Inaction breeds doubt and fear. Action breeds confidence and courage. If you want to conquer fear, do not sit home and think about it. Go out and get busy.
– Dale Carnegie, writer and lecturer
Author Archives: Team Dinks
Credit Scores should be Reengineered
We’d like to advocate for a reconfiguration of how credit scores are calculated. While we’ve always questioned how credit scores are calculated, this has been more on my mind recently with the financial crises as it is.
Currently the system for determining credit scores has a few things wrong with it:
1) It relies on one having to have a credit card – if you buck the system like James, and choose not to have a credit card, this hurts your credit score.
2) If you do have debt, then the answer to that is to have an even larger debt limit, to keep things in proportion. This is counter intuitive, as if one has a lot of debt you would then like to limit this exposure by not giving them access to even greater credit limits.
3) It requires that you keep open old cards that you don’t even use, just to keep you credit history established for longer.
4) It does not reflect at all whether or not you can pay back your debt.
5) The current credit score system is established by a private entities who are biased in favor of credit and banking institutions.
We believe that the credit rating system would be much better off to adopt the following changes:
A) Be based on whether or not you can actually afford to pay back; wouldn’t be able to sink themselves into a debt hole before they even have a pay check. This would be done on a debt to assets/income ratio, similar to the bottom line of a business.
B) It would not rely on one having to have a credit card, but rather on if you pay your bills (including credit cards).
C) It would factor in your reliability to pay your bills on time, based on past behavior; this would be weighted as more important than what your current income is. This is based on the presumption that a lender would rather see that you make less money and still pay on time, then make more money and be a delinquent payer. Thus, you wouldn’t be penalized for making less, but rather for not paying. Obviously sometimes these go hand in hand, but that is part of the equation for whether you want to lend out money to someone.
D) It should be regulated by a non-profit consumer
watch guard organization with appropriate privacy safe guards to protect citizens. Individuals would also have the ability to authorize who can access their credit scores.
For example, when we recently rented out our investment property, at the end of the day it was most important to know that the renter could feasibly pay the rent at the end of the month. Therefore, when we were looking at two candidates, one with $30k in salary the other with nearly triple that, the obvious choice was the tenant who would be more likely to pay us on time.
In our minds, this change would help to eliminate the necessity to rely on the credit card industry. It would mean that someone could more freely choose to have a credit card, rather than being forced into doing so to maintain a good credit scores.
Above anything else, credit worthiness should be based on whether or not you can pay back that debt. By instituting these changes, consumers would be rewarded for saving and paying back on time, and ultimately living frugal or within their means. With the current economy as it is, this would create balance in a system that has otherwise tipped off into the deep end. Let’s take this as an opportunity to put things back on track.
Sorry FICO, we’d like to see the end of you.
Happy Saving,
Miel
Carnival of Financial Planning Is Up
Hi All,
The carnival of financial planning is up at Zachstocks. Check it out.
Fed Hires Enron Lobbyist to Polish Image
Hi All,
Just saw this at Bloomberg. Evidently the Federal Reserve Bank has been getting a lot of criticism on Capital Hill. They’ve hired – and get this – a former Enron Lobbyist to try to improve their image.
Here is the text from Bloomberg.
Linda Robertson currently handles government, community and public affairs at Johns Hopkins University in Baltimore, and headed the Washington lobbying office of Enron Corp., the energy trading company that collapsed in 2002 after an accounting scandal. She was also an adviser to all three of the Clinton administration’s Treasury secretaries.
Robertson would help the Fed manage relations with lawmakers seeking greater oversight of a central bank that has used emergency powers to prevent Wall Street’s demise. While she wasn’t tied to Enron’s fraud, her association with the firm may raise questions, analysts said.
Full article is here.
Best,
James
Bank Failure Friday
Hi All,
The FDIC sends around press releases announcing bank failures on Friday after the markets close and people go home from work. At first these press releases were always a bit shocking to receive, now they’re starting to commonplace, more like casualty list of the nations economic problems. Wealth takes a hit when banks are constantly closing. It requires time and money to sort out the finances involved with the failed bank. I sincerely hope the country is able to pull itself out of this recession sooner rather than later.
Best,
James
——————————————————————————————
Press Release
Republic Bank of Chicago, Oak Brook, Illinois, Assumes All of the Deposits of Bank of Lincolnwood, Lincolnwood, Illinois
FOR IMMEDIATE RELEASE
June 5, 2009
Media Contact:
LaJuan Williams-Dickerson
(202) 898-3876
Bank of Lincolnwood, Lincolnwood, Illinois, was closed today by the Illinois Department of Financial and Professional Regulation, Division of Banking, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Republic Bank of Chicago, Oak Brook, Illinois, to assume all of the deposits of Bank of Lincolnwood.
Bank of Lincolnwood’s two offices will reopen on Saturday as branches of Republic Bank of Chicago. Depositors of Bank of Lincolnwood will automatically become depositors of Republic Bank of Chicago. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers of both banks should continue to use their existing branches until Republic Bank of Chicago can fully integrate the deposit records of Bank of Lincolnwood.
Over the weekend, depositors of Bank of Lincolnwood can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.
As of May 26, 2009, Bank of Lincolnwood had total assets of approximately $214 million and total deposits of $202 million. Republic Bank of Chicago agreed to purchase approximately $162 million in assets. The FDIC will retain the remaining assets for later disposition.
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The details are here.
Barter is Back…
Mint.com has the story.
Paying For College
Education is hugely important for the average individual. Nearly, 15 million Americas are enrolled in degree granting institutions of higher education. Having a bachelors degree results in less unemployment and higher average salaries (clicky), so many Americans are justifiably concerned about paying for college.
Now, according to Jane Bryant Quinn, there are at least five ways to cover your higher education costs.
1) Savings and Investments: The main idea here is to pay your expenses from savings or investments. Since having a bachelors degree gives you about $20,000 more in annual salary relative to just a high school degree, it can be better to use your assets rather than borrow to pay for school. Sometimes its hard to intuitively determine this trade off, so you could use some financial calculators to compare expected value of your investments versus the expected value of your salary after graduation.
2) Current Income: Spending income from your job or other sources reduces the amount of money you’ll have on hand, but at least it prevents the long term drain on your cash that loans can result in.
3) Loans: Jane Bryant Quinn argues that student loans are the most costly source of funds. This is due to the fact that your loan interest can take a long time to pay off. While Quinn is often correct, we dinks disagree on this particular point. Of all types of debt, student loans can be the least onerous. For example, student loans are currently tax advantaged under the U.S. internal revenue code, some loan programs have subsidized interest and some types of jobs offer loan repayment programs (e.g. military and public service occupations). Quickly put, its better to avoid debt, but student loans are an okay form of debt.
4) Work: Yes, work. Many colleges offer work study programs. These let students earn some of their tuition by taking a job. Some schools provide jobs for any student who wants one. I am currently on an assistantship at the University of Maryland that is essentially a work study program. They can be quite handy.
5) Grants: Be under no illusions, it usually takes some effort to get a grant. In addition, free money additionally tends to go to those who have the greatest need. Also, many aid packages include a combination of low interest loans, a work study job and a modest grant. So, while the chances of getting a grant are promising, you should probably assume that grants will only pay for part of your education.
To start you off on your funding search, there are a couple of other good resources you might want to review. The WashingtonPost has a good “how to” on the topic (here), and Bankrate.com has some offbeat ideas for funding your education (here). Finally, Kiplinger has the basics. How you pay for college and what you do in your years studying can have drastic effects on your future wealth.
Best,
James
Jon Stewart Sums Up the GM Situation
Hello People,
Okay, here is a clip from the ever humorous Jon Stewart. He sums up the situation with GM in about 7 minutes. For what my views are worth, I wouldn’t touch GM investments, whether stock, bonds, or any of their affiliated business in until GM has come fully out of bankruptcy, the federal government has fully divested themselves of ownership and the company has turned a real profit for at least 8 consecutive quarters. Your money is simply too valuable to be placed at risk around a failed company like General Motors. There are better ways to build your wealth than investing in a company that wouldn’t exist without government support.
| The Daily Show With Jon Stewart | M – Th 11p / 10c | |||
| BiG Mess | ||||
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25 Traits of the Not So Well To Do
I came across the great list from Freefrombroke. Its an amusing post looking at some of the traits of people who are less than financially successful. Among the top 5:
1) Own A Flat screen TV
2) Have All The Premium cable channels
3) Eating out often
4) Leasing a car
5) Buying a new car every few years
Its great summary of things NOT do to do if you want to be financially successful. Do the opposite if you want to build wealth.
Click here for the rest of the list.
Latest Internet Rumor: Fed Buying Bank Shares
Hi All,
Its generally not a good idea to pass internet rumors around. That said, economic statistics have been so schizophrenic recently, so it may not matter.
At any rate, the latest internet rumor is that the Federal Reserve has been backstopping (read: buying) the shares of many of the equity offerings mandated by the Treasury’s Stress Test. If true, this would imply that investors currently holding bank equities could look for declines in their share prices as Fed inspired demand slackens. You may want to take this into consideration if you own shares in some of these companies, as it will have implications on your wealth.
From craigslist:
The Fed has been buying stocks as a bailout <> 06/03 07:10:13
My college buddy that works on Wall St says that they think Fed is buying and backstopping stocks as a way to funnel more cash to banks and people. Banks need to offer more stock and need a market for their offerings. There is a reason why the Fed wont disclose their balance sheet – it would be like exposing the wizard of Oz.
The thing about rumors is most of the time they are wrong, but with how crazy the economy has been, it sometimes feels like anything is possible.
Disclosure: we own shares in Umpqua Bank and Citigroup.
Best,
James