The Trouble with Borrowing from Friends

If you have ever borrowed a large sum of money from a friend you probably already know the kind of trouble you can get into. If you haven’t, let me break it down for you so that you do. It generally starts off with you venting to your friend about your situation. Then they, being your good friend, try to offer help. You, needing the help, take it. Maybe you don’t take it at first, maybe your sense of pride causes you to think on it for a bit, but eventually you do.

 

At first everything is fine. But, lets say you are really in a financial bind. 5 months have gone by, and despite your best intentions you have not been able to repay a single penny. So now what starts to happen? That owed money will sit in the back of each of your minds. You and your friend have a fight, guess what will come up in that fight. In general conversation with your friend they mention the fact that they are still owed money. As time wears on you start to feel guilty that you have not paid your friend back. Just being around them makes you feel guilty. You start talking to them less to avoid confronting them on it. Or you avoid them altogether.

 

In an even worse scenario, lets say your friend starts to run into financial trouble. Then what? Guess who they will go to, and if not paid back right away, start to blame.

 

All of this; guilt, avoidance, non-communication, results in only one thing. No friendship. The same reason money can kill a marriage is the same reason it can kill a friendship.

 

The Solution

Here is the secret to keeping a friendship in this situation from going down the toilet. Keep talking about it. When you owe a friend money, don’t let the fact that you owe be the unspoken elephant in the room with every interaction. Stick to a repayment plan, and if you can’t follow it, communicate that fact. Make a new plan if you must or form a new agreement or do whatever you need to do to handle the situation, but handle it. And communicate it.

 

Final Thoughts

Borrowing from a friend when you are really in a time of need can be a lifesaver. It can be just the safety net that helps you out of a bind when you need it most. But personally, I consider borrowing from friends a last resort. But if you must, work out a repayment plan beforehand. Make sure this plan takes into account what to do if payments can’t be made. Any expectations on when things should be paid off and if your friend is expecting a little extra for their own troubles (interest.) Being in debt is itself a treacherous mind game. Adding onto it the multi-layered emotions of a good friendship can turn it into a nuclear bomb. So remember that no matter what happens, have a plan, stick to it and always, always communicate what is going on.

 

How I went from very poor to very good credit in 45 days

Not to long ago, I went from very poor to very good credit in 45 days. My wife and I were under crushing financial debt. I mean we still are, but the payments at the time far exceeded what we were actually able to handle. I had a pay cut from work a few months earlier, which we had not recovered from. We were behind payments, our credit scores were both shot and my wife was on maternity leave. We were definitely not in a good place. To handle payments we were using our savings. Savings which, by this time were nearly exhausted. We were considering some pretty serious options, like declaring bankruptcy.

 

Then Came an Angel

No, not really, but a friend of ours told us about a financial trick he knew about. A trick to open a bunch of 0% interest credit cards and reset your credit score in 4 – 6 weeks. “Even better…” he said, between my wife and I, we could keep our debt on 0% cards in perpetuity. Sound to good to be true? Let me tell you about a hack so outrageous, so ridiculous, so crazy, that I can not in good conscience actually recommend you do this. But I did it, and it worked. Here’s the true story…

 

Disclaimer: What you are about to read should not be taken as financial advice. In fact, it is a perfect example of something you should not do. What I am about to describe is the way I quickly achieved a solution to a big problem I had. However, this solution is extremely high risk. I can not in any capacity recommend anyone actually do what I will be describing below. Unless you are in the most dire of financial situations, even then, do not do this! I am not a financial advisor. Anything I say and or write regarding finances should not be construed as professional or expert financial knowledge.  You have been warned.

 

The Setup

So the first thing my wife and I did was find a friend, a very, very good friend. One who was not only an extremely good friend but one who was also willing to basically take on all of our debt for about two months, and who had excellent credit. Let me tell you, you’ll find out who your true ‘lifer’ friends are if you have one that will agree to this.

 

After getting our friends agreement for this, she (and her husband) needed to open as many long term 0% offer credit cards as they could. (See the Difference between a Hard and Soft Credit Check for more information on how this can affect your score.)  Then, after receiving them, combining as many as they could onto one card. So for example, for 3 different Chase cards at 10k each, they would now call Chase and ask to combine all the cards into one so that they have one card with a 30k limit. This was not necessary but just made it easier to track everything.

 

The Transfer

With the cards open and received, we then worked with our friend to do balance transfers of all of the debt onto her 0% cards. The purpose of this step was to clear all debt from our records. The only things remaining on our end was our house mortgage, car loan and a small amount on a personal line of credit. Then from there we just waited.

 

The Waiting Game

An interesting piece of information about the credit reporting bureau’s (Equifax, TransUnion, and Experian) is that they generally update right when a request to pull your credit is made. Another interesting tidbit, is that credit card companies generally report changes to status once a month. (Read this article from Nerdwallet for more details.) Depending on when in the month the credit card company reports to the agency, it’s possible to see a credit change in as little as 1 week, and a maximum of 6 weeks. So, we waited. I do want to point out that during this waiting period, we had already made agreements with our friend to cover any credit card bills that came in while the debt was in her name. And so we did.

 

The Return Transfer

If I remember correctly it took us just about 4 weeks before the score changed. And WOW did it change! From a Very Poor to Very Good credit rating in only 4 weeks! It felt like magic! Of course it wasn’t magic, if anything it was deception… but I digress. From here the plan was simple, make sure that moving forward, we could keep all the debt at 0% interest until it was paid. The reason we needed a friend to offset our debt was so that both of us could ‘reset’ our credit scores.

 

With our credit scores reset, my wife just duplicated what our friend did. She opened up as many 0% cards as possible, consolidated them and then transferred the debt back over from our friend to only her. This point was important. This plan wouldn’t work if we split the debt between us. Why? Because one of us has to maintain excellent credit, so that when the time comes and those 0% start to expire, we can simply transfer the debt over to me. In this way, switching off every year and a half or so, we can keep the debt on 0% cards in perpetuity.

 

What to Beware of

Where do I even begin. There are so many potential risks to this strategy that it’s why I could never actually recommend it to anyone.

 

First, beware that most banks do charge a transfer fee. When we went through this process we not only looked for long term 0% offers, but also for nothing greater than a 1% transfer fee. The way this works is the bank charges 1% of the total being transferred over as the ‘fee’ of doing so.

 

Example

If you are transferring 30k, the bank would charge $30,000 * 0.01 = $300. This amount is usually added on top of the amount transferred over, not as a separate bill. Keep in mind, however, that this is up to the bank! When my wife and I did this we made sure not to apply for anything with more than a 1% fee.

 

Second, if you do this with a significant other, the person who’s debt is not in their name must maintain good credit. Not doing so will put you right back in the same situation of needing a friend. Don’t treat your friends so poorly!

 

Third, remember that banks can change the rules of the game at any time! This works right now because interest rates, the economy etc. are going in such a way that some banks don’t mind extending large amounts of credit, that they don’t mind having a lot of long term 0% offers on the market etc. It’s important to remember however that this could change at any moment.

 

Lastly, Remember that banks have the right to collect on all outstanding debt at any time! It’s their money after all and if they want it back, there is little to nothing you could do about it except pay.

 

Why We Did This

At the time my wife and I did this, we were paying an absurd amount of money in interest. The amount we were paying in interest far exceeded what we could actually afford. Even including the 1% transfer fees we needed to pay on all the debt we were moving (both ways,) those fees combined were still less than the interest we were paying in a month. Now that it is done, we have all our debt on 0% cards, which means every payment is pure principle. In addition, the payments are now within a budget-able amount, instead of in excess of what we bring in every month.

 

Final Thoughts

This is how I got excellent credit in 45 days. I will point out and stress, however, that having excellent credit does not mean “good with money.”  If you are reading this thinking any part of this sounds like something you should do. Or worse, if you fee like it is something you “need” to do. Then the first thing you really need to do is learn how to properly deal with and handle money. My true story here is not an example of how to do so, quite the opposite. I recommend starting here.

 

What type of debt do you have?

 

In my endeavors to pay down my debt, I joined a financial Facebook group. I had asked a question about investing. The reply I got back, and rightly so, asked,

My first question would be what type of debt do you have?? Doesn’t really matter how you invest if you are getting hit with 15-23% Credit Card APR.

This question is correct because indeed if you have a lot of debt on credit cards (which I do) you absolutely want to get them out of the way so you are not paying an arm and a leg in interest. I had a similar discussion with a close friend regarding what I should prioritize in paying down my debt. For sure, the last thing you should be thinking about is using your money for anything else. Or so is the common financial thinking. I agree, mostly…

 

My debt: All on Zero

First and foremost, while my debt is on credit cards, it is all on 0%. There is a specific technique to this that I don’t recommend but I’ll write about my experience with that later. Here are the factors why I feel strictly putting all of my income towards the credit debt is not necessarily the best way to go. First, the amount of debt I have, $187,000. So lets run some numbers, I’ll use my actual payments so it is clear why this is not ideal.

 

The Bare Minimum

The minimum payment for all the credit card debt is $814. Now remember this is interest free, that $814 is going purely to principle. (As an aside, my payments before putting everything on 0% was above 2k. This was killing my wife and I, we were literally swimming… drowning quickly actually as I was dealing with reduced pay from a cut at work and a newborn baby at the same time. We burned through all of our savings faster than a hot knife through butter. That’s a tale for another day though.) So lets break this down, with the following formula:

debt / minimum payment = number of payments

number of payments / number of months in a year = years to pay off debt

 

Sound good? lets run it:

$187,000 / $814 = 229.73 …alright so for math simplicity sake, lets round this up to 230

230 / 12 = 19.16 …again for simplicity sake, lets round this to 20

So assuming minimum payments and assuming I’m always paying 0%, it will take about twenty years to pay off the debt. This makes a lot of assumptions that we know won’t be true. For example that the cards stay at 0%, which they won’t. That I don’t need to pay for say, consolidation fees so that I can move the money to keep it at 0%. (Again I’ll explain this technique in detail at a later time.) That I’ll have the same job and income level. I mean, hopefully I would at least get some raises in that time.

 

With Set Asides

So as mentioned above, I do put some money aside for investments, I also put small amounts aside for savings. (I’ll explain my account breakdown in a later posting.) So lets assume I were not doing that, and absolutely all free and free-able money was put towards paying the debt. In this scenario, the possible monthly payment would be about $1,164. So lets run those numbers again:

$187,000 / $1,164 = 160.65 …lets do our rounding again, 161

161 / 12 = 13.4 …rounded, 14

Better! 14 years. So, 6 years are saved. You’re probably going well hell yeah! You should do that! Go that route! Why would you not?! Well here’s why not. In this scenario we still have the above assumptions except we have some more now. So remember, that in this scenario all free money is going towards paying debt. No money is going to savings and those coffers are as empty as a free can of beer at a college party. So we’re basically saying that in 14 years, we are assuming no emergency of any kind ever occurs that requires money. Because guess where the money will need to come from if an emergency did happen… the payment for the cards. And if the payment for the cards is missed, guess what happens to that 0%? It goes up, but when your dealing with owed interest, bigger is not better.

 

Final Thoughts

So to the question of “what type of debt do you have??” The kind that seems will never end. The simple fact is if you need more than 3 – 5 years to pay off your debt, then you need a bigger change to occur to be serious about paying it off. So at this point, whether a few hundred get reallocated elsewhere, for all intents and purposes, is inconsequential at this time. I’d rather make sure that if, and lets be real here, when an emergency occurs, I will be able to handle it and not miss any payments. I want to feel like I’m making some progress in life, real or not, that some of my money is working for me in invested interest. They real key though is making sure everything stays at zero percent.

 

So what kind of big changes would need to occur to be real about handling this debt?  We are talking about big raises, promotions, new jobs, big side hustles (… like this blog…), etc. Remember that this entire article is only talking about my credit debt. It’s not at all talking about my mortgage.  In fact one big change that could potentially be done is selling my house. I actually haven’t run the numbers on this yet so maybe I’ll create a special post where I explore that. Bet you didn’t think I was being so literal about joining me on my journey to getting out of debt did you?

 

Have any thoughts or ideas on the things I write about? Let me know in the comments down below!