Today’s Wall Street Journal article Credit-Score Pitfalls of the Wealthy , in my opinion, seems to shed some light on the problem of our current state of the economy, though it likely wasn’t the intention of the author. In short, wealthy people who believe that “cash is king” and don’t regularly use credit don’t get the best deals…and therein lies the problem. To that I ask, “What?”
My Bachelor of Science Degree in Business Administration centered my studies around Finance and Commercial Bank Management. I did pretty well in my “money classes” and worked in the financial industry first as a banker & trust officer, then as a licensed financial adviser for over 12 years. For those who don’t know anything about finance, you at least know that “with risk, comes reward”-at least, academically.
That’s what puzzles me. According to this report, college students, on average, may receive up to 4-6 unsolicited offers for credit cards…EACH WEEK. Students who don’t have any money (for the most part). In the presentations I deliver to high school students, we’ve been telling students that the most valuable asset you have your first five years out of high school is TIME. Reflecting on my own college experience, I’d say that is a true statement. It certainly wasn’t money! From the start, we’re programming the public that you MUST have and use credit.
Which leads me to the absurdness of the reality that moneyed people don’t always have good credit scores not because they don’t have cash, but because they don’t typically borrow anything. Stick with me here for a minute…You see, when a business applies for a loan, the inquiry is routed through a credit analysis process during which the company’s cash flow is scrutinized against it’s own past performance, industry peers, and overall risk on a case-by-case basis. A business with the luxury of being cash rich will have a high coverage ratio – the number of times “free” or available cash could cover the debt payments. If there’s a high coverage ratio, presuming that multiple is not a function of some one-time windfall of good fortune, there’s no reason to deny the loan or ask for overly aggressive terms. When a person applies for one, we look at an overall profile of what people have typically done overall…not so much that individual person, regardless of their means to repay the borrowed money based on some kind of “profile”… Um, the last time we separated common sense from the loan underwriting process we wound up with a country full of bad mortgages…Gasp! Is THAT what we’re trying to “fix” with this band-aid of a Stimulus Package?
According to the WSJ article cited above, however, and the information I’ve gleaned from some of the sources mentioned in that article – the same does not appear to be true for individuals. For that, we’ve dumbed it down into a “credit score” that is some seemingly arbitrary, digestible number that “allows” for consumer loan underwriters to count on a third-party calculation of the likelihood that a person should be able to repay any debts they may take on (cars, boats, mortgages, etc.). [By arbitrary, I mean: Does anyone REALLY know what that “equation” looks like?]
As President Obama often begins an explanation, “Look…” If people WITH money suddenly decide to access credit (for whatever – likely economic- reason), they SHOULD get the best rates. Instead, we’re busy shucking out credit cards, 72 and 86 month car loans (seriously?), and arbitrarily cutting available credit via credit card limits to small business owners for unexplained reasons because we’ve become a nation of debt-hungry consumers.
And now, we’re injecting ANOTHER $700+ Billion into “the system” to avoid catastrophic failure…um, respectfully, the system has already failed us in the name of progress.
For those who find themselves seeking a return to personal financial success in these challenging times, I suggest the following:
- Put yourselves on a CASH BUDGET. If you don’t have it, don’t spend it. Sure, it may cramp your style a bit.
- When money comes in, STICK SOME IN A SAVINGS ACCOUNT. Yes, I know that the rates aren’t great, but wait until you start bouncing checks and receiving those aggregious fees on even the smallest of overdrafts.
- BE HONEST WITH YOUR LENDERS. If you are in a pinch and can’t make the payments, give them a call before they call you and let them know what’s going on. Often times, if you will simply schedule payments to automatically come out of your account (at a level YOU are comfortable with, NOT one set by the creditors), you can often cut down or even eliminate those calls that do nothing but remind you of the financial pickle you’re in.
- FOCUS ON THE TASK AT HAND. Sure, they will talk about how you’re going to “hurt your credit score” by closing this account or that one, or making less than the minimum payment….However, when you ask them if they’d like SOME payment or NO payment from you, it’s funny how their tone changes.
- RE-EVALUATE your needs vs. wants. Yes, television is an inexpensive entertainment option, but did you know you can actually get channels over-the-air FOR FREE? Hey, with the switch to digital television broadcasts, those new shows and channels will look EVEN BETTER than via cable or satellite when you watch them on the HD-TV you financed at 27% on your credit card. Turn off the cable….
Take this opportunity to re-value what’s important to you and your family’s financial future. Take charge of it. Pick up some books from Dave Ramsey! It’s going to be alright.