The Bad Credit Cycle

UnknownRochelle’s car is again the problem and there is no easy solution this time. The car can’t pass the state emission’s test; it seems to be because of a major problem with the engine. Her car has well over 100,000 miles on it, has had the emissions problem for most of the past year, and will be too expensive to fix. A repair shop said they could give her a current inspection sticker good for one year if she just gets her horn fixed. It doesn’t work either. This is a short-term solution, but it won’t fix the long-term problem.

Rochelle pays $535 per month for the car and insurance. She has an extremely poor credit score and is being charged a 20% interest rate on the car. To make matters worse, she still owes over $5,000 on it. Her first thought was to let it get re-possessed. Instead she has decided to keep making payments on the car and to go ahead with the repair shop’s suggestion. Bad credit has made Rochelle unable to buy a car from a regular dealer with a much lower interest rate. She is unable to borrow money at a reasonable rate from anywhere and currently also owes a total of $500/month to five different finance companies. When she needs more money she re-finances one of her loans with the current places she owes money to. She is locked into a vicious cycle. The poor do indeed pay a lot more for things.

Rochelle comes over for one of her last two interviews tomorrow morning. Her job is going well; she has been promoted into the position she has been training for the last few months. Her managers like her and she seems now to have a more sophisticated understanding of her job and how to do it. She is also taking classes given by the grocery store to prepare employees for further advancement in the company. That is the good news, but how to get ahead in the midst of all her problems is a huge challenge. Rochelle would have a lot more money if she had good credit. Fixing bad credit has no easy solution. It takes paying your bills on time over multiple years. She hasn’t done that in the past, and recently missed two car payments. Her friends tell her that she can just pay some money to a person who “fixes” credit. It isn’t true, of course, and so far she hasn’t been seduced by that scam. The US is full of people with bad credit, and a good number of them come from the middle class. But many more, like Rochelle, come from the underclass. For them, mistakes made early in life, when they had little understanding of the world, few positive role models, no or bad advice, and a complete absence of any family safety net, continue to dog them as they get older and form families of their own, no matter how hard they work to leave their past behind them.

 

Rochelle Begins Saving Money

images“Here’s another $8,” Rochelle said, holding out her hand.  We had talked about trying to save money now that she was working full-time.  She started by giving me $20 from her January interview money two weeks ago, then added $5 more the next week and now had added another $8.  Right now she puts it in a piggy bank at my house that must be broken to remove the money.  It is an old Mexican folk art bank in my Mexican folk art collection, and I have no desire to ruin the bank in order to remove the money.  She isn’t earning any interest, but there is really no interest earned in a bank savings account these days anyway.   In three weeks Rochelle has saved $33!  “And I’m not missing the money,” Rochelle said. I had hoped she would see it that way.

“Does the grocery store have a profit sharing or 401K plan?” I asked.  I knew they did and thought it was supposed to be a fairly good one.  Rochelle didn’t know the answer, but we went to my computer and looked it up.  After she has worked full-time for one year she can join their 401K plan.  The company will contribute $1.63 for every $1 she saves for up to 2% of her wages.  The webpage then showed what a $10/hour employee would save over 25 years saving at a rate of 5%.  Rochelle will not reach her year anniversary until next November, but I wanted her to be aware of what savings can do.  401K plans need to be monitored to truly benefit the employee, but I can teach her that later.  Right now she is seeing a light at the end of a tunnel; I wanted her to see the possibility of even more light.

I remember Rochelle asking me what I spent money on when we both worked at the department store.  She rarely saw me spend money during store sales, though most of the other employees did.  The employees usually bought things on their department store charge card to get a discount, but then didn’t pay off the charge bill which carried a 24.99% interest rate.  If I did buy something, I always bought it with my store charge card but paid it off in the next transaction.  That way I got the discount but didn’t risk having to pay an interest rate.  I was not that smart when I was Rochelle’s age, however.  I too didn’t pay my charge cards in full then.  Rochelle is learning about money and debt.  “I wish I knew all this earlier,” she told me.  I wish I had learned it earlier too.  She seems excited to have money in the bank and to think about the future.  Having good things to mention about Rochelle’s life journey is refreshing .  Everything, however, is still very precarious. Nothing has changed with childcare, nor transportation, nor with her mother’s health.  A problem with any of these things will bring on another crisis. But for right now, Rochelle is able to think about the future.