Tips for Money Management in 2006

Tony Cox looks at financial rule changes that could affect your pocketbook next year. He's joined by economist and author Julianne Malveaux and Matthew Scott, personal finance editor for Black Enterprise magazine.

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TONY COX, host:

From NPR News, this is NEWS & NOTES. I'm Tony Cox. Ed Gordon is on vacation.

You may want to sit down and take a deep breath before you open your next credit card statement. The Treasury Department has ordered card companies to double their minimum monthly payments in time for the new year. This is just one of several 2005 financial shakeups that could make for a painful 2006 if you're not prepared. For more on this year's changes to the financial rule book and what they could mean to your pocketbook, we are joined now in our Washington, DC, studios by economist and author Julianne Malveaux and in NPR's New York bureau, Matthew Scott, personal finance editor for Black Enterprise magazine.

Thank you both for being with us.

Ms. JULIANNE MALVEAUX (Economist): Good to be here. Thank you.

Mr. MATTHEW SCOTT (Black Enterprise Magazine): Thanks for having me.

COX: Let's start with you, Julianne, because you are an economist and economists are trained to look at the big picture. The Treasury Department says that this change is for the benefit of the consumer. I'm looking at a headline in front of me that says, `Good news, credit card companies are doubling their minimum payments; bad news, credit card companies are doubling their minimum payments.' So who is this really good for?

Ms. MALVEAUX: Well, Tony, we have so many people who have become addicted to credit cards. Minimum payments of 2 to 4 percent mean that the $500 stereo that you charge today, you know, they'll ask you for $15 a month, and you'll be paying for it 10 years later. So it's important to impose financial discipline. Obviously the way that it's going to happen will be a shock if you've been paying the $15 and you get the bill that says $30. But this--in fact, we have so much debt in America and African-American people are especially vulnerable to that credit card debt because we don't have the home equity debt, which is also being dealt with this year. So it's a good thing in the long run. In the short run, a lot of people are going to get pinched. It's a good time right now, at the end of the year, for people to take a look at what they owe, how they intend to pay it back, and cut up some of those cards.

COX: You know, that's interesting. Let me ask you, Matthew, because you know, paying the balance is always a very good idea, though very often it is not realistic for people. So what should we pay, and how do we calculate what we should pay?

Mr. SCOTT: Well, for people with good credit card management, this is not going to be a problem. They're just going to roll with the flow. They probably have additional money set aside for these types of things and they're probably using their credit cards well. For those people who do not manage their credit cards well or are living so-called paycheck to paycheck, this is going to be a problem. They're going to have to start looking at ways of taking money from somewhere else in their budget and putting it on these credit card balances, because they don't want to ruin their credit, and this is another swipe at the black middle class. People are just hanging on right now. Some people may be, you know, taking wage--haven't gotten the biggest raise in the most recent years. It's going to be hard for them to now meet these higher credit card payments, especially when you look at the rise in energy costs and the rises in other things, in inflation that's coming up here in the next year.

COX: Why did you say `a swipe at the black middle class'? Do you mean--are you suggesting something sinister about this?

Mr. SCOTT: Well, I won't say sinister, but it's almost as if every time the black middle class expands, something comes up that actually puts a little barrier in their way. And actually this affects all Americans, so it's not...

Ms. MALVEAUX: Right.

Mr. SCOTT: I'm not saying it's racially motivated.

COX: Yeah, but evident...

Ms. MALVEAUX: I was...

COX: Yeah, go ahead, Julianne.

Ms. MALVEAUX: Matthew, I was just going to have to disagree with you on that one. I mean, I do think that it hits the black middle class hard, especially the black middle class that's financially vulnerable. But who it hits hardest are people who do not own homes; therefore, they have no other low-cost access to money--people who do not own homes, people who have been irresponsible with their credit or they've had to use it for emergencies. You know, we have a record number of Americans who are declaring bankruptcy because--they're medical bankruptcies.

Mr. SCOTT: Exactly.

Ms. MALVEAUX: They spend $13,000 to $20,000 on medical bills and that's why they're declaring bankruptcy. But I wouldn't say--I mean, there have been swipes at the black middle class in some of the legislation that's come out in the past year, but this would not be the one.

COX: You know, you mentioned bankruptcies, which is a perfect segue into the next part of this discussion that I wanted to have with you, Julianne, because we know in October, the bankruptcy laws changed so it would appear as if the new rules regarding credit card payments may end up pushing people further and further into this more complicated bankruptcy law situation. Would you agree?

Ms. MALVEAUX: I would agree, because people who are at the edge, as Matthew said earlier, are not going to be able to double up on their payments. People who are using their credit cards to finance their groceries are not going to be able to figure out what to do. The new bankruptcy laws, however, as we all know, are pernicious laws. These laws were extremely punitive. The credit card lobby had worked on the Congress and the Senate for six years. Bill Clinton vetoed this legislation three times. Finally, you know, Mr. Bush had the alignment--you know, the moon was in the seventh house and the Republicans were in the majority, and so that he was able to get this kind of legislation. But understand the credit card lobby, while talking about the favor they're doing us, and there are a bunch of things they say they're doing well, basically made it more difficult for people to declare bankruptcy; basically, prioritized your credit card payments over your child support.

COX: Well, Matthew, what's wrong with--and in the reorganization of bankruptcy, as I understand it, people will not longer be able to just easily slip into Chapter 7 liquidation of their debts and will more than likely end up under Chapter 13 rules, which will require some sense of reorganizing. So what's wrong with cutting down on the bankruptcy abuses and forcing people to reorganize and pay what they owe?

Mr. SCOTT: Well, the unfortunate part is not everybody is abusing the bankruptcy laws. As Julianne mentioned, there are millions of people that have medical issues, and the medical issue is not going away. Those costs continue to go up. We have people that have lost their jobs over the last few years. What are they going to do? So when you start looking at the accumulative effect of this particular law, which is very stringent in terms of what you can and cannot charge off, so to speak, it becomes difficult for people to actually deal with paying off these debts. And of course, nobody has--nobody can foretell what's going to happen in terms of their medical issues, and you know, just as Julianne also mentioned, you don't--there's not a whole lot that people can do in terms of using their home as a way of mitigating some of their debt, if they haven't been able to actually get a chance to get one because the home prices have escalated over the last few years.

COX: We'll, we're going to talk about mortgages in just a second, but Julianne, I want to ask you in terms of this restructuring, reorganizing of the bankruptcy laws, did it also happen, or was it also changed with regard to Chapter 11 rules for business, or was it just for consumers?

Ms. MALVEAUX: No, businesses also will find that they will have a more difficult time discharging their debt. I want to go back, though--I want you to be clear on who your average bankrupt is.

COX: OK.

Ms. MALVEAUX: She's a woman who's somewhere between 28 and 32. She's a single mom who earns about $30,000 a year, so you're not talking about high rollers with closets full of bling. You're talking about someone whose child broke their arm and she took her Visa card to the emergency room to pay for it, because now hospitals won't let you just roll in there and send a bill. They want the money now.

COX: Up front, that's true.

Ms. MALVEAUX: And will add penalties and interest and penalties and interest until the $600 charge turned into a $7,000 charge, and I'm not exaggerating about this. I know one of these cases, you know, quite personally. But the woman just ignored the bills because she didn't have the money, and the next thing you know, she's got all this collection and was forced into bankruptcy. So we need to be clear who we're talking about. People at the top get a lot more protection. If you have a home, you can protect your home. But if you're a renter, there's no protection there for you at all.

COX: Now is...

Ms. MALVEAUX: Businesspeople can protect often the tools of their trade, so they're left with their computers, their equipment, often even their automobiles. But again, those people who are small business, self-employed types who don't have a lot of equipment, don't have protection. This bankruptcy law is heavily targeted against the poor, and this time I'll let Matthew have the middle class.

Mr. SCOTT: ...(Unintelligible).

COX: Well, let me follow up with you, Julianne, because this thing is very complex and comprehensive. There are pages and pages to it. I've read some of them. But I--there is a suggestion that in a case like the one that you mentioned, with the woman who had the medical bills, that there are provisions to protect that person if they can, in fact, document that the debt was related to a medical emergency. Is that right, or not right?

Ms. MALVEAUX: There are provisions there, but there are also requirements for certain kinds of legal help. We have had a government that has cut legal aid consistently. Where does someone who makes 28 grand a year go to get legal assistance? You have these consumer protection or these consumer debt places that, quite frankly, are--half of them are scams in and of themselves. So there are not a lot of places for people to go, and that becomes a problem in addition to the fact that if you're sitting here reading pages and pages--and I've read the pages--sometimes I get a headache--and Matthew's read them.

COX: Yeah, right.

Ms. MALVEAUX: OK, you're 28, you're a single mom, you know. You going to read all those pages?

COX: I don't think so.

Ms. MALVEAUX: Let's get real.

COX: You're right. I think you're right. Well, what should--are we talking about, then--let me ask both of you as we bring this to a close, do we need to move? If you're poor, and you should know whether you're poor and broke down or not, should you move to cash dealings, strictly, and just stay away from credit entirely? Matthew.

Mr. SCOTT: Well, everyone needs to start looking at how much credit they actually use, because it's not really in our best interest. The credit card companies raise interest rates on cards all the time, and you don't necessarily have to do anything wrong for them to raise those rates. So the only thing consumers can do is start monitoring and limiting the amount of things that they charge. It's a lifestyle issue, and we say at Black Enterprise save your money and grow your money for wealth. Don't make purchases that are going to take away from that wealth, and anything that you're buying that's going to generate interest payments against you is not a good thing.

COX: Julianne, I've got about 30 seconds. Is this hereditary? If you come from poor parents, broke-down parents, are you going to be poor and broke down in terms of handling your debt?

Ms. MALVEAUX: You will not have the tools to handle credit because you haven't seen it handled properly, but let me say this. A credit card is a tool. It's not an end, it's a means to an end. Oftentimes, if you buy an airline ticket with cash, you're considered a terrorist. I mean, you will be checked. You cannot check into a hotel or rent a car without having some form of credit card. So it's not to eliminate the credit card. It's to use it wisely. There's so much consumer credit information out there now, people need to get on site--Black Enterprise is doing a great job, I've got to say...

COX: Well, you know we got...

Ms. MALVEAUX: ...in the past couple of years in just making sure that people knew more about wealth. But Motleyfool.com--there's so many places to go to get the kind of information you need.

COX: Our time's running.

Ms. MALVEAUX: People need to treat this like any other, you know, consumer investment and investigation thing. No matter how poor you are, you can manage your credit.

COX: We got to go, Julianne. We got to go.

Ms. MALVEAUX: I'm sorry.

COX: We got to go.

Ms. MALVEAUX: You got me on the soapbox.

COX: We got to go.

Julianne Malveaux is an economist and author; Matthew Scott, personal finance editor for Black Enterprise, thank you both.

And be sure to tune in next Monday for a special NEWS & NOTES roundtable on wealth building in the new year.

This is NPR News.

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