Who Can I Trust?

There's a basic financial literacy assessment circulating among my students that I did not assign, and I felt the need to express an alternate view.

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The LendingTree quiz can be an eye-opener!  But if you don’t score as high as you would have liked, then don’t be hard on yourself.

The quiz was developed in 2007 and published in 2008.  During this time the “financial crisis” was beginning to make the news and resulted in the financial institution bailout in October of 2008.  Years of overleveraging, combined with inadequate risk assessment and disclosure seem to be the primary causes of the problem.

The “correct” responses in the quiz reflect the prevailing opinions of the time.  Since then, many Americans have come to realize that excessive debt benefits neither the consumer nor the lender in the long run (at least when there’s not a taxpayer-funded bailout).

Whenever you hear what you “should” or “shouldn’t” do, or what is “wise” or “unwise”, or any similar words or phrases, there are (at least) two thoughts to keep in mind.

First, these are all judgments that each of us must make for ourselves, based upon our own knowledge of financial products, our risk tolerance, and understanding of our own behaviors and circumstances.

There are many times in our lives when we have to tell ourselves that just because we can, doesn’t mean that we should.

Second, consider the source of the advice.  Whether the individual is actually competent in the particular field is an obvious question.

But an even more important one is whether their interests are in alignment with our own.  For example, a lender might encourage you to borrow the most that you can, but if you are uncomfortable with 30% or even less of your income being spent on housing, that’s okay.  This concept also comes importantly into play when choosing an investment advisor.

The quiz suggests that it’s "better" to have a couple of credit cards.  What they mean is that it can enhance a credit score to have credit cards, but not necessarily.  Though the scoring formulas may ding a few points, it is possible to have scores high enough to get the very best rates on a mortgage even if one has no credit card at all.

Do not try to manipulate a credit score.  Do practice effective financial behaviors day in and day out.  Pay what you’re supposed to pay when you’re supposed to pay it, and don’t take on too much debt.

An interesting note here is that, a few years ago, it was reported that World Financial Network National Bank (WFNNB) planned to deny new Gander Mountain credit card applications to customers with FICO scores of 800 or higher!  Gander Mountain sued, WFNNB (later Comenity Bank) countersued, and about a year later they resolved their differences and dropped the suits.

Some people still say that it’s practically impossible to get by without having a credit card.  If that really was ever true, it no longer is.  There are very many people today who choose not to have a credit card; they simply prefer the advantages of cash when spending locally, and they use a debit card when traveling, even internationally.  Nevertheless, if you do choose to use one or more credit cards, then pay the balance(s) in full every month.

The quiz also suggests that “smart” use of a second mortgage is to pay off credit card debt.  If you know of someone considering this, be sure they understand that they’re putting the family’s home at risk, and that they may have this opportunity only once.  Make the most of it; stop using credit cards.  In my opinion, anyone thinking of any kind of debt consolidation should run it by a reputable counselor.

One local credit union (that I otherwise have a lot of respect for) has suggested use of a second mortgage to "Take that all-inclusive vacation you've been waiting for."  Though I can think of one (very extreme) example when even I might consider this, it’s far more effective to save up for vacations.  After all, if I can’t save up for it now, how can I expect to borrow for it and to repay later  – with interest?

There’s a lot of valuable advice out there, but there is also a great deal of faulty reasoning and deceit.

The Federal Trade Commission suggests:

If possible, find an organization that offers in-person counseling. Many universities, military bases, credit unions, housing authorities, and branches of the U.S. Cooperative Extension Service operate non-profit credit counseling programs.

Here are a two sources of information that I know to be credible and that also have Indiana locations and are member agencies of the
National Foundation for Credit Counseling (NFCC):

·         Apprisen <http://www.apprisen.com/learning-center>

·         Greenpath <http://www.greenpath.com/university>

I took a glance at maps this morning.

For those of you near Lafayette, Muncie, and Noblesville, Apprisen’s Indianapolis is probably closest, and for Sellersburg their Lexington, Kentucky location might be more convenient.  The one of you in Goshen KY is only a few minutes from Apprisen’s Louisville location!

For Michigan City and South Bend, Grenpath’s Mishawaka looks good.  This one might also be useful for Ft. Wayne people, but it’s a distance, and this is particularly disappointing to me given the large population of the Ft. Wayne area.  Not too many years ago a NFCC member agency, CCCS of Northeastern Indiana, had several locations in the area.  Following mergers and acquisitions, they all dissolved.  For the student in California, the best that I can offer right now is to check with NFCC.org.

I expect that whoever picks up the phone at any NFCC organization is likely to be well-trained and able to help you.  Nevertheless,  if you’d like a referral to an individual in either organization, then tell me.  If you or someone you care about is a veteran, then I can also offer a referral to a counselor with the Armed Forces Services Corporation in Ft. Wayne.

Money Management International is another organization -  a huge company with 43 locations in 30 states – that appears to no longer have a location in Indiana.  Nevertheless, their resources can probably be trusted.

Some of you will enjoy the FINRA Investor Education Foundation Financially Fit? workbook.

We’ll likely talk more about how much we “should” have in an emergency fund, and just how to establish one.

Kurt Burnett