Guest Post: Emerging Credit and the Future of Lending

The following is a guest post by Jonathan of Master Your Card blog; (RSS feed). This post is a little bit different from many of the posts I have on brip blap, but I thought it was an interesting concept worth talking about – attempts by the banking industry to start pushing consumer debt onto people who have intentionally avoided it.

As the effects of the mortgage meltdown ripple through the entire lending community, the result is higher interest rates and stricter guidelines on who qualifies for credit. In the wake of what could be termed as one of the most devastating credit meltdowns in the history of the United States, many empty-handed investors are searching for someone to pin the blame on. And it seems that they’ve fixed their sights upon the lofty, mysterious citadel of Fair Isaac Credit Organization.

Mortgage lenders are crying foul play on Fair Isaac, citing major flaws in the company’s popular FICO Classic credit scoring model as being the underlying cause for the economic disaster that has taken the United States by storm. What do these allegations mean for the credit industry, and more specifically, the credit card industry? Let’s take a look at a relatively new phenomenon in the world of credit scores: the so called “emerging credit” scoring models.

Emerging Credit scores are largely the result of a shrinking market in terms of the number of consumers who are considered creditworthy. As the mortgage crises escalates, people who used to be considered an acceptable risk to creditors are no longer eligible for even the most basic of credit cards; but these companies still need to make money somehow, so where do they turn to market their credit products if the old crowd just isn’t going to “make the cut” anymore? The answer is found in the large clumps
of consumers referred to as the “unbanked”.

Unbanked consumers are those individuals who have little or no credit history, either by deliberately avoiding all forms of credit, or simply because they haven’t yet had the opportunity to establish credit for themselves. Either way, extending substantial amounts of credit to the unbanked has long been considered taboo by lending organizations, as the FICO Classic scoring model relied on so heavily in credit industries flagged such individuals as being unacceptable risks for investors. Now, however, companies such as Pay Rent, Build Credit, are bridging the gap between the unbanked and prime lending candidates.

For a long period of time, banks and other companies had little use for organizations such as PRBC. Now, however, in an eager, if not altogether desperate, search for qualified prospects, lenders are turning to information brokers such as LexisNexis, PRBC, and credit bureau TransUnion to dig up all the information they can find on an individual’s “unbanked” payment history, such as cell phone bills, rent deposits, tuition, magazine subscriptions, and so forth. Some agencies have gone ahead and begun to utilize this information in new credit scoring models, dubbed as “emerging credit scores”.

In all likelihood, it looks as if these new emerging credit scoring systems may become mainstream in a few years, which would have a dramatic impact on what credit card options are available to the average consumer as a result of creditors having a more complete picture of that person’s financial behavior. What does this mean for you and me? It simply means that more prudence needs to be exercised with traditionally unreported expenditures, particularly those expenditures which occur on a regular and continual basis, such as subscriptions or rent payments. As always, the new systems invariably favor those who are financially responsible and live well within their means.

Creative Commons License photo credit: SqueakyMarmot

7 tips to simplify today

In no particular order, with no particular theme, here are a few random simplification tips. Each one of them were ideas I had for separate posts, but they never really gelled, except #2, which was one of my early, early posts. Hopefully taken as a whole they provide a few simple ways to simplify life…simply.

  1. Learn to cook. You will be healthier (fewer health-related bills if you eat homemade healthy food than if you stop for takout every evening) and you will save money (unless you shop exclusively at Whole Paycheck, and even then it’s probably cheaper). Learn to cook healthy food, though. If you don’t cook, learning to cook will change your life for the better: it’s cheaper, healthier and better for your social life.
  2. Consolidate accounts. I used to spend a lot of time worrying about ten different credit cards and five different brokerages and a half-dozen retirement accounts and three checking accounts… you get the picture. It got worse when I got married – but then we saw the light and consolidated our accounts. Now I can go to Yodlee (easily the best account consolidation site out there, bar none, which I get through our bank) and tell you my net worth within seconds, pay all of my outstanding bills in minutes (those that aren’t autopaid) and check up on all of my accounts immediately. Our financial “basics” take less than an hour each month to maintain, freeing us up to concentrate on other things.
  3. Get married (and the corollary, don’t get divorced) or at least keep a stable monogamous relationship. If you get married, you’ll inevitably spend more money and save more money, have more time and less time – but I believe on balance being married means you have two brains to assault money problems (and opportunities) and we all know two brains are better than one.
  4. Stop trading, start investing. One of the worst time-wasters in my life used to be trading. Trying to keep up with the markets was a losing battle. Sure, I won some and lost some but the amount of time I spent and the tiny net improvement over passive investing was not worth it. Make targeted investments in things you understand. If you understand real estate, invest in real estate. If you understand hedge funds, invest in hedge funds. If you don’t understand anything, invest in some books about finance.
  5. Take public transportation if it’s available. I know you love your car, and I know the bus is a half mile away and crowded and doesn’t run on your schedule and blah blah blah blah. Public transportation is cheaper, better for the environment, better for your health (lots of walking and stairs). You don’t have to get train insurance, or fill up the subway with gas. You don’t have to take the bus in for repairs or buy new wipers for it. The bus is destroying the planet at a slightly smaller rate.
  6. Don’t buy stuff. I’ve already written about this, but I am a firm believer that you should buy stuff you need and don’t buy stuff you don’t. That’s a simple concept but hard to execute for a lot of people.
  7. Adapt to change. Trying to fight change in your life can waste money and make life more complicated than it needs to be. At every stage in my life I’ve found instances where I fought changing my habits – I didn’t want to cook at home (too lazy), to consolidate accounts (too much work), to get married (too busy with career), to invest instead of trading (I was smarter than the market, oh yeah), take the bus (I’m a busy international jet-setter, I have to take taxis!), or make do with what I’ve already got (this recipe calls for peppercorns ground by hand in a mortar and pestle, I couldn’t possibly find anything around the house to duplicate that action). Be willing to change your thinking and you’ll be ahead of 90% of the population of Planet Earth.

irie


photo credit: southtyrolean

I was at a street fair last summer when Little Buddy was first toddling along and knew how to dance just by wobbling back and forth and waving his arms. We were walking with my parents and came across one of the booths playing some music.

If you haven’t ever been to a New York street fair, they are tremendous fun. One of the North-South avenues is blocked off for 30 or 40 blocks and a variety of vendors fill up the streets and pedestrian traffic fills it up quickly. Everything is sold: sheets and bamboo mats, CDs and funnel cakes, high end purses and knockoffs of high end purses. Music blares from every corner, the smell of fried foods and kebabs and onions fill the air, and a good time is had by all.

So in the midst of this street fair Little Buddy tottered along with a protective father hovering over him. We came by a booth selling reggae CDs and blasting out reggae music (or faux reggae – UB40’s “Red Red Wine” – but it’s all good). He stopped and listened, entranced. Two guys who were either rastafarians or very accurate imitators of rastafari style were leaning against the booth, smoking. I am no expert (although I am not a complete naïf) but the smell of their smoke was not exactly cigarette smoke. Eh, no matter, it’s all-natural, after all. I was ready to pass on by with a wry smile, as I do.

But Little Buddy marched up to them and started to dance, beaming like the sun. He turned around in front of the two of them and danced. Everyone walking by laughed. He swayed and popped to the music. One of the two guys turned to me and said, “He is irie, mon, he is irie an’ he don’ care who know.” (That’s my poor written imitation of a Jamaican accent, and it sounds – to me, a fan of reggae music, the most positive, happy music I know – almost unbearably cool). It was a nice comment to make to a still-relatively-new father.

But that’s not the point – the point was that Little Buddy saw his happiness and grabbed it. Children have a way of doing this. They don’t think of consequence and they don’t think of fear or embarrassment. It’s not always a good thing – sometimes caution is necessary – but adults have definitely had this ability to seize happiness beaten out of us. We feel the need to be self-deniers, to SAVE forever for a retirement that may not come or a dream house that will have an empty room because we can’t afford furniture after making the mortgage payments.

If you read a lot about money on the internet, stop once in a while. Buy a latte. Eat lunch in the park. Live your life a bit. I know you need to scrimp and save and deny, deny, deny, but the moments when you can grab your happiness and wring it dry are few and far between. Your money problems will be there tomorrow. Today, be irie.

a brief update

stethescope
Creative Commons License photo credit: happysnappr

Just in case anyone has noticed that I have been somewhat quiet in regards to comments and emails, I beg your forgiveness and I hope to catch up soon.  Something I never could have predicted – out of all of the things I was nervous about – happened over the last few days after my daughter was born.  I got very sick the day after she was born with what I guess was a flu.  I’ve been staggering around with a 103 fever, unable to eat anything, coughing through the mask I had to wear for fear of infecting everyone else and generally struggling just to keep moving.  Just to put it in context, I am very seldom sick.  After losing so much weight and starting to eat a healthier, natural diet (and washing my hands and using Purell a lot) I’ve found I get maybe one cold per winter and it’s usually over in 48 hours.  I haven’t had anything more serious than a cold except once in the last 10 years (I had a bout with strepthroat about 4 winters ago).

I do count my blessings, though.  My parents and my wife’s parents and sister were supremely helpful, my daughter and son are both doing well, and my wife is recovering very well from the delivery, too.  So there is much to be grateful for.  If the worst that happened was me getting sick, so be it.  Probably the worst of it for me has been that other than the first day – before I realized I was sick – I haven’t been allowed to hold my daughter, which has been a real emotional downer.  But tomorrow I think I will be ‘healthy’ with a small ‘h’ and getting back on board with the fun stuff of parenting and problogging and enjoying summer at home.

So bear with me!  I appreciate all the comments and emails and just felt bad that I had fallen so far behind, and I will get caught up!

7 ways to mind your cash when you are abroad

This post originally ran as a guest post on plonkee money. Not only the author of a great personal finance site, plonkee’s also got a great second blog over here. I’m about 90% in agreement with her… 🙂


Creative Commons License photo credit: bogers

American Express – don’t leave home without it! That may be one of the most famous phrases in advertising history, but it tapped into a deep fear for most travelers: the fear of being stranded in the distant unknown parts of the world without ready access to their money. What are some simple methods to safeguard access to your money when traveling?

1. If you are traveling to very remote areas, make sure you have plenty of cash, not just credit cards. The parts of the world that don’t accept credit cards or debit cards are dwindling, but there are still places. Keep plenty of cash, but keep it spread amongst your wallet, your luggage and even a bit hidden somewhere else. I used to prefer to keep some spare money hidden in my toiletry bag on the theory that nobody is going to check there.

2. Carry dollars (or euros). Despite the fact that the dollar is terribly weak right now, it is still the most accepted currency in the world. Carry $100 bills; these are far easier to exchange, ironically enough, overseas than in the US. If you are coming from another country (you’re a European traveler, etc.) I would still recommend carrying US dollars. Don’t count on your drachmas or forints being accepted everywhere.

3. Keep a list of your credit card numbers and customer service – and give a copy to someone at home. There is nothing like having your wallet stolen overseas. However, you want to be able to quickly cancel them if you do lose them or have them stolen, and the easiest way is to have a separate “panic card” ready. Give one to a friend at home in case your panic card is stolen, too.

4. Debit cards are convenient, but pricey – and see point #1, too. When I started traveling in the early 90s, debit cards were almost worthless when traveling. As time has passed, though, they have become far more useful. Be careful when changing money, though – you may pay a fee to your bank and the local bank. In addition, you may get hit with an exceptionally unfriendly exchange rate.

5. Go gray, but be careful. I can’t emphasize enough that you should stay in compliance with the laws of the countries you visit, which often prohibit individual currency exchanges. Depending on the country you visit, though, you may find significantly better exchange rates dealing with individuals than with banks or exchanges. In developing countries with high inflation rates local people will often be willing to give you better rates simply to protect their earnings by converting them to dollars. I would not recommend exchanging with locals, however, unless laws (and safety) permit.

6. Get rid of change. Spend your change as fast as you get it, and small bills, too. These are often difficult – if not impossible – to exchange on your return. Try to spend all of your local currency before you leave the country. Exchanging your money to local money and then back to your money is a terrible waste. Try to spend down to 0 before you leave; put your last few expenses on a credit card.

7. The most important money tip when traveling, of course, is to keep it and yourself safe. Never flash large sums, never discuss how much you have, keep it well hidden and ensure you know how you could get ‘emergency money’ if you needed it (for example, where ATMs are that accept your bank’s ATM network).

Fun (and safe) travels!

wealthstreaming, or snowflaking for income

skyline6

When my post on wealth ideas lost to I’ve Paid For This Twice Already in FMF’s March Madness Tournament, I started thinking about snowflaking. Snowflaking is a spinoff of the “snowball” debt elimination concept invented by Dave Ramsey but the snowflaking version of this concept has really been popularized by Paid Twice. In a nutshell, it’s making every attempt to generate income, however small, to apply to your consumer debt. The idea is that even tiny payments on principal make a disproportionate difference to the overall total amount paid when you consider interest.

But since I have no non-mortgage debt, and my mortgage is at a very low rate of interest, I’m not focused on debt repayment. Yet the concept can be tweaked and twisted and all of the sudden it makes great sense in my life and for my (multi-)million dollar journey. I’ll call this concept, for lack of a better word, wealthstreaming. And yes, I know it doesn’t make much sense, but I like the way it sounds.

I had one big stream of income until recently – my consulting work. I have other streams, too – interest, dividends, some web-based income, some (very minor) income from miscellaneous sources like commissions for landing new business. I like to think of all of these as faucets pouring into the same sink – the water’s coming through different sources but ending up going through the same drain (my family’s expenses) and the goal is to make the water pour through in such quantities that the drain can’t process it all and the sink overflows. Neat, huh?

So until recently the consulting income was a heavy stream. Now that I’m problogging for a while, that stream will trickle off (residual income comes in after the work’s completed). Some other income will hopefully pick up a bit – web-based income, referral income (bonuses from new work or recruiting other consultants) and even some other side businesses that I might work on (an e-book is in the works)! I have been doing quite a bit of studying of the coaching profession as well. My goal is to have the streams get heavier and heavier until they match the force of the consulting income stream, because then I can turn that faucet off, and not just for a trial run – for good.

The beauty of some of the streams is that I tapped someone else’s water line. Those dividends? No more work goes into generating those. I made the money, invested it, and now those companies just give me a check once a quarter. I like those streams. A lot. In fact, I want as many of those streams as possible.

Other faucets need to be kept open by my effort. The web income won’t flow unless I keep working on it. Referrals take a lot of work. Those streams are nice; not as nice as the streams from someone else’s line, but more fun and easier to generate than the one-hour-of-work-for-one-hour-of-pay consulting stream.

I try to learn new skills so I can widen the faucets or clean them up – or best of all, I can add another faucet to the sink. I’m picking up web design, slowly – hey, there’s a potential future stream! I am learning about investing in non-stock-market investments – ah, maybe rental income in the future? It’s hard work to develop the skills to add new faucets, but if you have 50 faucets all giving you a trickle it’s easier to maintain than one overstressed faucet creating a bottleneck because there are only so many hours in a day.

So that’s my idea – wealthstreaming, for lack of a better moniker. Adding tiny stream of income after tiny stream and seeing which one flows fastest. Not just concentrating on the big streams, but looking for the little streams that take no effort to maintain. What’s nice about the idea is that since I don’t have a grand idea – I’m still brainstorming the next Facebook or the next Digg – I can work on increasing my income today and not worrying about hitting a million dollar jackpot. I’ll just keep opening faucets until the sink spills over and I have more water than I need – because then I can share the water with my extended family, my friends and others.

Guest Post: Education – a curse or a cushion?

The following is a guest post from AJC of 7million7years.com. He only recently started blogging but he’s already one of my favorite daily reads. If you’re the type who likes RSS, you can subscribe to his blog here.

school kid looking surprised

People often ask me what it takes to be an entrepreneur.

Probably the best book that I can refer you to is the E-Myth Revisited by Michael Gerber … it has changed many business owners’ lives (including my own).

In it, he shakes the myth of the entrepreneur being some sort of ‘knight on a white charger’ – you know the type, like Jack Taylor, the founder of Enterprise Rent-a-Car who was a navy pilot in WWII then went on to launch Enterprise in 1957, taking it to $78 million revenue (it’s now a $7 billion company!) before handing the reins to his son, Andy in 1980.

Here’s how Andy describes his father:

My father was the true entrepreneurial risk taker. He was the guy flying airplanes off carriers. He did not see taking a $25,000 second mortgage to invest in a business as a huge risk, because he saw real risks being taken during World War II.

There’s no doubt that adversity makes for better entrepreneurs … adversity gives you a ‘nothing to lose’ attitude.

Contrast that with the educated middle-to-upper-middle class …

… once you finish college and put in a few years learning the corporate ‘ropes’ it’s very hard to let go of the comfortable $50k – $150k that you are earning (and that your lifestyle has magically jumped up to meet … you know: cars, toys, vacations, etc.) to jump into a business that all the odds point to going broke.

You see, that education that we strive for, to lift us out of the middle-class, actually serves to keep us there.

After 6 years in the corporate world, I was bitten with the ‘entrepreneurial bug’ so badly, I was miserable every day that I was still at work after that little epiphany (I used to LOVE my job until then).

Yet, it still took me 4 years to leave …

If I was still working, no doubt I would be well on my way to saving $1 million or maybe even more by the time I retire at 65.

But, from where I now sit that seems WAY too little WAY too late …

Creative Commons License photo credit: Môsieur J.,  …selected by Steve

my latest tax deduction

“The joy of having a baby today can only be expressed in two words: tax deduction.”

Anonymous, via About.com

By the time most of you read this post, I will probably be sitting and waiting. Whether I’m sitting and waiting hand and foot on my wife and daughter or still waiting for the doctors to catch up to their schedule remains to be seen. I feel somewhat superstitiously trepidation writing something like this in advance of the event, but today my wife’s C-section was scheduled and we were off to the hospital for our (ever so slightly early) 6:30 am appointment.

Creative Commons License photo credit: mape_s

Preparing for a child is a funny exercise. We have been running around, cleaning, organizing, buying and returning for months now. Our son has been fed a steady diet of “I’m a Big Brother” books and given a baby girl doll to care for. We think we’re ready.

And of course you never are… I fully expect to be hit in the head with a brick just like I was when my son was born. The brick was the “wow, I’m a father! uh-oh, I’m a father!” brick. It was followed closely by the “can humans actually survive on this little sleep” brick, by the way.

Posts will still be appearing but forgive me if I’m a little slow replying to emails or comments for a few days! Actually the real chaos will begin early next week when Bubelah and the baby (gotta think of a nickname like Little Buddy has) come home!