The four letter word of personal finance is debt. Most of us have it; none of us wants it. I’ve written a lot about how to get out of debt. Today I’m excited to have Liz Weston, author of Deal With Your Debt, on the podcast.
We cover a lot of questions about debt, credit, and even retirement. Here are some of the topics:
- Which debt should you pay off first
- Should you pay off all non-mortgage debt before investing for retirement
- How your credit affects getting out of debt
- Some mythes about debt
- A rule of thumb to help you determine how much to borrow for school
- How much you can save by driving your car for a few more years
You can listen to the podcast above. If you prefer, here’s a transcript of my interview with Liz:
Rob: Liz, welcome to the show.
Liz Weston: Thanks Rob.
Rob: I’m so thrilled that you were able to take a few minutes out of your busy day to talk to us. I’ve enjoyed your books and your writing at MSN and other places. Your book on credit scores was probably the first book I read. And it’s interesting… Our son, who is now 20, actually took that book without asking me because he wanted to read it from cover to cover.
Liz Weston: Wow!
Rob: Yeah, and he’s not really into that, “Let’s save a lot of money,” right now. He’s into that, “What kind of a car can I buy?” But he took that book anyhow and read it from cover to cover.
Liz Weston: Wow.
Rob: And I just read your, ‘Deal With Your Debt’ book and wanted to talk to you about that. I believe people listening to this podcast can learn a lot from that. Before we start to dive into your books though, for those who may not be familiar with you, could you just give us a little bit of your background?
Liz Weston: Yeah. I’ve actually been covering personal finance for two decades now which seems like a really, really long time. I started out as a newspaper reporter and was a reporter for the Los Angeles Times for several years. Then I went to MSN and started writing with them.
The credit scoring book kind of evolved because nobody else had written a similar book for the consumer market. You could find a lot of academic books, books for people in the industry, but nobody was explaining to the consumer how their credit score was affecting their ability to get loans, their ability to get insurance. A lot of insurers use the credit information and scores. They weren’t talking about how landlords were increasingly using credit scores to evaluate you. So I thought it was time to take some of the mystery out of it.
My timing was pretty good, too, because right about the turn of the last century was when FICO started lifting the veil a bit and letting us know a lot more about it. I think consumer advocates were really putting pressure on them saying, “Hey, look… This is such an important score.” And at the time you weren’t able to see your score. There were agreements between these companies, the credit bureaus, the lenders and FICO that they would not reveal the scores to consumers and that was just blatantly unfair. So little by little we started to learn that credit scores existed and here’s how they are used and here’s how they’re created. And we know a lot more about them than we ever did.
Rob: Yeah, we kind of take it for granted today how easy it is, whether you’re going to look at a FICO score or different formula but how easy it is to get your report free online, your credit score and the tools to analyze it—what’s hurting it, what’s helping it. When my wife and I bought our first home the internet didn’t exist the way it does today and I had no clue what a credit score was. Or what ours was. You just applied and you either got approved or you didn’t.
Liz Weston: Well, the way that I think people found out about them is that their mortgage professional might have said, “Hey, your credit score’s really good,” or “You’re credit score’s not that great.” That might have been the first time that a lot of people ever heard there was anything such as credit scores. The fact that there is credit scoring dates back to the 1950′s. This is something that started in World War II when we started to become more adapted to applications in retail and all that, through the 50′s, 60′s and 70′s.
Rob: Okay. And how long ago did you write your book on credit scores?
Liz Weston: The first edition… I want to say was 2004. It was right after my daughter was born and I still can’t figure out how I did that.
Rob: Am actually going to ask you about that in a minute so just hold that thought, you know the thing is the research for that book had have been a lot more difficult then than it would be if you were writing that book today.
Liz Weston: Well, yeah. I benefited from a lot of things and one was a really good relationship with Fair Isaac which became FICO, and that was because I really started diving into this when I was at the Los Angeles Times. So I had that institutional sort of backing so I could call up Fair Isaac and actually get a phone call back. I established a great rapport with Craig Watts, who happened to be the PR guy at the time, and just kept asking questions. Just having those reporter skills of being able to figure out who had the answers, go to them and get them to talk. That really came in handy back then.
Rob: Oh, I bet. And when did you originally write your book ‘Deal With Your Debt.’ I know you’ve revised it in the most recent version in 2013 which is the one I read most recently. But when did you originally write that book?
Liz Weston: That was the next book after ‘Your Credit Score‘ so I want to say it came out around 2006. I know it was pre-recession because when I went back to re-write it a lot of things had to change because the whole credit market had been blown up and it had to be re-assembled. But the basic principles I was talking about stayed the same. One piece of advice I actually lifted directly from the one book and put into the revised book is, don’t rush in to buy a home. Buy it when it’s right for you. And I said this before the mortgage mess and I’m saying it now. It’s just not a decision that you can rush into.
Rob: So a lot of people should have listened to you before the market— I can remember when the market was going up and up there’d be conversations at work and the folks that were renting… You could just see it on their faces. They were just downcast because these prices were going up monthly. It was almost an emotional toll on them. They felt like they were missing out. Then, of course, it crashed and they had smiles on their faces while the rest of us were all bummed out.
Liz Weston: But most of us giving advice would take a lot of crap for telling people to wait, and for telling people, “No you can’t afford that mortgage that your mortgage broker keeps saying you can afford.” It’s crazy. And you keep saying it and you keep getting this push back. I wish I had saved this letter because I got a letter from some 24 year old mortgage broker who told me that interest rates would never go up and that his clients would never have a problem re-financing these scary, scary loans he was going to put them in. And I just thought, “That’s the level of naive confidence you can only have at 24 years old.” Because if you were miles on you would realize, “Wait a minute. The world is changing and whatever goes up is going to come down and this is just not sustainable.”