I had the amazing privilege to attend the Consumer Assembly last week in Washington DC, and there was a panel discussion on credit scoring. The panel was actually a discussion on a group of American consumers that are dubbed by the industry the, “Credit Invisibles.” These are people who cannot get a “good” credit score in the typical way, by having open lines of credit that are at least six months old. The industry that scores credit, including the Fair Isaac Corporation (FICO), the developers of the FICO credit scoring models, and Vantage Score Solutions, LLC, the developers of the Vantage credit scoring models, feel that “credit invisibles” are disadvantaged in receiving access to credit products. And they are, but this new model by FICO to address the credit invisibles and those with marginal credit is not good for consumers.

I first blogged on the new “UltraFICO” score back in October in a two-part article series. The first was an introduction to the scoring model and the second was on some unspoken dangers related to judgments and bank account attachment when the credit reporting agencies have you bank account information, which you must consent to disclose under this model.

During last week’s panel discussion I learned more about the purpose of the model, and some facts that have me re-thinking my original posts about how this score may be “OK” for a mortgage product. And I was wrong in my previous posts. The model is not “OK” for any credit. None.

Before I move on to the specifics, I have to take a moment and point out that the panelists, including the VP from FICO from whom I received the information directly, entered into the lion’s den of an audience of consumer advocates, and spoke openly and answered questions about their products. That was a very nice thing to do, and I am appreciative of their honesty. I also know that in their “heart of hearts” they believe that they are helping consumers. It is at that point, I cannot disagree more. Remember, the credit scoring businesses are in the business to help people get and stay in debt. Any model that they can create to help consumers access credit is good for them, not necessarily for you. They sell these models. You are denied under one, they offer a second. Here are five “Fun Facts” about the UltraFICO:

1. The “UltraFICO” will be marketed, and is intended, for all types of credit not just secured, collateralized mortgages. In my original post, I speculated that the releasing of banking information to show the history of cash transactions might be “ok” or even great for mortgage lending, the only good use I could envision for this model. Well, when you apply for a mortgage, the banks take your last months of bank statements anyway. So, for that credit product, this appears to be moot. The UltraFICO will be available to all creditors who wish to purchase it.

2. The UltraFICO is intended to be a “second chance” credit scoring model. This little piece of information was new to me, and this is the first indication that it is not good for consumers. I originally believed that borrowers could just “opt-in” to this model by consenting to include their banking info. Actually, this is intended to be an option for people who would be denied credit in the original model. The credit denial becomes a “maybe” and the borrower has the option to “consent” to include their banking info in the hopes that their credit score will go up and they can be approved.

3. The Premise of the UltraFICO by Fair Isaac is faulty. One telling thing about this model is the statement by the panelist that the checking account information would be reliable because, “Consumer’s are in control of those accounts.” I disagree. I had a debit card number stolen and used in a fish market in Mexico. Filed the report, got the money back, but in this day and age of data breaches, I would never make the statement that consumers are always in control. FICO assured us that their model would be able to determine these little situations and not count them, but the scoring models are not transparent. All types of situations can arise where a consumer, for a period of time, may not be in complete control of every transaction in their account.

4. The UltraFICO model needs two to three years of banking information. Ah, another tidbit of info I was previously lacking. To use this model, consumers must 1. not have bounced a check in the last twelve months 2. Have at least two to three years of checking account information available for the model and 3. Have an average balance of $400.00. Good to know. 78% of consumers live paycheck to paycheck. There are many consumers that cannot maintain an average $400.00 balance after bills are paid and groceries are purchased. The VP assured us that in the beta-testing, using Experian as the Credit Reporting Agency (CRA), most consumers had their score increase under this model. But this now provides the information that a consumer may know they do not have, and “opt-out” of the model, rather than be denied AND have a score decrease.

5. Your banking info will be out there to the CRA, including “new” Finicity, who will become a CRA to comply with the Fair Credit Reporting Act. A fourth CRA will enter into the picture, Finicity who will be the CRA for these UltraFICO banking information providers to FICO for scoring. Because FICO never sees anything but the “raw data” they have zero, none, no liability for what happens to your info. Under this model, FICO assures us that it will be a “single use” calculation of the borrowers banking info. Okay, what happens then? The CRA and the creditors are responsible for protecting the data and are subject to the FCRA, so, it’s good. Or is it?

Data breaches have recently revealed sensitive info that an identity thief can use to create an account, such as social security number and date of birth. But now, a breach can put your banking info at risk, no need to create a fake account when they can raid yours, or use the UltraFICO themselves. How many additional hours will consumers add to the identity theft cleanup mess when the bank must investigate everything, and to close that account could subject the consumer to bounced checks and whatever else. But, you can file a dispute with the Credit Reporting Agency online. Eyeroll.

If you are purchasing a house, find a bank who will perform manual underwriting, and do not use the UltraFICO to provide your banking account information. Please. Your info will be out on the internet for who knows how long. Even if the CRAs pinky swear to delete it. For other types of credit, if you are going to be denied without this info- you are going to be denied. The interest rate is likely higher than you would expect anyway once the UltraFICO model is used. And for the car dealers and others who will “deny” people initially to access their banking information for approval, we know, we know. If you give a mouse a cookie, he will want a glass of milk. Protect your banking from the UltraFICO.

 

 

We are in spring! As we make the transition from winter into the new season, I want to invite you to take on a personal goal to find and save as much money as you can in April. Think of it as the “grown up” Easter Egg Hunt. We all tend to have several places we spend money without really counting the cost. Once we really pay attention to our money and write down where it goes often we are surprised on how much “runs away” after the bills are paid. So, for the savings challenge, there are three basic steps that if you commit to for 30 days, you will surprise yourself by how much you get to keep in your pocket.

Step One: Make a grocery budget and a list. Then take cash and leave the debit card at home

This can seem very scary if you don’t normally give yourself a budget. We start at the grocery store because those guys are the GREATEST marketers and woo money away from us on a consistent basis with “Red Hot Buys” or those end caps with items on sale that aren’t on the list. Even if you use the item on sale, if you aren’t out, and it isn’t on the list, you will pick it up later. Save that $2.99 now. Do that for three items, and you have saved just about nine bucks. Skip the sale items you don’t need and watch the savings grow!

Another tip: When you shop the sales and the “buy one, get one free” (BOGO), the bottom of the receipt will indicate what you have saved. That is money you would have spent if you had not been a super shopper. Transfer that amount to savings for additional motivation.

Step Two: Give yourself a weekly budget for gas, lunches, kiddo, etc., and withdraw exactly that amount of cash once a week. Again, leave the debit at home”

If you know your family has a drive through dinner on Wednesday between sports and scouts, budget for it and pay cash. You will not be as tempted to add on an item or “up-size” anything when you order. And if you don’t have the debit card with you and make a commitment to stick to your budget of cash for that one week, you are likely to be more aware when you must give up your paper money, and not overspend. Even better? The rest of your money stays in the bank!

Step Three: Save your change. When you are out spending only cash, you will get change as you purchase stuff. Save your change for the month.

I have a few mugs around the house to collect change. One is by the front door, so you take the keys out and see the mug, you put the change in there. The one that actually gets the most coin is on the washer (right?). Once a week, collect the mugs and empty them into a centralized place, perhaps a jar, or a piggy bank. At the end of the month, count the booty.

If you are already doing the steps above to your money, here are a few additional tips that you may try for 30 days and get in to the savings challenge as well!

Challenge yourself to save a specific amount each week

Mike and I try to squeeze at least $8.00 off the budget each week, just on various things. Seems silly, but when we are successful, we are saving a little over $30.00/month, $360.00/year. We aren’t always able to do it, but we have a goal for that money.

Withdraw your cash for envelopes only once a week, instead of per paycheck

Withdrawing money only once a week means more stays in the bank, and if we have money left over from the previous week, we can take out less. Also, this ensures we don’t keep a lot of cash around for temptation. If it’s in the bank, we are less likely to use it mindlessly!

Save your singles

The next step after saving your change is to save your singles. Mike will break a five before he gives up his dollar. It adds up! Doing that each week for the month of April may accelerate your savings!

Calculate your savings weekly to really see the impact of implementing a few changes this month. Every dime you save is a win. No amount too big or too small. I’m in. If you want to see how we are doing, and let me know what YOU have saved, just like my Facebook page: dawnkennedylaw. Game on!!!

There should be a rant warning attached to this article, but I am going to try and provide some tips, so it’s a rant with tips. Odd, but utter frustration with the student loan servicers is the place where many of us are today. I know I am frustrated with the level of “service” many students are getting.

An audit reportby the Department of Education Inspector General was released back in February, and it was a doozy. Between 2015 and 2017 Federal Student Aid, which provides oversight for servicers, found that there were many instances where the servicers failed to meet requirements with respect to borrowers, follow the federal rules, and actually harmed borrower’s rights.

But my rant isn’t only with the government oversight failures. The servicers are contracted to “SERVE” borrowers. Taking payments, updating the accounts, making arrangements to change plans or prevent default, etc.  For weeks there have been reports within our listserv of borrowers waiting on the phone 90 minutes or more to get to a human. Or a fax number that isn’t working. In some cases there was no response from the loan servicer to any communication by a borrower (or lawyer) at all, be it email or fax.  I haven’t tried a carrier pigeon dipped in the blood of a virgin, but not sure who to address it to.

And while systemic problems with the system aren’t limited to only one servicer, NelNet has recently come under fire, again, for their servicing problems. A year ago Nelnet acquired another servicer, Great Lakes Educational Loan Servicers, and made themselves the largest of all the student loan guys. And they are currently in six lawsuits for their shenanigans… well done, guys.  Don’t get me started on FedLoan either- they also left the “service” out of “servicer.” 

So what can a borrower do? Know their rights. Keep trying to contact the servicer, and if they don’t respond, get help. Document everything. And know what your servicer cannot do. If you are getting the run around, or the servicer is doing any of the behaviors listed below, you can, and should, always file a complaint with the Consumer Finance Protection Bureau.

1. They cannot threaten you with late fees.

2. They cannot just “steer” you into forbearance, there may be an affordable payment option available, they need to let you know about those.

3.  They cannot allocate your payments in a way that hurts you.

3. They cannot “thwart” your extra payments to reduce the loan or pay off early. It is in the servicers best interest to keep you in your loan as long as possible. If you are making extra payments, DO NOT let the servicer put you into a payment holiday, skipping payments ahead. Make them put your payment on principal. And keep records!

For more things loan servicers cannot do to you, read “9 Things Your Student Loan Servicer Isn’t Supposed to Do”. Here is the most current link to servicers with contact info. And here is the link to the complete list of phone numbers for the Department of Education departments that  “handle issues” related to federal student aid”

 

 

I am a lawyer, so it may be odd that I recommend to many people that they should try financial coaching as an option before filing for Chapter 13 bankruptcy. It is also, in many cases, an unpopular opinion with both consumers and some lawyers. I’ll get this out of the way upfront. Yes, I can take a bankruptcy matter, but I find there are many cases where it may do more harm than good. It is also tax refund season, and many people wait for their refund to file so they can afford the bankruptcy filing fees. In fact, I have received a few calls in my practice about it lately, so I thought I would get my rationale into an article.

First, a few bankruptcy basics. When most people think about filing bankruptcy, they are referring to a Chapter 7. A Chapter 7 bankruptcy (meaning filed under Chapter 7 of the Bankruptcy Code) wipes out or “liquidates” almost all of the debtors unsecured debt, but there are exceptions. As well as some rules regarding secured debt such as cars and mortgages. It’s not just a wave of a magic wand, and since 2008, requires the debtor “pass” means test, if the household income is below certain thresholds. There are of course special exceptions, and what law doesn’t have exceptions?

What if the consumer “fails” the means test? Then the bankruptcy code they are eligible to file under is a Chapter 13. A Chapter 13 is basically a court approved repayment plan to creditors. The bankruptcy filing creates an estate, and a bankruptcy trustee manages the repayment for three to five years until it is completed and the bankruptcy (estate) is discharged.

So now we know the basics, why coaching before filing? My top three reasons.

First, the consumer keeps control of his or her income while debt is paid. When a consumer files bankruptcy, all of the debts and all of the income are listed on various “schedules.” The consumer’s assets, meaning property, bank accounts, disposable monthly income, etc. become the “bankruptcy estate.” This includes the consumer’s income, because it is what the filer is promising the bankruptcy court he or she will use to repay the debts. A repayment plan is submitted to the court, and if approved, the estate (with the payment plan) will be managed by a bankruptcy trustee, who works for the court.

So, the consumer no longer gets to control his or her income. It is an asset promised to pay debts, and all debts are paid from this estate for the length of time that bankruptcy is in repayment. This also means that any income increase, such as a raise or bonus, at any time the estate still exists will belong to the trustee. The trustee may demand that more money be paid to the creditors, particularly if the increase exceeds 10% of the consumer’s current income. And you cannot lie to the court. Never a good idea. And most of the time the consumer must submit personal tax returns to the court annually anyway. This is for as long as the estate exists.

Only after discharge will the consumer regain control. While it is true a certain percentage of the debt can be discharged at discharge, most of the debt must be repaid. The general rule is that at least as much of the debt that would have been discharged if the consumer qualified for a chapter 7, and the court can order more based on disposable income and assets.

Another note, if the consumer owes family money, and pays some of it back in the months preceding a bankruptcy filing, the trustee, under what is known as a “claw back,” can demand the family member return the money so it can be added to the estate. This is because the court will presume that the money was paid to a “preferred” creditor.

Second, coaching can help change attitudes and habits, a bankruptcy often doesn’t. Consumers are already required to go through a credit counseling type personal finance class before filing any bankruptcy and again before it can be discharged. I can’t speak to the effectiveness of these courses. But you can potentially see the limited change in money habits these courses have by looking at the average of Chapter 13 bankruptcies that successfully make if the full five years to discharge.

Only about one in three approved payment plans makes it through to discharge. Yup. Only about 33%. Yikes. Another statistic? Approximately 8% of bankruptcies are from re-filers, which account for about 16% of annual filings. More than 1 in 20 filings each year are from consumers who already filed once before. Yes, life can happen to anyone, and I am not here to judge, but if the consumer worked with a Ramsey Preferred Coach, I would take a bet that there would have been an emergency fund prior to that second filing.

When someone works with a coach, the repayment of debt comes not from fear of the court or trustee, but from a sincere desire to change from habits that can be personally harmful, to those habits that give peace of mind. The “not owing a monthly payment to anyone who charges a $39.00 fee if you are one second late with a payment” peace of mind. Also, a coach can keep you accountable. How can you forget to budget if you meet with a coach each month for a while? What if something comes up and you have a question? There is a coach walking beside you for support. Coaching is not forever either, and many people don’t even need three to five years of coaching, unlike a Chapter 13.

Third, the consumer may be asked about filing a bankruptcy long after it is removed from a credit report, and it may affect future opportunities. I find this to be a heartbreaking fact that many people do not really consider prior to filing. Everyone is thinking about the credit report, the “ten years” hit in the “public records” section. But that is just one part. Consumers are often asked on a job application, mortgage loan application, security clearance application, “Have you ever filed bankruptcy?” Which is not the same as, “Have you filed bankruptcy in the last ten years?” And the “have you ever” question must be answered YES. This can lead to loss of some future opportunities that were never even thought of before.

Jobs in law enforcement, for example, are difficult to obtain after filing. Not to lie, even getting a license to practice law can be a challenge because an applicant may not pass the Moral Fitness requirement. Military or government jobs requiring a clearance may be an issue. So, while there is protection against losing your job during a bankruptcy, and protection from discrimination at your current employer, no such protection exists if you try to change jobs later in private industry.

And that’s it. My three biggest reasons for advising consumers to try coaching first, before filing a chapter 13 bankruptcy. If you or someone you know is in a financial situation where bankruptcy has been raised in conversation, you (or they) may want to have a chat with a financial coach, first.

This is the week that the IRS is estimated to process to filers. In the first quarter of every calendar year federal (and sometimes state) tax refunds are issued to qualified filers. In fact the average tax refund for the 2018 filing year (2017 return) was over $2,200.00. I’ve already spoken about how to ensure every dollar you can keep goes into your pocket each month, and not into the IRS coffers (until you file the next year’s return). Another issue, comes from the fact that the money received by many taxpayers is immediately spent paying down debt accrued the previous year. Some of that debt is from short-term overspending during the holidays, accounting for about 39% of Americans using the refund to clear that debt.

It is this cycle of annual debt that needs to be addressed, because if $1,000.00 of that refund was placed into a “baby” emergency fund, many Americans would not have to incur debt for “emergencies.” The stats are incredibly scary. The latest figure is that 78% of Americans live paycheck to paycheck. Almost 8 in 10. Following the logic, everyone knows at least a few people who are unable to cover even the smallest of budget hits without putting another bill in jeopardy. Additionally, a full 70% of Americans are in debt.

The recent government shutdown highlighted that for many Americans just treading water with money, they are one missed payday from being in financial distress. And we all saw the comments and memes about how government workers should have something put away or should be able to cover one month of expenses. Based on the statistics, 8 out of 10 cannot.

So, why am I telling you this? If you have a tax refund coming, and do not have $1000.00 saved for an emergency, you are not taking full benefit of the Uncle Sam Savings Plan. $1,000.00 goes a long way for car or home repairs, unexpected expenses, and other hits to the budget that throw a wrench in how the bills are paid. And once you put $1,000.00 away, be diligent in keeping it that way. Refill it if it gets used. Seriously. Mike and I had a pipe burst recently during the Polar Vortex, and we mopped up the water, grumbled a little, and called the plumber, knowing it could be covered from the emergency fund. (For Ramsey listeners, we are finishing baby step 2.)

Of course, $1,000.00 isn’t a “full” emergency fund, which is three to six months of expenses saved, but it is a good start to cover many, many of the instances where Murphy moved into the spare bedroom for a week. Of course, my next piece advice is to get out of debt as fast as you can, so YOU control your income, not some credit card company or bank. When you commit to payments, you promise to give them a share of your income each month, no matter what life throws at you. And I would strongly urge anyone getting the “average” refund to apply the $1200.00 over that emergency fund starter towards any outstanding debt.

Somewhere around 80% of taxpayers get some sort of tax refund each year, and that was true again for 2017. The average refund amount was $2878.00. And while many people love to celebrate the lump sum when they get the check, the IRS shouldn’t be used as a savings account. Here are a few reasons why:

1. You could actually have the money to use throughout the year. If an employee paid every two weeks adjusted their withholding to be accurate as to what they really will owe, that average “refund” of $2787.00 becomes $110.00 in the paycheck every payday. This equates to roughly $220.00/ month into the household! With 78% of Americans living paycheck to paycheck, that is a big addition to the monthly budget.

2. The IRS controls the overpayment until they give it back. The IRS doesn’t pay interest on the extra amount you paid or allow you to access your own money until tax time. Once you have it withheld, or you send it in for the self-employed, it is in the IRS coffers until you file your tax return. And the government isn’t paying you any interest on the money they get to use until they have to refund the excess you gave them. In reality, you are losing control of your own income.

3. The cycle of debt/ pay with return is expensive. Many Americans go into debt throughout the year and pay off balances with a tax refund. This allows lenders to charge interest, even short term, and the debt is much more expensive than if the money was in your budget every month to use. An extra $220.00 a month can prevent the need to take on short term and expensive debt, especially if you use that money for an emergency fund.

It’s too late to affect your 2018 tax return and refund, because the 2018 tax year closed about a week ago on December 31st. But you can make changes now to bring home more money in each check, and to prevent a huge sum being refunded in 2019. Check your withholding, by checking your paystub, or ask HR. If you had a change in dependents such as a new baby, kid graduated and moved out, or got divorced, make sure the number of people you are paying taxes for is accurate.

For example, a family of four should be withholding properly for a family of four. One special note for a two-income family-the higher earner should be withholding the proper number of dependents; the second earner should claim zero. This prevents under withholding and a tax bill at the end of the year.

After your adjustments, enjoy the new sum in your paycheck, and for the first few months, why not squirrel the extra away in an account? You haven’t seen it regularly anyway. Only once a year in that government tax refund.