When Emily and Payton Brown bought their first house in December 1993-a nice little $112,000 bungalow in this Florida city-they were on top of the world.
Now, the Browns are in a world of financial trouble. Worse yet, most of their money woes could have been avoided.
First, the young couple lived beyond their means, spending more than they were taking in. Even now, their monthly living expenses exceed their take-home pay by $111.
Then they ran their credit card debt up to almost $35,000, buying mostly furnishings and other things for around the house. Payments on those cards, which are now two to four months in arrears, are in excess of $900, and that’s over and above the shortage in the Browns’ normal living expenses.
On top of all this, Emily lost her job and was out of work for two months last year.
To cope, the couple took out cash advances on their credit cards. That’s right, they used their credit cards to pay on their cards. But of course, they fell further and further behind.
Fortunately, when the Browns also became two months delinquent on their mortgage, they sought help. Unfortunately, their situation is not all that unusual, according to the credit counselors who helped them and thousands of others just like them.
“People feel very powerful when they buy their first house,” says Cora Fulmore, director of housing for the National Foundation for Consumer Credit in Silver Spring, Md. “They feel like they can accomplish anything. But if they’re not careful, they can become overextended very quickly.”
Patrice Allison, the counselor who helped the Browns pare down their living expenses by $500 and work out a payment plan so they can bring their mortgage current, says the worst situation she’s seen among new homeowners was one who had 49 credit cards and ran up debts totalling $64,000.
Fulmore says she’s seen even worse. How does $74,000 in credit-card debt grab you? And both women say they’ve heard of people who have gone above $100,000.
“Many of the people we see owe more than their annual household income,” says Allison, the shelter program coordinator at the Consumer Credit Counseling Service of Central Florida.
How can that happen? Easy, according to Fulmore, who says the first two years of homeownership represent a difficult period of adjustment for every buyer.
“There’s a lot of things to become accustomed to,” she says. “That’s true for everyone, but especially so for people who have lived in apartments all their lives.”
Renters may be used to paying for their electricity, for example, but little else. So water bills and invoices for garbage removal often come as a shock. And so do fees charged by their homeowners’ association.
“The idea that you must abide by the association’s rules and regulations, and pay the association a fee to boot, is foreign to many first-timers,” says Fulmore. “They come in thinking, `This little piece of dirt belongs to me and I can do whatever I want with it.’ “
Worse, though, is the constant bombardment from solicitors-the door-to-door salespeople peddling vacuum cleaners, the telemarketers hawking portraits over the phone, and the catalogs in the mail pitching about everything.
“As a new owner, when you sign on the dotted line, your name and address are placed in the public record where anybody can get at it, and they do,” says Fulmore, herself a former counselor at CCCS of Central Florida. The agency is part of nationwide network of 1,100 credit counseling services operated by the National Foundation.
Usually, new owners are canvassed beyond their ability to pay-and all too often, according to Fulmore, beyond their ability to resist. But even when they’re able to withstand the salesmen, the pre-approved credit cards are sometimes too alluring.
“Homeownership shows stability,” Fulmore says. “Creditors are more willing to take a chance on you when you can’t get up and move quickly. But many people believe that if they’re pre-approved for a $5,000 or $10,000 line of credit, they can swing it.”
According to Allison, much of what most first-timers purchase with their credit cards is for their homes-curtains, blinds, furniture, appliances, lawn mowers.
“They want the house to look just right,” the counselor says. “They want all those little neat things that make it look just like a model home so when their family and friends come over, they’ll will `ooh’ and `ah’ over the place.”
Before they know it, however, many of them are in over their heads.
“They take on everything they can,” says Fulmore of the clients her nonprofit agency sees. “It’s like a new toy. But they’re qualified for debt on their gross income, not their net income, and gross is not real money.”
How do you avoid such situations? First, these counselors advise, make budget and stick to it.
Second, resist temptation. You may need a year’s supply of soap powder, but not all at once, and certainly not at this time.
Third, don’t try to master all the possibilities. Show a little self control. Resist instant gratification. Set priorities for what you need.
And above all, know your limitations and accept them.
If draperies are a necessity, for example, Fulmore recommends doing just one room at a time. And if you need a washer and dryer, consider used machines. “So what if one’s pea green and the other’s gold?” she says. “Who’s going to see them anyway?”
Finally, if it’s too late for this advice and you’re already in trouble, get help.
But be careful where you seek help. Many of the same frauds who hold themselves out as credit counselors for people who can’t buy homes because they have bad credit are offering post-purchase counseling as well.
One sure way to know you’ve put yourself in the wrong hands if the “counselor” asks for a fee equal to one mortgage payment. Reputable counselors charge no more than $50, and many charge nothing at all.
