Kids listen. We don’t always think they do, but they pick up on a lot. Getting out of debt has been a major conversation in our house recently, and our kids have had quite a bit to say about it. When we made the decision to get out of debt in 2012, we didn’t even think about what we should tell the kids. It quickly became obvious that the changes in our lifestyle were going to affect them, though – so we decided it was only fair to warn them what was coming.

We are trying to balance giving them enough information without worrying or overhwleming them. Our kids’ ages range from 10 to 1, so the information we give our oldest is drastically different from what we give our 4 year old. Here are a few things we have learned about talking to our kids about debt.

Kids Remember What You Say
Last month, we spent a lot of time explaining to our kids that they couldn’t include everything they saw on TV on their Christmas lists. I finally capped their lists at 5 items each – if they wanted to add something to the list, they had to take something off first. I made this “rule” in early November, and over a month later my six year-old was debating what he was going to remove from his list in order to put “Longhorn Pillow Pet” on it. This was a good reminder: even when it doesn’t seem like they’re listening, they are - and they will remember it!  (And don’t say anything you don’t want repeated…)

Kids Believe What You Say
We had a family meeting to tell the kids a little bit about our plan to get out of debt. One of the things we were preparing them for was a more “restrained” Christmas.  We told them that they would only be getting one present from Santa and one present from Mom & Dad on Christmas morning. (Their brains translated that to, “You’re only getting one gift, so you’d better make it a good one!”) I expected them to have major trouble with it, but several times they have told me, “Mommy, for the one present I’m getting from you…” as though this was the way we had always done it.

In fact, they had much less trouble with the idea than I did!  While I was shopping, I would start to think, “Oh, one more little present won’t hurt anything…” It was very difficult for me to stick with this decision and resist the temptation to spend more money than we had budgeted. Kids have a much greater capacity to adapt than we think they do. We often underestimate them, but they have an easier time with it than we do.

Kids Will Hold You Accountable
“No going out to eat.” This was Rule No. 1 that we told the kids about in our Family Meeting. They whined a little bit, but ultimately understood, and they rarely asked to go out to eat afterwards. One evening, however, several out-of-town family members decided to get together at Chili’s and we decided to meet them. As we’re leaving, my precociuos 6 year old reminded me, “I thought you wanted to get out of debt!”  Talk about a kick in the stomach! Once they understand the “rule,” they rarely understand that there can be exceptions. They may need that word explained to them. (Of course, if they see Mom and Dad breaking the rules repeatedly, they will quickly learn that it wasn’t really a rule to begin with.)

So what do your children need to hear and understand about getting out of debt?

I believe they need to understand how the debt got there in the first place, why it’s a problem, and what your plan is to fix it. Without understanding where the debt came from, they won’t know why it’s a problem. Explaining this on a kids’ level can be difficult. We have had to talk about borrowing money and why that’s not a good idea. We’ve tried to explain what interest is, but that is difficult to do with young kids, too. Here is how we finally explained it to our kids:

When you borrow money from the bank, you have to pay it back to them. When you pay it back, you also have to give them some extra money. That’s called “interest.” So it’s like borrowing $10, and having to pay back $15.

For some reason, when we explain debt to our kids, it starts to sound really dumb. They look at you with expressions that say, “Why would anyone want to do that?” And we ask ourselves the same question.

Explaining why debt is a problem is less of a challenge. “We can’t go out to eat because we have to pay our credit card bills,” will usually suffice. But we’ve also tried to explain some of the emotional and spiritual aspects of debt. We want them to understand that learning to wait for what you want, and save for it, will allow you to value your money, your time, and your possessions more. We don’t want them to take for granted the things that they have. According to James A. Roberts in Shiny Objects: Why We Spend Money We Don’t Have in Search of Happiness We Can’t Buy, “When we use credit cards, we make quicker purchasing decisions, are more likely to buy, and are willing to pay more.” I want my children to make less emotional decisions and understand what it means to work hard and save hard, and truly enjoy the things that they buy with their hard-earned money.

Finally, kids need to understand that you have a plan. This is the part that will keep them from worrying. As I said before, kids have an amazing ability to adapt to change. When we laid out for them the things that we are changing in order to get out of debt, our kids immediately got on board. Without a plan, however, kids will remain unsettled, worried about the future and how things will turn out. (Even with a plan, there will be some of those doubts to contend with. We were recently given a gift card to a restaurant and took the kids out to eat. On the way out of the restaurant, my son asked, “Does that mean we added money to our debt?” He was so worried we had to stop right there and explain.)

Experiencing the consequences of our actions are never fun. But it is my hope that we can use this time in our family’s life not only to learn from our own mistakes, but also to teach our kids how to avoid those mistakes. Talking to them about our debt is a first step.

What information do you give your kids about your finances? How much is “too much” information?

The credit rating bureaus, whose reports influence everything from credit cards to mortgages to job offers, have a two-tiered system for resolving errors — one for the rich, the well-connected, the well-known and the powerful, and the other for everyone else.

The three major agencies, Equifax, Experian and TransUnion, keep a V.I.P. list of sorts, according to consumer lawyers and legal documents, consisting of celebrities, politicians, judges and other influential people. Those on the list—and they may not even realize they are on it—get special help from workers in the United States in fixing mistakes on their credit reports. Any errors are usually corrected immediately, one lawyer said.

For everyone else, disputes are herded into a largely automated system. Their complaints are often electronically ferried to a subcontractor overseas, where a worker spends, on average, about two minutes figuring out the gist of the matter, boiling it down to a one-to-three-digit computer code that signifies the problem — “account not his/hers,” for example — and sending a dispute form to the creditor to investigate. Many times, consumer advocates say, the investigation translates to a perfunctory check of its records.

Why is this front page news?

Wouldn’t the rich, well-connected have lawyers and such to handle such matters? Is it any surprise that such errors would be taken care of quickly?

The bottom line is you have to be on your toes. You have to keep on eye on your credit report. The article mentions some lady who was denied a job because of a credit report error. It might be a good job to check your credit report before you start looking for a job.

Their nine reasons:

1. Financing your purchases doesn’t teach self control.

2. Financing your purchases means you aren’t sticking to your budget.

3. Credit card interest rates are expensive.

4. Credit card interest rates increase when you can’t pay off your balance in full.

5. A poor credit score can affect your insurance rates, being accepted for a job or the ability to finance meaningful purchases like a home.

6. Poor financial habits can jeopardize your relationships.

7. Financing purchases can lead to higher spending.

8. In a worst-case scenario, the habit of financing your purchases can lead to bankruptcy.

9. Avoiding financing can bring peace of mind.

I agree with all of the above. BUT…

A smart person can use credit to their advantage. If you have the option to pay cash or get 0% financing, check to see if you can get a discount for paying cash. If not, take the 0% offer. Then, put the cash in an interest-bearing account and set up automatic payments to pay off the purchase within the interest-free period. Sure, interest rates aren’t good right now but you will earn a little something.

Although mismanaging credit can hurt your credit score, managing credit properly (rather than not using it at all) can help it.

Beauty matters in life and loans alike. Beautiful applicants are more likely to get loans and pay lower interest rates than less attractive applicants with the same financial information. Moreover, loans to beautiful loan applicants are bad investments because beautiful borrowers are much less likely to repay their loans than less attractive borrowers. Lenders to beautiful borrowers give up the utilitarian benefits of high interest rates and high likelihoods of being paid because they are fooled by the positive sentiment exuded by beautiful applicants. Or perhaps they are not fooled at all. Perhaps they willingly give up the utilitarian benefits of high interest rates and steady loan repayments for the expressive and emotional benefits of associating themselves with beautiful people.

The author references this paper, which you can download (I have not read the paper).

I thought the paragraph was interesting. Perhaps beautiful people get the benefit of the doubt because they appear to take care of themselves. It’s really no different that the advice we normally hear about dressing your best for a job interview. Employers typically don’t want to hire an “ugly” person even if their credentials are outstanding. Maybe this same thought process carries over into other parts of life. Maybe less-attractive people would do better to do business with QuickenLoan.com where face-to-face contact is not necessary.

1. Get Prepared: The More You Know, the Better – Develop a budget so that you know what you can afford to pay back. Familiarize yourself with the Fair Debt Collection Practices Act (PDF). Understand your loan terms. Get all your bills organized and take good notes.

2. Be on Guard When Dealing with Creditors – Credit companies have one goal: to get your money.

3. Remember That No Two Creditors Are the Same – What works for one creditor won’t work for another.

4. Communicate – This is no time to stick your head in the sand. Don’t avoid the calls.

5. Make Collectors Stop Calling and Writing – The book has sample letters that can be used to get creditors to stop calling. If they don’t, you can contact your state’s attorney general and report them.

6. Make Offers to Your Creditors – Make a reasonable offer to your creditors and see if they accept. If they think you are serious, they will be more willing to work with you.

7. Remain in Control – Remember that you have something that your creditors want: your money. This puts you in control.

8. Be Patient and Persistent – Be patient. If you get nowhere, call back and speak to someone else. If that doesn’t work, talk to a supervisor. Be patient.

9. Have No Fear – Don’t let creditors scare you. I’m sure that some of them will say some pretty scary things. Remember you’re in charge.

10. Threaten to File for Bankruptcy – Creditors hate the idea of you filing for bankruptcy. The authors recommend saying the following to a supervisor: “Without a sharp reduction in my rate so I can afford to pay, I will have to consider bankruptcy.”

11. Call Once, Then Use Certified Mail – After an initial call, it’s best to use certified mail. Certified mail gives you signatures and receipts for your records.

12. Get It in Writing – If a creditor offers you something, get it in writing before you pay anything. Without it being in writing, creditors may “forget.”

13. Only Agree to Terms You Can Afford – Why would you do anything else?

14. Never Agree to Pay a Debt You Don’t Owe – Makes sense to me.

15. Use Time to Your Advantage – The longer you stretch out negotiation, the better it is for you. Debts expire after the they reach the statute of limitations. Creditors are aware of this and are more willing to negotiate the closer you get to the statute of limitations.

16. Uncover your Creditor’s Bottom Line – Chances are good that your debt was sold to a debt collection company. The authors say that debt collectors pay $.02 to $.08 for each dollar of debt. That means if you had a $1,000 debt, the debt collector paid $20 to $80. Understanding this gives you power to negotiate. The authors say that debt collectors might be willing to settle for 50% to 70% of the original debt.

17. Don’t Let Legal Jargon Trip You Up – If the creditors use terms you don’t understand, ask them to explain. Do not let the jargon scare you. Remember, take notes. Use Google and research what you don’t understand.

18. Be Honest in Your Dealings – Don’t lie. You lose credibility if you lie.

19. Never Assume Another Person’s Debt – Make sense to me.

20. Use Honey, Not Vinegar – Be nice.

Most of the twenty keys are addressed in depth in the book, which is around 350 pages. This book (from what I can tell as I have not yet had time to read it in its entirety) treats the subject of getting out of debt in great detail.

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• Amount owed on revolving accounts is too high

• Too few accounts with recent payment history

• Proportion of balance to limit revolving accounts is too high

• Lack of recent non-mortgage installment loan information

The only two from above that might apply to our situation are the second and fourth ones. We have no credit card debt but we do use a Visa that is paid off monthly. Other than our house note and a car note, we have no debt. It seems crazy that that should count against your credit score. Oh well, 821 is awesome.

Charles Geisst is calling for national usury laws. EDIT: He doesn’t mention a specific rate in his book, so I sent him an email and asked him what kind of rate he was talking about. His response: “Probably set it to float at about 400 basis points above conforming mortgage rate[s].”

My question to you is:

My opinion….

I hate regulation but in this case I think some sort of cap is a good idea. Here’s why I think this way:

Extremely high interest rates are usually charged to those who have no business borrowing money in the first place. The high interest rate, though compensating the lender for the increased risk of loaning money to people of limited means, only seems to insure that the borrower will default or at least not be able to meet the payments, requiring them to take out another loan. Peolpe who borrow money at extremely high interest rates are almost destined to fail.

Of course the issue with placing caps on interest charges, is that it will force payday lenders out of business. It will also most likely lead to loan sharks—a sort of black market for money. But, for all I know, those people may already exist.

Thoughts?

My name is Robert Applebaum. I am a 35 year old attorney from Staten Island, NY and the founder of ForgiveStudentLoanDebt.com. This movement began as a proposal I wrote one morning on a Facebook Group called “Cancel Student Loan Debt to Stimulate the Economy.” This is my story:

I am a 1998 graduate of Fordham University School of Law – an education I financed through the Federal Stafford Loan program. By the time I graduated from law school, I had amassed approximately $65,000 in student loan debt.

Starting in 1999, I began working as an Assistant District Attorney in Brooklyn, N.Y. where my starting salary was $36,000 per year. With a strong desire to use my education to serve my community, I was forced to place my loans into forbearance because I simply could not afford to make student loan payments while paying rent at the same time.

Thanks to “capitalized interest” – a racket whereby interest continues to accumulate, which then gets tacked onto the principal, the amount I owed grew exponentially over time. After five years of service as an ADA, while watching my student loan debt grow at an alarming rate, I was forced to make the unfortunate decision to leave a job I loved simply because I felt that I needed to begin to pay down my student loan debt. But for that debt, I likely would have continued in public service indefinitely.

For the next five years, I made regular payments on my student loan debt, never once defaulting on my loans and I continue to make payments to this very day. Despite five years of regular payments, and because of the first five years during which my loans were in forbearance, my principal loan balance is more than $20,000 higher today than it was on the day I graduated. Unfortunately, I’m not alone.

Apparantly Mr. Applebaum has NO IDEA how interest works. You see, people and companies don’t loan money for free. The $65,000 Mr. Applebaum racked up had to come from somewhere. It was loaned to him with the stipulation that it would be paid back at some point in the future with interest. Mr. Applebaum didn’t understand this and then when he figured out he couldn’t pay back the loan, he was surprised to find out that the interest was being tacked on to his loan amount, and therefore increasing his debt.

DUH!

Come on Mr. Applebaum. You’re a lawyer. You can’t figure this stuff out?

You made a mistake and it shouldn’t be up to the American taxpayer to bail you out. Instead, why don’t you look for a better job or move to a place with a lower cost of living so that you can afford to pay back your loan and pay rent?

I don’t mean to pick on Mr. Applebaum. But, publicizing his plight and asking for the Federal Government to step in and magically wipe away his debt is just too much for me to handle.

Should we forgive student loans as a way to stimulate the economy?

I say NO. Actually I say HELL NO!

Lots of college students bought cars too. Should we forgive those loans too? I’m joking of course, but how far are we supposed to take this loan forgiveness stuff? It’s silly if you ask me.

Thoughts?

Thanks for the link, Stacey.

RELATED: Smart Spending: Should Feds Forgive Student Loan Debt? – the comments are along the same lines as AFM’s readers.

I took the information found in that chart and made another graphic showing just how much interest a person would pay over a 30-year mortgage depending on their credit score:

As you can see, the difference is significant. Just moving from the second highest to the highest FICO Score ranges saves you nearly $10,000 in interest over 30 years (even more if you factor in growth on the $27 per month payment difference). The difference from the lowest to the highest ranges, is nearly $100,000 in interest expense over 30 years (or nearly $200 per month)!

My advice to anyone looking to finance a purchase is to first GET A HANDLE ON YOUR FICO SCORE! The $16 spent to find out your score is an investment—especially if you have no idea what your FICO score is. The information provided to you by myFICO is easy to understand. They also show you areas that are hurting your score and things you can do to improve it.

Then take the time and effort to improve your score. Remember the two most important areas of your FICO score are:

• How timely you are with your payments, and

• How much you owe compared with your total available credit.

I would keep those in mind, along with the other items that go into calculating your credit score (found here) if a major purchase in your future.

Related:

My FICO Score is 794. What’s Your Credit Score?

The 2009 Personal Finance How-to Roundup

Bureaus Roll Out New Credit Score Formula for 2009

How Long Will It Take to Improve a FICO Score?