Over at Make Money Your Way, Troy continues the investing for beginners series, and now he explains that there are 2 types of options: Call options and Put options. Click here to read more…
Have you ever wondered if everyone around the world takes up as much debt, has as many credit cards, student loans or consumer loans than you do?
I remember the first posts I read from US personal finance blogs, and the amount of debt people were in was mind boggling. I often thought ok, only fat people would start a diary about their weight loss, but it doesn’t mean that everyone is overweight, the same has to go for debt and PF bloggers. But then I read studies about the average amount of debt Americans carried and saw it was pretty normal to have a car loan, a student loan and a balance on several credit cards.
We do things differently in France. I don’t know if that is because our grandparents lived through WWII and are generally very cautious with money, passing on strong values of frugality and good money management, or because the system makes it hard to borrow money if you don’t have a good job.
Student loans? Very rare
A few kids in my business schools took on loans. If you check how I lived on $400 while in college, or how I graduated with $25,000 in savings, you’ll know I didn’t borrow money for college, nor did I pay for tuition during those five years.
If you can’t afford to study, you’ll get a scholarship. Public university costs roughly $2,000 a year, business school can be up to $20,000 a year and that is one of the rare occasions when students would take on a loan. All business schools have work/study agreements with major companies, like I did, the company paid my tuition and I worked for them in return, so students who take a loan are the ones who are too lazy to work want to experience the “full college life”, or take a semester abroad, and don’t realize that they can travel the world after college like I did, with the money I didn’t dump on tuition.
Sorry about the brag fest, back to the point, we almost never borrow for college. We live at home until we can afford our own place, and will shop on the curb for a sofa the neighbors threw away rather than borrow for it.
Car loans? Nope
The same goes for cars. I didn’t own a car until I was 29, and most of my friends do not own one. Outside the big cities with reliable public transportation, people have cars in their 20s, but they buy a beat up 10 year old car cash with their summer job money until they can buy something better.
I only know a couple of people who financed a car.
The credit/debit card
The vast majority of people in France own a “carte de crédit”. That means credit card, but in reality it works like a debit card with an overdraft on the account. If I go shopping with my carte de crédit, and spend €100, the amount is deducted within a couple of days from my current account. If my balance was €150, it is now €50. Another €100 purchase, and I am now in the red, at €-50.
You cannot carry a balance on your card, safe for a few that will pool all your purchases until the end of the month, at which time you get the grouped debit, you do not get the usual 3 weeks after statement to pay it off.
And you want to know what the biggest ripoff is? We get charged, around €40, a cool $50 per year, for the privilege of owning one such card. A debit card! There are 60 million French people, I’ll let you do the math…
The account overdraft
As a result of the carte de crédit, most people have an overdraft authorization on their account. Mine is at around 8% with ING and interest is calculated daily, with no minimum. That is a breath of fresh air considering my old bank was charging a minimum fee of €5 even if you were €0.20 in the red for a day.
The overdraft rates are usually lower than your credit card rates as anything over 16% is considered usury if I remember correctly.
The store cards
Only a few stores offer credit revolving cards with a high interest, usually tempting you with a 0% balance on a big first purchase. It is very rare that people apply for a store card, generally you either can afford the purchase or not.
Our “credit cards” suck
Since almost no one goes into debt and pays 19.99% APRs on their cards, we don’t get travel rewards, hotel points, cashback. Zilch. Just a yearly fee, that usually includes purchase protection and identity theft cover, period.
The loan affordability
Whenever you take a mortgage, a loan or open a line of credit, the bank checks out your income. You have to earn at least 3 times the loan repayment amount, net. If you earn €1,000, you can take a €333 mortgage. If you earn €1,000 and already pay €350 in rent, you can’t borrow anything. If you make €1,000 and have a €200 mortgage, you can take consumer loan as long as the repayment is less than €133 a month.
This criteria is very strict and limits the number of bankruptcies. It also makes it a nightmare to get a mortgage those days, with the price of real estate in Paris… Often your parents have to cosign your mortgage, at 35 it is quite the experience.
No credit scores
I did not have a credit score until I moved to the UK. There is a bad debtor file at the central bank, listing people who have gone bankrupt but that is all they check, after they checked affordability.
Our only debt is the mortgage
Because it is so complicated and not in our habits to borrow, our only debt is generally our mortgage. Again, the banks try to make back all the money they don’t make selling us credit cards and personal loans, so we have crazy fees, early repayment penalties, and very strict mortgages that make switching a pain.
We sometimes get a consumer loan on top to make house renovations, because we plan on paying that one quickly, and the couple extra points in interest is worth it for the convenience of settling the loan years before the mortgage.
As a result, we usually graduate debt free, and you don’t hear so much about debt journeys from $500,000 in the red.
Where else have you seen differences about debt and finances in general?