This month’s Your Money in The News: How financial knowledge shapes our debt perspective, a sketchy new FICO score on the horizon, the student loan debt domino effect, and more…
American households are currently carrying 1 trillion in credit card debt. Many are only making minimum monthly payments. The Fed’s rising interest rates are going to explode their debt balances.
For example, if you have a card with a $10,000 balance, making only the minimum payment each month will cost you $12,000 in interest and take you 27 years to pay it off at a 15% interest rate. Once that interest rate is raised to 17% percent, you’ll pay $13,600 in interest and it will take you 28 years to pay it off.
The Fed’s rising interest rates are going to explode credit card debt balances.
Cutting up credit cards only deals with the symptom, not the root of the problem. The truth is that the root of our nation’s credit card problem is grounded in our lack of financial knowledge. Our schools’ out of touch curriculum isn’t preparing us for the real world. Why don’t we teach kids about money in school?
Not having or not using credit cards isn’t the solution. In the real world, credit cards are essential. To rent a car, reserve a flight, or buy anything online, they are necessary. Still, people allow their consumer debt to increase to the extent that they can become prisoners of it.
The root of our nation’s credit card problem is grounded in our lack of financial knowledge.
But, debt itself is not the problem. Bad debt is the problem. Bad debt is consumer debt, such as credit card purchases, or a car loan. Good debt is debt that someone else pays off for you – such as real estate debt. For example, when you purchase real estate and manage it properly, you can pay off your mortgage with the rent from a tenant.
People can fix their problems with debt by reducing their liability purchases, and increasing their asset purchases. The wealthy use debt to their advantage. Wall Street is able to take your debt and turn it into an asset. That’s what financially smart people do, and it’s one example of why rich people get richer. – Paraphrased from Robert Kiyosaki
According to the heads at the new UltraFico, the primary limitation of the traditional FICO score system is that there are a lot of people who have no payment history because they don’t have or use credit cards.
The new UltraFICO, (initially only available through a small group of lenders during its pilot phase,) is designed to include more people in the financial ecosystem by getting at people who don’t have access to credit.
How will they do this? By getting consumers to allow their banks to share their financial data with a third party. The data will be used to calculate a score.
- The length of time their bank accounts have been open
- Their banking activity
- Their balance
- Who they pay and who pays them
Participating in this program involves sharing very sensitive banking information with third parties, so consumers should keep that in mind before doing so. – Maureen Mahoney, Policy analyst for Consumers Union, the advocacy division of Consumer Reports.
The UltraFICO’s goal is to score the “unscoreables,” the “no hits,” or “thin files,” and drive the conversion rate. They say it will give consumers more options. Really? Or is it just a sneaky way for the credit card and lending industry to sell credit products to a more vulnerable type of borrower and expand its customer base?
What do you think?
To what degree is taking on student debt to get a degree affecting people’s’ ability to obtain and grow wealth?
- The average millennial with student debt has 75% less net worth than their debt-free peers.
- The median net checking and savings bank account balances of all grads under 35 who have loans is $5,500 vs $10,180 for those who don’t have loans.
- The average grad under 35 with student loan debt has around $21,000 in retirement savings vs $40,000 for those who don’t have student loan debt.
BTW – you actually get hit thrice by not being able to contribute to your retirement account when you’re young:
1 – You’re not saving.
2 – You’re missing out on compound interest over time.
3 – You’re missing out on the the tax benefit.
It can destroy trust in your relationship, for one thing. Your partner may wonder what else you are hiding if you get caught out hiding money issues.
It’s a pain in the ass. If you are hiding the truth from your spouse, you are juggling two budgets: the real one and the lie. This is stressful and exhausting.
It’s unhealthy. If you are hiding money stuff, you probably aren’t dealing with the other stuff you should be dealing with. How can you be truly transparent about even more intimate matters if you don’t feel safe enough to share financial knowledge?
It’s just not fair to your spouse. If you are carrying hidden consumer debt, you are messing with their credit record, too. In addition, if your spouse thinks you two are doing better than you actually are, they may be making decisions about their future that are based upon inaccurate information.
Credit Card Pay Off Corner
Adeola Omole‘s paid off $70,000 worth of consumer debt in under three years after asking herself two things:
- Why did I get into debt in the first place?
- Why do I want out?
Your ‘why’ basically has a lot to do with your mindset, your money mindset, your beliefs around money, your limitations surrounding money.
Instead of just making your minimum payment every month, pay off specific purchased items. If you charged dinner last month, pay that off, and say, a 3am Amazon spree. Put a face to that money and change the way you look at charging stuff.
Assessing individual purchases within that larger balance prompts consumers to evaluate what they spent, and to think about what expenses are being left uncovered and accruing interest.
It’s all a matter of interest. Paying down a credit card debt with 20% interest is a much better investment than the long term 9-10% annualized return of the overall stock market. On the other hand, if the debt you’re referring to is a mortgage at 4% interest you may come out ahead investing that in the markets.
You’re better off investing instead of paying down low-interest debt, at least from a mathematical perspective.