered a sales tax credit to car buyers. Congress also enacted a “cash for clunkers” incentive for car buyers who turn in old, gas-guzzling cars. Lease deals, which used to be prohibitively expensive, now sometimes rival car loans as a less expensive way to buy a car.

• Installment loans. When stores offer no-interest-for-a-year deals, or agree to finance your TV, computer, or new living room furniture, that’s an installment loan. They can be pretty pricey, and rarely are the best way to pay for a purchase. The no-interest promotions have largely dried up; those that remain usually are carefully constructed to trap the borrower into paying interest. You have to monitor them very carefully. Some medical offices are now offering their own installment loans, usually for high-priced procedures that insurance doesn’t cover, such as LASIK eye surgery or cosmetic surgery.

• Student loans. The way in which families pay for college is shifting dramatically. That’s a good thing. In the late 1990s and early 2000s, increased dependence on costly private loans put some graduates into so much debt they had to give up on favored careers and grad school. Now the federal government is the direct, primary lender for a much larger share of student loans, and rates have come down. There’s a host of new repayment plans that offer great leniency to students who graduate and enter low-paying public service careers.

• Retirement plan and life insurance loans. You can borrow money from yourself. Many companies allow workers to borrow against their own 401(k) accounts; in those cases the interest you pay back is paid into your own account. Most advisers do not recommend this strategy; it removes money from an account you should allow to grow until you retire. But this can actually be a reasonable place to borrow money in an emergency; it costs less than some other forms of debt.

Cash-value life insurance policies also allow account holders to borrow their own money back. This, too, can be a reasonable way to meet emergency expenses or even pay for college or other big costs, especially if you no longer need the full life insurance death benefit.

Other Kinds of Loans