Lessons - Breaking Free From the Debt Cycle That's Destroying American Wealth | George Kamel - Personal Finance Educator

In this lessons episode, learn why credit cards, loans, and mortgages can harm your finances, though some people use them strategically, discover how avoiding credit scores can bring peace and prevent overleveraging. Understand which financial products are most harmful for different groups, and why taking responsibility is key to breaking free from debt. If we look at all the different things that we sort of just touched on, we spoke about credit cards and line of credits and mortgages and leasing your car and credit score, they're all damaging to various degrees, but I think that some people would argue that there's a place for all of those in people's lives as well. There's some utility to getting out a mortgage if you, or maybe there is, I don't know. I know that Ramsey has a pretty hard and fast opinion on debt, right? So out of all those things, is there a place for them at all in an early person's life? Is there anything they can use strategically? Is there any point, for example, of trying to even focus on a credit score, are all these things really just myths that are going to damage your life, your ability to afford things, your ability to build wealth later on? Well, I had these fears as well. You know, when you dive into the Ramsey plan and it's like, hey, cut up all of your credit cards, close them down and, you know, don't worry about your credit score. Eventually, it's going to disappear and you're going to live life without it just fine. These are things that, you know, when you're young, you're scared. You're like, I don't know, that's not what I've heard. And then living it out, personally, when I cut up my cards in that class, I closed the accounts, I paid off the cards, my credit score went to indeterminable within about six or eight months. It was just gone. And then I went, I'll have to rent an apartment. And they're like, oh, you'll just need a little more deposit. I mean, as long as you have proof of income and you don't have a criminal history, you're fine. And I went, oh, okay. So that was one myth busted. I went to rent a car without a credit card or credit score. And then I went, well, yeah, we have a debit card policy. You'll seem to add a little more to the deposit up front. But other than that, you're good to go. And I went, oh, wow, another myth busted. And then I went to get a house to get a mortgage. And this was the big kahuda. Everyone goes, well, you need a credit score to get a house to get a mortgage. And I went through a process called manual underwriting to no score alone. And this is what they used to do back in the 70s and 80s before credit scores were rampant. They would look at your act, a real person would look at your personal financial history, look at your income. You do have stable income, look at your tax returns, look at all these things to go. Do you have the ability to repay this mortgage? Do you have a solid down payment? What is your debt to income ratio? And so based on all those parameters, they gave me mortgage with no credit score. And so that's when I realized that there really isn't a lot of hoops to jump through. And my life is actually better having opted out of this system entirely. And so that takes, that's a big sort of a curve. If you can make that curve, you're going to be just fine. But a lot of people, they go, no, thank you. I'm going to keep living the way I'm living. Or I'm going to do it for a tax deduction. Or my tax guy said, I can write this off. I'm going to do the lease. And they're trying to finesse the system. And it's burning so many mental calories that could be used for, you know, more beneficial things to your life. And that's what I'm saying out there. You can live a life in the system and you can build wealth. But what I found is it's much more peaceful and simpler to just buck the system entirely. When you look at bucking the system and getting rid of the credit score, what it's forcing you to do is to not be over leveraged and to be more financially responsible because now, like you're saying, they're asking you to actually just reserve a little bit more of your cash for the purchase you're making, which is just smart financial sense. Anyways, because how do people get into trouble? They just over leverage themselves. I'm very curious in your opinion, what would be the most predatory financial product that you've seen people get hooked into? Oh, man, there's so many. It's like choosing your lease favorite child. You know, there's there's the most predatory for different people groups. So I'm going to I'm going to say for lower income folks, the payday loan and the tote the note car a lot. Those are the most predatory products out there because it puts you in an endless cycle. When you have a 400% interest rate, it feels impossible to climb out of that. Even if it's a low amount of debt, it makes it so difficult to get out of that. And so you're left re-entering that cycle over and over again. Then we look at the middle class. The biggest wealth killer is the car payment. And as cars have gotten more expensive, you know, the same thing happened with student loans. We saw this. The colleges said, Hey, the governments are going to back the student loan companies so we can increase tuition because people will just take out more loans because the student loan companies are happy to give it because the money's backed by the government. And so you saw this just spiral out of control and tuition, you know, blew past the rate of inflation, the rate of the housing market, everything. It just exploded. The same thing kind of happened with the car the car market post COVID, you know, supply and demand issues. We got to make the chips. We got to increase the supply and car manufacturers went, we could raise prices and people will still take out loans because what's a $500 car payment versus a $350 car payment? And people are already used to payments into the life. So we saw the average car payment increase to over $700 now. And people are just going, well, you got to have a car payment, you got to drive something reliable, you got to drive something safe. And I'm like, dude, a 2003 Honda Accord is safer than some of the cars that are out there on the road to the, okay, that thing's a beast. You cannot take it down. And so we also have justified a lot of these purchases emotionally and psychologically, truthfully, because we just want them. We want the nicer car, we want the nicer house, we don't want to have to budget and save up and pay for things with money we actually have. We'll just put it on the card. And then as you look at the younger generations, they've really gone away from credit cards, but now they're addicted to buy now, pay later, a firm and clarinet, all these services because they go, well, credit card equals bad. I know that 25% interest, that's not good. But with buy now, pay later, I can still have all the things I want now without having to need the money right now upfront. And so that's another addiction for the younger generations. And then of course, the credit cards one are the kind of the overarching nemesis from, you know, people in their 30s to people in their 60s were just so used to it. You have 16 cards in your wallet now that you've justified for different purposes. Maybe it was a, there was a bonus with points. And then we see this new credit card actor trying to pass that basically will crush credit card rewards. And so now people are petitioning against this. I don't know if you've seen no, what is this? And there, there's a, so basically visa and master card have had the monopoly as the processors in its crushing business owners. You know, when you look at the fees they're charging business owners, the extra 3% or 3.5% if it's an MX card. That's why a lot of businesses say we don't take MX because they're not going to take a 4% hit on every purchase for the pleasure of you swiping your MX. So what they're saying is, hey, there's going to be other processors that are going to enter the space. You're not going to have the monopoly on it. And that's going to hurt all of the reward systems that are tied to that. So capital one, discover all of these places that have the visa master card logo on it. And so when you look at how they're able to devalue points at any time, the fact that people don't even redeem them, the black outdates, the mental psychology of what is 100,000 points? Oh, it's a $10 gift card. I didn't realize that. It just felt good to be at Chuck E. Cheese getting more points and more points. So that one overall is, is I wouldn't say it's as predatory as the others, but it's definitely one of the biggest killers because it's sort of a silent killer because the payment is low. You're, it's a $200 monthly payment on my credit card. The problem is you're never going to pay that thing off, making that minimum payment. You've got to be putting a thousand bucks on that balance in order to make it go away forever. And so there's, there's a lot out there. And the first two-thirds of my book breaking free from broke, I systematically am going after the credit score, the credit card, the auto loan, investing traps, mortgage traps to help people go, hey, I know this is what we have all believed, but there's a different path. And here's what you need to know. And I do it with a lot of research and also a lot of humor because this stuff can get heavy if you're not making jokes about it. I think it's stressful because what you do is you're, you're really just reeducating people on how to look at finance. And it's really a paradigm shift from everything they've known their entire young and adult life. People know this, but everybody buys a house with a mortgage, a majority of people buy a house with a mortgage. And when you start to do the math and you start to figure out how much extra this house is costing me over 25 or 30 years, it hurts. Like it really, really hurts. It's a very uncomfortable conversation because then it forces people to understand that the financial system is not there to benefit them. So they kind of have to take their own financial future into their own hands, which is an uncomfortable thought. I mean, you have stats and you have data, but if you don't use your credit cards, if you have nothing on your credit cards, there are credit card companies that will just shut your card down. You're doing all the right things. You open a line of credit. You open a credit card. You're not using it because you're not using it. They're not making money off of you so then they shut it down. Oh, exactly. Well, they're always offering you, well, hey, if you do good, we'll give you more line of credit or, hey, your credit score could be higher. If you opened up more lines, here you go. That's the marketing we hear. The marketing is never, hey, before you make that purchase, is it in the budget? Did you save up? Do you actually have the money in savings? Is it going to derail other financial goals? Have you invested in your Roth IRA yet? Nobody's marketing. Do you like that? They're going, hey, buddy, over here, I got some candy in the van. You want some more line of credit? And we're falling for it. As adults, we're going, sure, absolutely. And it's not because we're dumb. It's because we've been led to believe all these things in society, misguided guidance counselors, well-meaning parents. They're all complicit in this crime of leading us to the source of pain and frustration. And as I talk about in the book, the inflection point is realizing that it's not all your fault, but it is your responsibility. So if you just say it's not your fault, then that says, well, I'm just a victim of life. Life happened to me, but it's not all your fault, meaning there were other things, there were other sources, there were other influences, forces at play here, but you're still the one who signed the dotted line for that credit card. You need to take responsibility, because if you're the problem, you can be part of the solution. Thanks for tuning in. If you found this valuable, don't forget to hit that subscribe button so you never miss an episode. And if you want to dive deeper into this conversation, check out the links in the description to watch the full episode. See you in the next one.