We always run around looking for experts to solve our problems whenever things get out of hand, yet in most cases, these problems could be avoided only if the person had taken a few simple steps. This will not only save you a lot of money in terms of the money spent on the cost of service for the financial expert and penalties and fees from your debt, but it will also ensure that you are in more control of your future financial destiny. Nothing works better than a plan that has been set-up by the debt holder himself or herself. Thus, everyone should ensure that become their own financial regulator. Laura Rowley demonstrates in the following article the importance of regulating your own financial affairs.
This week Senate Banking Committee Chairman Christopher Dodd, D-CT, released a 1,300-page financial reform bill to address the issues that led to the financial meltdown. Among the provisions is the creation of a Consumer Financial Protection Bureau that would make and enforce rules on many of the everyday financial products that Americans use, from bank accounts to mortgages.
Supporters say that current regulatory agencies (led mainly by former bankers) are much more focused on protecting the industry than on keeping the little guy from taking out a predatory mortgage or other deceptive loan. “The Federal Reserve has had the power to deal with most of these abuses and hasn’t done it,” says Harvard Law Professor Elizabeth Warren, chair of the Congressional Oversight Panel looking into the $700 billion bank bailout. She spoke with reporters in a conference call in November.
“The basic idea behind [the Bureau] is it will permit and indeed will push toward making consumer products simpler and clearer, eliminating the tricks and traps,” Warren says. “The idea is not to have a bunch of thou-shalt-nots, but instead [provide] a lot of transparency so consumers are in the driver’s seat. They can compare products and get a more competitive market that works for them. It’s also about letting consumers manage costs and risks more effectively.”
Not surprisingly, the financial industry is doing everything it can to kill that provision of the bill, arguing that it will stifle innovation.
“That’s exactly backwards,” Warren responds. “A functioning market encourages innovation. The Food and Drug Administration is a good example. Back in the 1920s anyone who had a bathtub and box of chemicals could be a pharmaceutical company, and a lot of people got injured. The investment in making beneficial products was sharply reduced because any claim you make could be matched by someone else who made an equally bold claim, but did not back it up with hard science.”
Once the FDA required companies to verify their claims, the market began to work, Warren says. “New people came into the market and said, ‘I’ll invest in making a product to cure headaches because I know I can make a credible claim and not be competing with someone who is lying or cheating.’ The same thing is true over in consumer credit. The products have become so complex anyone can basically make any claim.”
Warren gives the example of a Congressional hearing on credit card abuses a few years ago, where a major bank pledged to eliminate universal default (the practice in which a card company boosts interest rates because the consumer is late on a debt to another firm). The bank quietly reinstated the practice within a year because it was losing revenue to competitors who recognized that most consumers don’t know what universal default is or how it works. (The new CARD Act bans the practice on existing balances; new balances are still subject to an interest rate hike based on universal default with 45 days’ notice.)
Many people may dislike the idea of spending millions of taxpayer dollars to create another Washington bureaucracy. On the other hand, many conscientious borrowers who did not take out interest-only, adjustable-rate, exploding home loans are finding they are now underwater in part because of those who did and then defaulted, decimating home values.
“There is plenty of room in here for criticizing consumers who were irresponsible,” says Warren. “When you see someone in trouble on a mortgage, one explanation is the person went out and took on debt they should not have taken on. Another is that the person thought he was doing a quite reasonable thing and got caught by a trick or trap inside the instrument. It is possible to make these things clear to consumers and then hold them responsible for their decisions. The American Enterprise Institute put out a sample mortgage which is three pages long.”
Let’s face it, the financial industry pretty much owns Congress; they’ve spent hundreds of millions fighting reform. (A recent study found the industry showered Congress with more than $270,000 in campaign contributions two weeks before the vote on the CARD Act reining in abusive credit card practices.) The group Change.org is collecting digital signatures to build support for a Consumer Financial Protection Bureau. So if you care, let your congressman or senator know.
In the meantime, I think it’s worth pointing out that a little common sense goes a long way in avoiding the major pitfalls of consumer finance. I haven’t experienced problems with overdraft fees, high interest rates, sneaky auto loans or tricky mortgages, because I think choosing the right products and managing them well is crucial to my long-term wealth, so I pay close attention to those decisions. A few simple “thou shalts” and “thou shalt nots”:
Thou shalt not live beyond thy means. Almost half of Americans reported having trouble keeping up with monthly expenses and bills, according to a 2009 survey on by FINRA Investor Education Foundation. Nearly one-quarter reported overdrawing their checking accounts. Know exactly how much money comes in, how much goes out and make those numbers match up. There are a million creative ways to budget, but start by tackling your biggest costs – housing, autos (buy used, for cash), health insurance and for parents, child care. (Try this calculator to figure out if a second income is worth it after taxes, child care and other costs.)
Thou shalt set aside cash for emergencies. Only 49 percent of FINRA respondents reported that they had set aside funds sufficient to cover expenses for three months in case of sickness, job loss, economic downturn or other emergency.
Thou shalt not carry a revolving balance on thy credit card. According to the FINRA study, 51 percent of Americans have carried a balance from month to month resulting in interest charges; 29 percent made a minimum-only payment; and 23 percent were charged a fee for late payment. Thou shalt not get sucked into the debt-settlement trap.
Thou shalt not use a financial product without searching for the best deal. The FINRA survey found 63 percent don’t shop around for credit cards, half don’t shop around for auto loans, and a third don’t shop around for mortgages.
Thou shalt save early and often for expensive goals. Only half of FINRA respondents had a retirement plan through an employer; 28 percent had another kind of savings plan. Only 41 percent of parents had saved anything for college.
Finally, thou shalt not be overconfident whilst demonstrating financial ineptitude. When asked how good they are at dealing with day-to-day financial matters, half of FINRA survey respondents with credit cards and checking accounts gave themselves the top score of 7. However, a quarter of these respondents separately indicated they engaged in behaviors that generate fees or high costs, such as using credit cards for cash advances, paying late payment or over-the-limit fees or overdrawing their checking accounts. Among those who gave themselves a score of 6, 40 percent engaged in these wealth-destroying behaviors.
Recent years have seen an explosion in free financial education for consumers willing to devote the time and energy to understanding their money. Whether the Consumer Financial Protection Bureau succeeds or not, your best financial advocate is still you.