Archive for February 2010

Credit Scores in the down economy

One of my favorite times of my week is Sunday morning when I get to lounge on the couch while my family spoils me. I get to sit on the couch and watch the cooking channel, while reading the paper and eating breakfast. I usually keep my laptop nearby so I can report any interesting articles I read to you all. Today’s Sunday Oregonian had several good articles in the Business section for me to write about this week.

Brent Hunsberger’s front page article “You are not our credit score” (http://blog.oregonlive.com/finance/2010/02/you_are_not_your_credit_score.html ) goes into detail on how the down economy has thrown a wrench the FICO credit scoring system. Most individuals were not able to avoid the downturn of the economy during the recent past. In the article quotes Fair Isaac Corp “Consumers with high FICO scores (we’re talking 760 to 789) are now more likely to default on their home loan than on their unsecured credit card debt.” Why?

With so many home owners finding themselves upside down on their home loans they are deciding that the best option is to just walk away and start over. A friend of mine was asking me for some advice last week because he has a rental home in Las Vegas that he purchased during the height of the market for close to $300,000 and he found out that a neighbor recently sold their home for $70,000. He’s one of the few that can actually make the payment he committed to in the loan, but he is scared because the rate lock expires this fall and the rate will begin to adjust. The finance company will not talk to him about refinancing or adjusting his loan unless he’s late on his payments. The only advice I could give him was to be persistent and continue to call the finance company until they are willing to work with him. I also suggested he find out what the laws in Nevada are for collecting the remaining balance on short sales in case he decided that he just has to sell it.

He asked me about some of the companies that market themselves as “consumer protection agencies” and say they will work with the finance company for you to get your mortgage adjusted. He said he called one and they said they would help for the “low rate” (please note my sarcasm here) of $3,000. There have been many companies that have preyed on consumers in several different ways marketing they can fix your credit or financial position. These companies even if they are legit in what they are doing do not do anything that the consumer couldn’t do themselves with little effort for free. Plus, these companies cannot guarantee results. So my advice….STAY AWAY! You money is better spent paying down your debt or better establishing your emergency fund.

Wow, this blog ended up going a totally different direction than I expected. I think I’ll stop for now and pick this up tomorrow. There is more I’d like to discuss relating to credit scores because I really haven’t even scratched the surface on this topic that I am very passionate about.

The History of Personal Finance Education in Oregon

I got a call today from a California Jump$tart board member who was doing a survey of the states to find out each state’s educational requirements in finance education. I was once again reminded of Oregon’s digression in their financial education requirements, while we are seeing other states progressing in this area.

So let’s start with some history. Until 1997 Oregon’s high school students were required to have one semester or ½ credit in personal finance in order to graduate. Since then personal finance has been required in the Oregon Academic Content Standards as a small section under the Economics requirements. Here is a link to the Oregon Academic Content Standards http://www.ode.state.or.us/teachlearn/real/documents/ss.pdf

In 1998 The National Council for Economic Education did a survey of the states to find out what requirements there were around finance education. In 1998 there was only one state that required a course in personal finance be taken. The most recent survey results from 2007 showed that seven schools now required a course. Here is a link to the report http://www.ncee.net/about/survey2007/NCEESurvey2007.pdf

In 2007 the Oregon Legislature realized the lack of financial education and assembled a legislative task force to “study and make recommendations about how to increase and improve civics and financial education in kindergarten through grade 12”. I served on this task force and the final report was produced and presented to the legislature in October 2008. Here is a link to the task force’s page http://www.ode.state.or.us/search/page/?id=1836.

In 2009, as a result of the report Senator Rick Metsger presented a house bill to bring back the ½ credit personal finance graduation requirement which did not make it out of committee.

So where do we go from here? Why is it that Oregon was one of the few states that had it right long ago, but dropped personal finance?

The New Credit CARD Act

In the Sunday Oregonian the article Credit Cards: Know your rights, know your rates (http://blog.oregonlive.com/finance/2010/02/credit_cards_know_your_rights.html)
highlighted some of the laws going into effect with the new Credit CARD Act which goes into effect this month. While I do agree with many of the parts of the new law, I also feel that much of this would be unnecessary if we only properly educated our youth on how to manage their finances. I really am against predatory lending practices, but also feel that consumers need to bear responsibility for their actions.

Here are a couple parts of the new law that I question:

Co-signer required under age 21. Those under the age of 21 will be required to have a co-signer unless they can provide proof of a job.

Shouldn’t this be the case for everyone? If someone cannot provide proof of income then how are they going to be able to pay the monthly bill? The credit card companies are taking a big risk offering financing to individuals that cannot provide proof of income. Thinking about it, those under 21 are probably more likely to pay the bill without an income stream because many are still relying on Mom and Dad to pay their bills. Still, a 50 year old with no income, per the legislation, can still go and get a credit card.

Marketing on college campuses. Credit card companies are no longer allowed to market on college campuses and are not allowed within 1,000 feet of an event linked to a higher education institution.

So here is where I may get the gasps…I don’t agree with this. Only half of the population gets even some college education and we’re saying they’re not qualified to decide if they should get a credit card? If we don’t think our top educated can handle it then what about the rest of the population. Colleges actually make money on allowing credit card companies to market to college students so we are taking an income stream from colleges during a time they really need the funds. How do you think the colleges will make up for the lost income? Plus students will miss out on the free gear they get from applying for the credit card. Okay, that one was a joke.

What should we do?
It seems to me we trying to protect young adults from their own poor decisions and likely just delaying the poor decisions. We really need to address the root of the problem which is a lack of financial literacy.

How Financial Beginning Began

I have no idea how the whole blog thing works, but my web guys says to “just write” so I will.  This is strange for me since I pay an amazing person (www.kelleynpc.com ) to do all of my writing for the business because, after all, I am a finance person and we’re not known for our writing skills.  I’m not quite sure what my focus for this blog will be.  I want to share information and stories to further the financial literacy movement, but will this going to interest an online crowd?  I’d also like to inspire people.  I know very cliché, but I love what I do and I’d love to help others do the same.  I created the position I’m in and the organization I work for and it has far exceeded my expectations.  Still, I’ve gone through a lot to get to where I’m at so maybe sharing some of my struggles along the way will help too.  So where to start?  I guess I’ll start from the beginning and how Financial Beginnings (www.financialbeginnings.org ) came to be.

I grew up in this little manufactured home in the middle of the woods the younger of two kids.  When I was young we were poor, though I didn’t realize it at the time.  My mother was going to college and working nights while my dad worked during the day.  It’s funny now looking back on when my family had more money, the only thing that sticks out in mind as changing is the food got a lot better around the house.  Suddenly we had bagels and juice on hand, which we never had before.

It was a combination of have less when we were younger and being fifth generation cheap, which helped my parents to instill some very valuable financial habits into my brother and me.  I knew when it was appropriate to ask my parents for money, such as if my shoes were falling apart or there was a field trip at school I wanted to go on.  I would never go up to my parents and ask for money if I was going out to the movies with friends.  We were given an allowance and expected to work if we wanted money to go out.  Which, I did.  I babysat, house sat, and worked at the local Dairy Queen.

When I turn 16 and got my driver’s license I remember my dad saying that I could use his car whenever I wanted.  Still, that came at a price.  He took the average gas price by the average miles per gallon the car got and charged me for my mileage.  He had a book in the car that I had to write down the mileage on when I entered and left the car.  Then at the end of the week when it came time for allowance he’d give me my $10 and then take it right back to cover my mileage expenses.  Within about two months I bought my own car.

At 16 I reached another financial milestone.  I got my first credit card, now I’ll pause for the gasps.  A credit card company sent out an advertisement to get a credit card before the legal age of 18 by having your parents co-sign.  I convinced my parents this was a good idea and then entered the world of debt.  The credit card came conveniently right before prom; needless to say I ended up looking awesome with a new dress, shoes, hair done, the works.  And needless to say my parents and I had a talk when they opened up the first credit card statement.  That month I also learned about late fees.  I got my bill sent it out a week before it was due and it gets there after the due date and I get a $25 late fee.  I was so mad when I got my next statement; I called my attorney uncle to verify if this injustice was legal.  He assured me it was.

When I was legally able to be held to a contractual obligation at 18 I went out and financed a car.  I was very proud that I got out of the dealership thinking I hadn’t been taken.  I went in there telling them I wanted a car under $10,000, he showed me a car, I fell in love when to sign the documents and the price showed as 12,000.  I told them this was unacceptable and they agreed to drop it down to the $10,000 but would only give me $100 for my trade it.  I ended up leaving with both cars, a loan at 13% and a $2000 warranty because “the lender said I had to have one”.  Yah, I wasn’t taken.  It wasn’t until I later worked for that finance company that I learned the dealer forced the warranty on me and that 13% was not a good rate to be paying.

Remember that car I was going to trade in for $100, well I kept it and sold it the next day for $1000.  Yah for me right?  Well when I called to get my first insurance policy on my own the first six months of insurance conveniently ended up being $1000.  When I called and got my first insurance policy I just called and said I need “full coverage” and they told me how much to pay.  It wasn’t until a couple of years later that I met with a financial advisor and he told me I was crazy for being married with a house and only carrying the state minimums and I immediately bumped up my insurance.  My insurance agent never took the time to explain to me what the limits meant and the importance of them.

It was this same agent who did not tell me about renter’s insurance until I asked about after getting a call from the maintenance man at my apartment asking me if he could enter because they heard water running in my apartment.

From the time I left high school I realized that I could not accept being a poor college student.  So I went to school full time and worked part time.  At first I found that I was not interested in college and my grades suffered because of it.  So I dropped school to part time and increased my work to full time.

My work experience in the finance industry was working for Meier & Frank collecting on their department store credit cards.  Imagine me, not yet legal to have my own credit card, calling people to collect on an outfit they bought last year and now don’t want to wear because it’s out of style.  You can imagine with all of the bills people had, paying their M&F card was not high on the list.  I heard every excuse in the book.

I then upgraded and moved onto collecting on auto loans.  I found this to be much easier as cars are higher on people’s priority list to pay.  I was assigned a group of accounts and found that the same people delinquent time and time again.  The customers came to know me quite well.  I recall getting a call from a customer one time telling me that his Audi A8 was stolen.  I let him know he should call the police.  He said he was worried about the payment though and I told him he would need to file an insurance claim.  I then discovered the reason for his worry…his insurance policy had lapsed and he had no coverage.  A $38,000 vehicle was stolen and he still owned the full amount.

I also recall one customer that had two vehicles financed and both were severely past due.  I had to send both cars out to be repossessed.  The customer called me and worked out a way to keep the vehicles.  He then sent a letter to my manager tell him how great I was to work with.  I think this is what must customers do not realize.  If they just work with the finance company there are ways to make the situation work out for both parties.

I recall my friend and I talking at work about how uneducated the customers were.  How they did not realize how their credit was affected by their slow payments. How we were asked multiple times if they could just give back the car and call it even.  He came up with a wonderful idea…. Finance companies hiring individuals to go into the classroom and teach about credit!  They would be creating good consumers and in turn lowering their exposure to loss.  I loved the idea and told him that I was going to work on how to make it happen.  But, life goes on and so do the bills that go with it so this had to take a back seat to everything else.

Newly married my husband and I went to a financial advisor and learned the amazing concept of compound interest.  This was an eye opening experience.  He informed us that the state insurance requirements were not enough to protect ourselves, our homes and our assets.  Who knew?  When I got my car insurance I told the agent I wanted “full coverage” I didn’t understand that just meant the minimum liability requirements and collision coverage to protect the finance company.  We immediately increased our liability insurance and purchased and umbrella policy.

We also discussed investing with the advisor.  At the time $2000 was the maximum amount one to contribute annually towards an IRA.  The advisor turned to my husband who was seven years old than me and told my husband if he were to put $2000 away each year until he was 60 he would have $800,000.  Wow!  He then turned to me and said with you getting a seven year head start you will end up with over 2 millions.  Wait a minute!  Seven years younger at $2000 a year, that means I only put away $14000 more and I end up with over double.  Compound Interest!

I was so excited by what we had learned from our financial advisor that I decided this was the career for me.  I was focused and needed to return to school to obtain the education I needed.  Obviously, majoring in finance seemed like the natural path.  I went back to school full time and with this new focus I found that I was a model student.  I was driven to become a financial advisor.  I obtained by BS in Business Administration focusing in Finance.  Still I never had to take personal finance as a required course. My finance courses were all focused on being a financial analyst.

While finishing up school I obtained my insurance and securities licenses with ease.  I was ready to go out and help people prepare for retirement.  Still nobody had ever told me this was actually a sales job!  Since I had gone seeking this information when I got married I just assumed everyone else did too.  I did not realize that most people actually have to be sold on the concept of preparing for retirement.  And they definitely did not was to be sold by a 22 year old blond.  I quickly left this field unable to accept the negative salary I was earning.

I entered the job market and found this to be a very hard time to find a job.  The economy was slow and there were not enough jobs to go around.  I found a job as a liability claims adjuster.  It was a great job because of the flexibility that came with it.  It also was similar to the collections industry because I had to deal with people in hard situations.  I excelled at the job and moved up very quickly.  I was repeatedly amazed by how people failed to properly project themselves.  There were multiple times where the people I worked with did not have enough insurance to cover the loss leaving themselves open to large debt obligations.

Throughout each of the different parts of the finance industry I worked in I found a lack of financial literacy among customers and how this lack of knowledge ledge to heartache.  I increased my research in providing finance education to youth.  I originally planned on proposing the idea to a credit card company, but after my experience as a financial advisors and insurance claims adjuster I realized that providing credit education was not enough.  Students needed a comprehensive program to provide them the foundation they need in personal finance.  Students need to know about banking, insurance, credit and savings & investing.  And that is how Financial Beginnings was born.

www.financialbeginnings.org