credit explained

Credit Should Have Been Explained This Way

Credit is really, really important. Don’t agree? Take a look at the United States National Debt figures. This country wasn’t built on paying for things with cash. Yes, our government hasn’t done the greatest job with managing debt over the years and that inability to effectively manage it has had a lasting impression on individuals when it comes to managing their personal credit.

For starters, most people have serious trouble defining credit. If someone were to ask you what credit is, would you be able to rattle off a simple definition? If not, don’t worry, credit can be summed up with this acronym, O.P.M. (Other People’s Money). Simple right? Now, depending on what source you reference, you may see a definition similar to this; credit is the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future. But why is something that’s so fundamental to our country’s existence such a misunderstood concept?

The Urban Financial Services Coalition (San Francisco Bay Area chapter) was hosting a workshop on understanding the importance of credit. During the Q&A portion, a young man wanted to make a comment about how he learned about credit. He stated that his story was simple and one that should be shared with everyone. The young man’s story starts off with him being in college and his mailbox was full of credit card offers. He knew that establishing credit was really important, but didn’t know the first thing about it. Up to this point, he only heard things like how credit was bad and that you should avoid it all cost. Note: for those of you who believe that, please consider changing your opinion. The young man decided that he needed to seek counsel as it applied to getting this credit card and he reached out to someone who he knew was really good with money…his mother. Note: when seeking financial advice, please consider a professional or at minimum, someone who is actually good with money.

During this brief 10-minute conversation with his mother, the young man learned how to ensure that his credit would always remain stellar. His first question to his mother dealt with which card should he select and from which financial institution. He had offers from both banks and credit unions. His mother simply said pick the card that you think looks the coolest. Why on earth would she say that? Well, the mother knew that any financial institution sending such mail wouldn’t be offering a college student any great credit card deals. It would be their basic student card, which probably wouldn’t have an annual fee. And for applying, they would probably get a t-shirt or some other tchotchke.

The young man didn’t think picking a card was that easy and expressed to his mother that he “heard” that he should be concerned about the interest rate prior to applying for a credit card. The mother gave him a great lesson about interest that all should take heed. The interest rate will never apply to you if you pay off your bill in full each month. In case you missed it, it’s worth repeating. THE INTEREST RATE ON A CREDIT CARD WILL NEVER APPLY TO YOU IF YOU PAY OFF YOUR BALANCE IN FULL EACH MONTH.

Reader Challenge: Go out and survey 10 people. Ask the question: What is the biggest thing for you to consider when shopping for a new credit card? Chances are, 8 or 9 out of the 10 people who you ask will say the interest rate is THE most important thing. The sad thing is, if the interest rate is their top concern, then they have already lost. What they are telling you is that they don’t manage money well and are okay with overspending/living above their means and as a result paying their financial institution more money than they deserve.

Next, the young man asked his mother how he should use his brand new credit card. She said make a few small purchases each month and pay off the balance in full when you receive your statement. She informed him that his credit limit would probably be pretty low (it was $200) since he was new to credit, plus the fact that he was a college student. And unless it was a real emergency, he should NEVER get close to that $200 limit. She reminded him that spending on a credit card is like getting a 30-day, interest free loan. If you don’t pay off your balance in full, that dreadful interest will most certainly kick it. She went on further to explain, that as a result of him sticking to this simple process, the financial institution would probably raise his limit. She warned him that just because they raise his limit, doesn’t mean he should go spend more. He should stick to his simple plan on making a few small purchases each month and pay off the balance in full, no matter how high is limit may become.

As a result of that conversation with his mother, the young man never had issues with credit. Of course, his mother didn’t share with him all the moving parts when it comes to credit; like there being 3 credit bureaus, the credit score and how all 3 bureaus report it different, how your credit score is calculated, why checking your credit report from all 3 bureaus each year is extremely important, etc. The biggest thing the mother did for this young man was keeping it super simple. Many of us tend to complicate financial matters and it causes a ton of stress in our lives. This young man has always viewed credit in a positive light, primarily because his credit was indeed stellar, he actually learned how it worked and adopted a great habit early on. It also helped that the person he received the advice from was a great steward of credit.

Not all of us will be fortunate enough to have parents who understand credit and how the game works. Just imagine, what if everyone had someone break down credit prior to getting their first credit card, like this mother did for her son. Debt (credit card debt specifically) probably wouldn’t be much of an issue.

taking inventory

Taking Inventory

Getting your financial house in order is a goal that most people set for themselves. Of course, not everyone will gets things in order at the same stage in life. Like anything else, most people will do things when they are ready, not when some financial professional tells them to do so. Or they will decide to take action as a response to a life event. Here are a few examples. Let’s say you have a friend (who has young children and a spouse) that passes away unexpectedly. After witnessing that, you then decide to get serious about having adequate life insurance to protect your family. Or you have a co-worker who is getting well into their golden years but still HAS to work because they didn’t save/invest appropriately for retirement. Only then do you decide to start taking retirement planning seriously.

No matter your excuse or fear around financial planning, you must take it step by step. You have to crawl before you can walk and you must walk before you can run.

Completing a personal balance sheet is the “crawl” step that everyone should take. This document, which can be found pretty much anywhere on the Internet, is really easy to do. It’s going to require you to list everything that you own (assets) and everything that you owe (liabilities). And, with some basic math (assets – liabilities) you will be able to determine your personal net worth.

Taking this “inventory” enables you to focus on where you need to start as it relates to your financial plan. Plus, as you continue to move forward with your financial plan, this can serve as your barometer of financial fitness. The goal is to continue to grow your assets, while decreasing your liabilities.

Some experts will recommend that you update your balance sheet once a year. However, if you are the type that needs more frequent feedback, perhaps you should consider updating your balance sheet quarterly or twice a year.

settle

How to Settle A Negative Account

Many people struggle with debt and sometimes you may not be sure how to attack it, especially if you’re delinquent on multiple accounts. Typically, the creditor will make various attempts to recoup their money that is owed to them, however at some point they may give up and charge-off what you owe them. A charge-off means that the creditor has given up on trying to get the money from you and after that two things occur…1) they refer the account to a collection agency (either an in-house firm or third party) who then becomes responsible for recouping the money and 2) it’s reported as a negative item on your credit report.

With any long overdue account, trying to settle that account in some form or fashion may be your best bet. Sometimes, if an account has gone to collections, they may even send you a letter stating that you if you pay 70%-80% of the outstanding balance, then you’re good to go. For example, if you owed $10,000 and they say you can settle by paying $7,000, then that’s a win!

But if that’s not the case, here are some things you NEED to know about settling an account:

  1. You have rights under the Fair Credit Debt Collection Practices Act (FDCPA) Sometimes creditors and collectors can appear to be nuisance, but keep in mind they are just doing their job. However, they have guidelines that they must adhere to and being abusive and or harassing is a big no-no.
  2. Make them validate the debt. Collection agencies purchase debt from the original creditor or they are working on behalf of the original creditor. If the collection agency contacts you and asks for repayment, simply ask them to verify that you actually owe the money. In accordance with the FDCPA, collection agencies that have been assigned a debt are not the creditor and therefore they cannot prove that you owe the money. Why? Simply because you never signed a contract with them. However, there is one exception…if the contract you signed with the original creditor has the insertion “…debtor agrees to be responsible for payment of this debt to creditor or its assigns”.
  3. Build rapport with your creditors/collectors. Dealing with creditors and collectors can be intimidating but remember, you created the debt and owe the money. Explain to them that you’re unemployed, or that an unexpected death or illness has occurred. They need to know something and they understand that life happens, but leaving them in the dark about your situation is NOT the thing to do.
  4. If negotiating payment arrangements, make sure you have the money! Having the money to negotiate with is essential. Knowing this dollar amount will allow you to discuss a realistic payment schedule that fits with your spending plan. Also, the terms you discuss will of course need to be acceptable to your creditor.
  5. While negotiating, keep your emotions in check. Again, your creditor has a job to do and you owe the money. But they will be more willing to listen to you if you stay cool, calm and collected during the entire process.
  6. DOCUMENT, DOCUMENT, DOCUMENT! You must get everything in writing once you have negotiated a settlement payment or plan. Once that’s complete, ask your creditor to fax, scan/email or mail the plan to you.
how can a planner help

How Can A Financial Planner Help Me?

Having a conversation about financial matters is a struggle for most people. We all understand that it’s imperative to have your financial house in order, however, most people typically don’t. The fear that you face around this issue will never subside until you decide to take action. You either need to do-it-yourself (which most won’t commit to doing) or enlist the aid of a financial planner.

Financial planners don’t get a ton of fanfare, but they should. The issue stems from the fact that people don’t understand the value that a financial planner can provide. People don’t understand that a financial planner may be the solution to all of their money woes. People don’t understand that a financial planner needs to be cherished just like your barber or hair stylist. Wait…like your barber or hair stylist? Yes!! When you need your hair done for an event or before you go on a trip, you will move mountains to get that appointment. Or if your person doesn’t do appointments, you will wait as long as it takes. Why?? Because looking good is non-negotiable!! However, when it comes to financial matters, you’re okay with NOT taking immediate action and continuing a life of financial misery. There isn’t a sense of urgency when it comes to interacting with a financial planner, nor is there typically an immediate (there are exceptions) outcome received. Thus, people tend to shy away from meeting with a financial planner or they constantly reschedule their appointment.

Now that we’ve addressed the psychology behind why people avoid financial planners, let’s move on and take a look at what you need to consider when you are ready to find your go to person. For starters, whoever you decide on, you actually need to like them. It doesn’t make much sense to do business with someone that you don’t like. Next, it’s recommended that you should interview 2-3 candidates before making your decision. Before finishing that first meeting (which is typically the free consultation that most will offer) you should know exactly how they get paid and what they are capable of doing for you.

Here’s a menu (of sorts) that you should consider when walking into that first meeting. A financial planner usually works in one of 3 ways:

Transactional-based business (Needs Analysis):

Think of this level as the basic package. You need a solution and this planner can sell it to you. The planner will capture the necessary information as it applies to your need, conduct an analysis and will conclude with recommending a solution(s). It doesn’t require much follow up after the transaction is complete. The planner will be in touch at a minimum annually to do a review or may be in touch periodically for service related matters. The planner earns a commission on the solution that is sold.

Managed money (Wealth Management):

This can be considered the “I’m in it with my client” level. You are entrusting the planner to manage a certain amount of money for you. The services at this level may involve the following as it relates to your money: 1) how your portfolio is allocated amongst the different asset classes 2) managing risk within the portfolio 3) enhancing (growing) your portfolio and 4) tax planning. You will probably meet with your planner on a quarterly basis to review your account. The planner will charge a quarterly fee based on the solution chosen and the account size. A fee-based relationship requires the planner to act in the best interest of the client because their compensation is tied directly to performance. Good performance, better pay, poor performance, less pay.

Comprehensive Financial Planning:

This level is like the deluxe service at the car wash. The planner is going to assist you with an in-depth analysis of some or all of the following areas: Net Worth and Cash Flow, Investment Planning & Allocation, Risk Management, Retirement Planning, Income Tax Planning and Estate Planning. At this level you will meet as necessary to help ensure that you understand your financial plan. At a minimum, you will conduct an annual review of your plan. Compensation at this level is two-fold. First, there will be an agreed upon fee for the financial planning service. Second, a commission and/or fees will be earned by the planner if you decide to purchase any solution(s) to implement your financial plan. Some people choose to only have the planner produce their financial plan, pay the fee and opt to implement a solution(s) with another planner.

bw challenge write up

The #BuildWealth Challenge Results Are In

How did this #buildwealth challenge come about? Simple…I was trying to determine what financial areas were causing the most issues for people. Was it a lack of understanding of the complexities of the various insurance and investment related products? Or was it dealing with basic money management skills and credit. I set out to see if I could get 500 people (ended up with 510) to respond to my brief survey.

Please note that I am not an academic and this research project wasn’t as thorough as I would have liked. I didn’t capture any detailed demographic information (got plenty of feedback about that), however the respondents of this survey come from a variety of age ranges, ethnic backgrounds, educational backgrounds, professions, etc. Despite all of that, I think the results we very revealing about the relationship people have with money. I do have plans for future #buildwealth challenges and I will most certainly do a better job of capturing more detailed information.

Without further ado, let’s jump into the results!

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I know some may argue that they track their financial success some other way, but I felt strongly that someone’s net worth tells the “real” story. You can determine your personal net worth by using a simple formula, Assets – Liabilites = Net Worth. This formula can be found on an important financial document called a balance sheet. Please familiarize yourself with this document because it’s a great first step to getting your financial house in order. By its very nature, completing a balance sheet will require you to gather all of your financial information as it applies to what you own (assets) and what you owe (liabilities). Think of this (taking inventory) as the all important first step on the road to financial rockstar status.

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For starters, the fact that two people skipped this question is kind of crazy. I’m not really sure what to make of it. And, for the 9% who put “neither”, that intrigued me because it says a couple of things; 1) they don’t have the slightest clue about where their money goes on any given month or 2) they just don’t care about knowing where their money goes. The question is simple…who is control, you or your money? People feel like they are living check to check because they haven’t taken the time to do some form of a budget, which would provide some level of control. If the old school way of budgeting doesn’t work for you, try the 50/20/30 plan or some other budgeting method. The key is to figure out what method works for you and stick to it. Also, don’t be so hard on your self if you can’t master the budget right away. Keep in mind that you have to crawl before you can walk.

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Understanding the importance of credit is critical to living a decent life in this country and I was happy to see that over 60% of the respondents were in the good/great category. For the small percentage who stated they have “no idea” about their status, my hopes are that they at least excercise their rights by obtaining one free credit report (no score) from each of the three credit bureaus once a year. The interesting thing about credit is that you can screw it up, then clean it up, then screw it up again, then clean it up again. And you can repeat that for as long as you would like. But, once you clean up your credit, unless there are some unforeseen circumstances (i.e. job loss, divorce, becoming disabled) it should not be that hard to maintain a positive credit standing.

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This question wins the prize for “most skipped” and that wasn’t a big surprise. The way the question is phrased probably has something to do with it, as I didn’t specify what type of insurance. Plus, most people don’t truly understand why insurance is the cornerstone of their #buildwealth plan until something goes wrong. Let me ask a question. If you were going to build a house, where would you start? If your answer was anything other than the foundation, we need to talk! When it comes to building a home, a solid foundation sets the tone for the remainder of the house. In regards to your #buildwealth plan, not having a strong insurance foundation may jeopardize your saving, investment and retirement plans. If you were to get seriously sick or injured, your bills don’t stop just because you’re not working. Unless you have adequate savings, I seriously hope you have the proper amount of disability insurance. How about if your spouse/significant other (who happens to be the breadwinner) dies unexpectedly? Again, unless you have savings or some other assets that you can liquidate immediately, I seriously hope you have enough life insurance. I’ll stay away from medical insurance because I know everyone who has medical coverage is grateful. Clearly, the insurance conversation isn’t a fun one to have but hopefully I’ve shed some light on how insurance can affect your overall financial well being.

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There’s going to be a day when you don’t want to get up and go to work. When that day occurs, hopefully you have more than enough money to survive. Retirement, whether you’re just starting your career, a seasoned professional or your winding things down, should be on your radar. The younger you are, the more time you have, the older your are, the less. It’s scary to know that some people have worked 30 or 40 years and have nothing to show for it. Or they are in their early 70’s or even 80’s and they “have” to work because they can’t afford not too. Having your retirement plan in order is of the utmost importance. Back in the day, your employer typically took care of retirement planning for you, however, the responsibility now falls on your shoulders. Many companies have done away with pension plans (because they are expensive to manage) and the long-term viability of social security seems to be an issue, but I’m optimistic that our government will figure out how to make it last. There are some employers who don’t provide a retirement account, and that’s okay, because there are plenty of avenues for you to open one up on your own. There isn’t a good excuse as to why you shouldn’t have an account (be it with your employer or on your own) that’s dedicated to retirement. And if you are one of those people who is struggling with the question of “how much should I save for retirement”, the answer is simple…A LOT!

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Risk is another area that more of us need to discuss when thinking about our #buildwealth plans. Let’s get one thing clear, there is risk in every single type of account that exist. The big question when it comes to risk is how much can you tolerate? If you’ve ever worked with an investment professional or opened any type of investment account, you’ve taken a risk questionnaire. Some experts will say that if you’re young, you should be aggressive and if you’re older, you should be more conservative. And of course there is everyone else in between. The theory makes sense because if you’re young and you’re investing aggressively for the long-term, despite the ups and downs of the market, you will probably be satisfied with the growth in your account. Just search any historic data about the long-term performance of the stock market and you will understand. On the flip side, when you’re older, you may be relying on those funds to live, thus it’s all about preservation. You might not be able to live comfortable if a major dip in the market occurs and your account balance is cut in half. Managing risk will ALWAYS be a work in progress for everyone. Life will cause you to think differently about risk. When you’re young and single, you make different choices in relation to someone who is older and has a family. When you’re salary is $150,000/year, you’re investment decisions are different from someone who is earning $80,000/year. When you are an educated investor, you’ll tend to make more riskier investments as opposed to a novice investor. I could go on with examples, but you get the point. Be mindful of the risk that you’re taking and make sure you are the one that’s driving your decisions on risk and not your emotions or some outside influence.