Showing slides to a room full of personal finance writers and editors in San Francisco, two executives from Fair Isaac have been extolling the improvements credit scoring has brought to Western civilization. The list of benefits is impressive: a more democratic distribution of credit, greater extensions of credit, a faster loan decision process, and control of delinquencies and charge-offs.
They should know. As part of Fair Isaac, the premier credit scoring firm in America, they have brought innovations to the process of consumer lending that have changed lending. When you apply for a home mortgage, your credit report will probably show a Fair Isaac score as well as a complete listing of every open credit account that you have. While you may not see the test directly, Fair Isaac tests are used by credit card marketers, retailers, and automobile lenders. The use of credit scoring has also helped fuel a massive expansion in consumer credit, vaulting the amount of consumer debt outstanding to new highs. In the five years since December, 1992, consumer credit of all forms has increased more than 50 percent, far outpacing wage and salary growth.
But something is wrong. Reporters are shaking their heads.
One asks why personal bankruptcies are at record levels if credit scoring is so wonderful. The speakers seem unaware of that bankruptcy isn’t just a loss statistic, it is something painful that happens to a rising number of human beings. There is an odd silence at the end of their presentation.
One week later I am in a Fun Ed classroom in Carrollton, Texas. In classrooms nearby people are learning to paint an oil landscape in three hours, cook with new seasonings, or how to deal with being single.
But I am listening to Dave Ireland. “There is a time bomb about to go off in our society. It is a bomb of debt,” he says. ” I am a man on a mission. It is to eliminate all the debt on the planet.”
Mr. Ireland, an employee of Eastman Kodak before he was downsized some years ago, is teaching a course he calls “Back to Black”, three hours of instruction in how to eliminate all personal debt. Not just credit card debt. Personal loans. Auto loans. And even home mortgages. He is teaching people how to live debt-free.
“What we’ve got is The Great American Debt Opportunity,” he says. “It’s an opportunity to take every dollar you’re giving to bankers and turn it into $11.83 of personal wealth.”
Twenty-six people have paid $29 to learn his method and most will spend another $39 to buy a copy of a large paperback, “The Debt-Free and Prosperous Living Basic Course.” Also available on a fairly low-key basis from Financial Independence Network Limited, Inc.: software for planning debt reduction, and a monthly newsletter.
If everything goes as hoped for the Financial Independence Network Limited, a few of those 26 people will become soldiers in a war for the American wallet. This war will pit a highly trained army of computer directed lenders against a nearly invisible guerilla force of people like Dave Ireland, telling people all around the country that it is time to tear their credit cards in half and pay cash.
What’s at stake?
The largest single consumer of personal income for millions of families: Interest payments.
You can get an idea of how large interest payments loom by considering an imaginary family with an income of $4,500 a month and what debt they would qualify for using conventional lending guidelines. Based on that income and a 10 percent down payment they would qualify for a $139,000 mortgage with a monthly payment of $973. Insurance and tax payments would take them up to the 28 percent guideline limit for home debt. In addition, they could have $350 a month in other loan payments and still meet the 36 percent “back end ratio” test.
Basically, they could commit nearly 25 percent of their gross income to loan obligations and never set off an alarm bell with creditors. Many families carry more. In addition to an auto loan they may carry credit cards, a home improvement loan, a home equity loan, student loans, or revolving credit at retail stores. While some of that money goes to repay principal, the broad trend in consumer debt is very clear: minimum principal repayment.
The side effects? Maximum interest payments and a growing number of people who are “tapped out”, late on payments, or missing payments altogether. From 1.1 million filings last year, personal bankruptcies are expected to hit over 1,500,000 by the time the bubbles are gone from our New Years’ Eve Champagne. A recession would drive them even higher.
This information is distributed for education purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, product, or service.
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(c) A.M. Universal, 1997