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Stash Wealth Financial Planning Review – The Planner for HENRYs

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Stash Wealth Financial Planning Review - The Planner for HENRYs

Millennials are a lot more interested in their personal financial well-being at a younger age than the members of the two generational cohorts that came before them. But what else would you expect of the kids that came of age during the financial crisis and saddled with an average $30,000 student loan debt?

Luckily, millennials also came of age during the digital revolution, and a number of the cohort’s members have created platforms designed specifically to help millennials handle their finances.

Online financial planner, Stash Wealth, is one of those resources.

What Is Stash Wealth?

Stash Wealth is the online financial planner dedicated to serving the HENRYs (High Earners, Not Rich Yet) of the world. The startup was founded in 2013 by former Wall Street executives Priya Malani and Rob Kovalesky to serve millennial high earners they felt had been ignored by traditional firms or who may be fearful of financial management.

Stash Wealth’s services include personalized financial planning and investment management. Clients can also get personalized advice from Stash’s in-house experts — dubbed “rebels” — on topics like estate planning, investing, taxes, and accounting. For additional assistance, the company provides financial information to the general public through articles on its blog.

This review only covers Stash Wealth’s financial planning offerings, but we briefly touch on their investment management services at the end of this post.

How Do You Know If You’re a HENRY?

Stash Wealth defines a HENRY as an individual — or couple — who’s already earning about six figures annually. That’s a tough bracket to reach considering only 2.7% of millennials earned $100,000 or more in 2015, according to data from the U.S. Census Bureau. But becoming a HENRY isn’t all about income.

Stash has created a quiz to help potential clients figure out if they qualify as a HENRY. If you’re not quite there yet, Stash Wealth has a partnership with invibed, which runs a low-cost Wealth Coaching program for about $450.

How Much Does Stash Wealth Cost?

Stash Wealth’s pricing makes it clear HENRYs are their target audience. You — or you and your partner — can complete a Stash Plan for a one-time fee of $997. The Stash Plan is a financial plan for your life that will address how and when you can reach all of your financial goals.

After your plan is created, you’ll graduate to Stash Management, a full wealth management service, which you’ll be charged for based on how much money Stash is investing for you. It has two payment tiers:

  • $50 per month for those with less than $50,000 in assets managed by Stash
  • 1.2% of the assets Stash manages for you annually ($100,000 invested = $1,200 annually) if Stash is managing more than $50,000 worth of assets

If you’re an entrepreneur, you can build a Stash Plan for Entrepreneurs for $1,597, but you’ll need to call to learn more about the entrepreneur’s plan.

What Do You Get for $997?

Stash Wealth will create a customized Stash Plan, which is a financial plan customized to your current and future needs. You’ll be prompted via email to fill out two documents that will help establish your “baseline,” then you’ll have two meetings with a certified financial planning duo who will create your Stash Plan.

Even at close to $1,000 plus ongoing management fees, Stash’s completely digital service is a cheaper alternative to paying $1,100 to $5,600 a year for the average personal financial adviser.

Unlike some other online financial advisory firms, Stash Wealth doesn’t offer a payment plan. In the FAQ on the website, the company explains the reasoning is because they want to be sure they are attracting clients who truly can afford the service and qualify as HENRYs.

Stash Wealth has a particular client in mind, so their pricing isn’t comparable to competitors like LearnVest, which will run you about a third of the cost at $299 for the initial financial planning fee, and they will charge $19 for ongoing financial planning, although the LearnVest program doesn’t include investment brokerage.

How the Stash Wealth Financial Planning Process Works

Every Stash Wealth client will receive a comprehensive financial plan. MagnifyMoney reviewed the process over the course of several weeks.

Your baseline paperwork

Shortly after you make your online payment to get started, you’ll receive an email from Stash asking you to do three things:

  1. Fill out your profile.

This is one of the two PDF forms that will be attached to the email. It will ask you to fill in basic information about yourself like your name, address, employment, and income. It will also have you enter basics related to your finances such as which banks you have relationships with, who you already use for money-related items like taxes, and how much you have in your emergency fund. This form will also ask for the same information about your significant other if you’re completing the Stash Plan as a couple.

  1. Schedule your baseline meeting.

In the email, you’ll see a link to book a meeting using the online scheduler, TimeTrade. Once it’s booked, you’ll get an email confirmation in your inbox.

  1. Complete and return the Baseline Workbook.

The final thing Stash asks of you before your meeting is to fill out your Baseline Workbook. Your workbook is an 8-page document that will dive deep into your financial business. You will trace where your money goes after you get paid, check off whether you use cash or credit more often, explain what your savings are consist of, and list your debts and assets, in addition to providing other information.

Stash understands this may take a while, so they give you some time and ask that you email the document back at least a couple of days before your scheduled baseline meeting.

Your baseline meeting

This will be your very first meeting with your Stash advisers. It will take place over video chat and recap all of the information you entered into your Baseline paperwork. The meeting should take no longer than an hour. Your planners will share a screen with you during the call to show you a Baseline Results document, which was created from your information. It will show, with charts and diagrams, how you spend your money, what your money map should look like, and how you’re doing so far saving for retirement.

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The Stash program is intended to be educational as well, so your advisers may sound very similar to your finance professors in college. They will spend a good portion of the time explaining things like a money map (see above) or how different kinds of retirement accounts work. They’ll also make sure to ask if you understood everything and will re-explain if necessary.

The “reverse budget”

Stash will create what they call a “reverse budget.” The reverse budget calculates how much you can spend guilt-free each month after subtracting your fixed and flexible expenses. They will show you a budget with and without debt, so you’ll be able to imagine how much extra cash you’ll have on hand once your debts are settled.

The homework assignments

After this call, you’ll get some more homework to complete before your second meeting. The second meeting is meant to help align your life to your reverse budget. I was advised to open up an online savings account with Capital One 360 and nickname it “emergency fund” and to keep a checking account open at a brick-and-mortar bank. I had just closed my checking and savings account with my brick-and-mortar bank, Wells Fargo, and opened checking and savings accounts with Ally, so I didn’t take this advice. I was earning 1% on my savings account with Ally anyway, which was slightly more than the 0.75% I would have earned at Capital One.

I did, however, set up multiple savings accounts for emergency, travel, and moving costs to correspond with my savings goals.

My other homework was to find my most-recent monthly statements for my credit card, my retirement accounts, and student loans and send this information to them as soon as I could.

The follow-up email includes a link to schedule your second call, which should take place in about three weeks, and will have a final workbook attached to it. A PDF copy of your Baseline Results will be attached to the email for your use.

Your Stash Plan Workbook: goal setting

Your Stash Plan Workbook will come attached to the follow-up email for your first call. It’s intended to make you think about your financial goals and how you’ll reach them. A major part of this workbook requires you to think of what you want your life to look like in retirement.

You might already keep a few basic goals in mind like saving for retirement (check) or an emergency fund (double check), but your workbook will force you to consider savings goals to which you may not have given any thought. Some examples: traveling twice a year, returning to school for a post-bachelor’s degree, taking a six-month hiatus from work in Europe, remodeling your home, or saving to care for your parents in their old age.

screen shot 2

You’ll rate each goal from 1 to 10 based on its importance to you, and make note of how much you think you’ll need and when you’ll need the money. For example, going back to school for a graduate or doctorate degree is about a 7 in importance to me, and I want to have about $25,000 saved for it and (ideally) start my post-college education in 2020. I also want to travel to see family members, who live in Ghana, every few years. I set that travel goal at about a 9 and allocated about $2,000 for a trip every two years.

The workbook continues to a section called “Retirement Lifestyle Goals,” which addresses any big dreams or goals you have for your life in retirement (think: buy a yacht) and asks you to put them down even if you’re not sure if you’ll be able to afford them. You’ll move on to a “Retirement Living Expense” section that asks you important questions like when you plan to retire, what your retirement income will be, and if you’re willing to delay retirement to reach all of your goals.

You’ll finish the workbook by filling out detailed information about all of your current assets, investments, and liabilities. While you’re doing all of this, be sure to gather any supplemental financial documents to send back digitally with your completed workbook. Examples include:

  • Bank and investment statements
  • Retirement account statements
  • College fund account statements
  • Employer benefits
  • Social Security Administration Statement
  • Liability statements
  • Insurance policies

Stash asks that you send in your completed Stash Plan Workbook and documents via email 10 to 14 days before your second call.

Filling out the workbook was a lot of work, but it was worth it. It took about an hour for me, and I only use one bank and one credit card and my only other debt is in student loans. Most of my time went to setting financial goals for the long life ahead of me. It was eye-opening as there were a lot of things I knew I wanted in life — like rental property — that I had yet to set a deadline or budget to. Completing the workbook helped me realize I should start saving now for almost any larger purchases I wanted to make within the next decade like a possible wedding or owning rental property. I was a little confused when it came to the investing and retirement parts of the document like retirement income but was able to complete the form using context clues.

I did have to fill out the form three times, as it had trouble saving some of the information I had input. I’m still unsure whether the problem was the way I was saving it to my computer or the form itself. In the end, it was no big deal. I typed up some of my goals in an email to supplement what the form had held onto.

Your Stash Plan meeting: how to execute your Stash Plan

Your final meeting with your advisers will explain to you exactly how to make your Stash Plan a success. During this meeting, your advisers will first check in with you to ask if anything about your financial situation has changed since you sent in your workbook. For example, I decided within the month to move to a significantly cheaper apartment, so my monthly budget had to be adjusted. My planner made note of that and sent me an updated Stash Plan with the follow-up email at no additional charge.

After your touch base, your advisers should walk you through the details of your new financial plan, which they will have up on a shared screen for you to see. They’ll speak with you about how you should budget for your savings goals and when you’ll likely reach them.

Your Stash Plan meeting: how to execute your Stash Plan

My advisers emphasized making the most of automation for my savings goals and any recurring expenses. This takes some element of human error out of the picture. I’d used automation before and found it would bite me in the ass when I forgot which date I’d set a service to credit my checking accounts. To avoid my unfortunate recurring lapse of memory, I set my automated payments for the day right after payday, and if I couldn’t change the due date, I used the budgeting app Mint, which has a bill reminder feature.

They will also give you a few suggestions for managing your new financial plan. My advisers suggested I open up a 0% balance transfer card (they recommended I use Chase Slate or Citi Simplicity) to help pay down my credit faster. They also recommended an app called Debitize, that lets you use your credit card like a debit card. The app pays off charges to your credit card with money from your checking account so you can build credit without overspending.

They also advised me to channel any extra funds I had to paying down my credit card debt faster, as it’s the highest interest debt I have. After my credit card was paid down, I was to use the extra money to build up my emergency fund.

In addition, the advisers suggested I consider adding a disability insurance policy and some estate planning documents to my life. I was told to ask my employer’s human resources department about disability insurance. For estate planning documents, they included a recommendation to a Stash Expert in the follow-up email. Finally, they explained to me what my next steps would be should I choose to graduate to Stash Management.

Next Steps: Investing with Stash Management

Once you have your financial plan set up, you’ll make the decision to either stop there or continue to Stash Management. This review only covers Stash Wealth’s financial planning offerings, but we did dig a bit deeper to look into their investment management services.

After your plan is created, you can choose to graduate to Stash Management, a full wealth management service, which you’ll be charged for based on how much money Stash is investing for you.

It has two payment tiers:

  • $50 per month for those with less than $50,000 in assets managed by Stash
  • 1.2% of the assets Stash manages for you annually ($100,000 invested = $1,200 annually) if Stash is managing more than $50,000 worth of assets

With Management, you’ll get ongoing help with financial planning. That includes your taxes, purchases, budgeting, combining finances with a significant other, planning for a baby, buying your first home, or anything else. You’ll have access to monitor your accounts and investments through an online portal, but you likely won’t have to do anything.

Stash gives you a unique ID so you can log on to the company’s online platform. You’ll grant Stash’s team permission to implement their suggestions for you like automating your savings and investing your money in the stock market. When you have a question, you can call, email, text, or even use Facebook’s messenger 24/7 to communicate with Stash.

Stash isn’t a robo-adviser like Hedgeable, Wealthfront, or Betterment. A human being will actually invest your money and communicate with you as needed.

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Pros and Cons of Stash Wealth for Financial Planning

Pro: Quick responses

I was impressed with Stash’s response time. If I had any problems filling out the PDFs or any questions, I could expect an answer to my email on the same day or within 24 hours at the latest.

Pro: Some face time

Both meetings with your financial planner will take place over a video chat, which adds a personal layer to the totally digital process. You won’t awkwardly stare at your adviser the entire time since they’ll be showing you your results or plan for most of the conversation, but I thought it was nice to put a face (and a smile) to who was handling my sensitive information.

Con: No mobile app

Stash Wealth is only accessible to you on a desktop, which can present an issue if you want to check on your plan or investment on the go. However, you do have the option to download your plan as a PDF, which most smartphones will allow you to pull up without cellular data or Wi-Fi.

Con: No budgeting software

Your Stash plan will lay out what you need to do, but it’s up to you to implement and track your progress — unless you pay for Stash Management. You can use other platforms such as the free version of competitor LearnVest or budgeting services YNAB or Mint to manage your financial information, goals, and more, but it would be convenient to have a budgeting platform to show you your awesome new plan right away.

Con: No credit score information

You’ll need to download a separate app it you want to monitor your credit score. Unlike other popular budgeting apps like Mint, or a credit monitoring service like Credit Karma, you won’t be able to see any information related to credit score or credit report information with Stash Wealth.

Other Financial Planning Platforms to Consider

There are a host of other robo-advisers and online financial planning tools that target millennials cropping up to choose from that you may prefer over Stash Wealth.

LearnVest

LearnVest Premium is a more-affordable alternative for those looking for personalized financial advice from an expert. If you sign up for LearnVest’s premium service, you’ll complete a process similar to Stash’s, where you’ll meet twice with an adviser who will create a plan for you and then have the option to pay for ongoing support. LearnVest costs $299 for the initial setup, then $19 a month for email access to a personal financial planner, in addition to the budgeting and goal setting features online dashboard features. With LearnVest, you won’t get investment advice.

XY Planning Network

The XY Planning Network is a network of fee-only financial advisers who focus specifically on Gen X and Gen Y clients. There are no minimums required to get started as a client, and advisers in the XY Planning Network are not permitted to accept commissions, referral fees, or kickbacks. In other words, no high-pressure sales pitches or hidden agendas. Just practical financial advice doled out at a flat monthly rate. The organization is location independent, offering virtual services that enable any client to connect with any adviser regardless of where the client resides.

Garrett Planning Network

A national network featuring hundreds of financial planners, the Garrett Planning Network checks many key boxes for millennials. All members of the Garrett Planning Network charge for their services by the hour on a fee-only basis. They do not accept commissions, and clients pay only for the time spent working with their adviser. Just as important for millennials, advisers in the Garrett Planning Network require no income or investment account minimums for their hourly services.

Mvelopes

Mvelopes is an app that provides a spinoff of the cash envelope budgeting system popularized by Dave Ramsey. Like Stash Wealth, its basic version is free and allows you to link up to four bank accounts or credit cards. Mvelopes has a second tier called Mvelopes Premier. It costs $95 a year, and you can link an unlimited number of bank accounts and credit cards, among other features. Mvelopes’ top tier, Money4Life Coaching, adds one-on-one coaching tailored to your financial needs, as Stash Wealth Premier does. However, there is no price for this tier specified on the website.

The Final Verdict

Stash Wealth is a great deal if you’re a HENRY, but it’s definitely not a program for everyone. It forces you, as a young high earner, to swiftly exit any present hedonist mindset you may have and consider your future seriously.

For me, it demonstrates how important it is to take advantage of extra funds and invest them into your future while you’re young, handsome, wealthy, and only have yourself to think about. But if you’re not making enough to have an extra $1,000 stashed away for financial planning, there are less-expensive alternatives you can use on your way to HENRY status.

Brittney Laryea
Brittney Laryea |

Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

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Consumer Watchdog, Featured, News

How the “Financial Choice Act” Could Impact Your Wallet

Editorial Disclaimer: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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A plan to repeal major aspects of Dodd-Frank — legislation enacted to regulate the types of lender behavior that contributed to the 2008 economic crisis — crossed its first major hurdle last week when the U.S. House passed the Financial Choice Act.

The bill still has to pass the U.S. Senate and be signed by the president before becoming a law. However, if it does, significant changes would be made to some regulations that might require consumers to pay more attention to their financial decisions.

“[The Financial Choice Act] stands for economic growth for all, but bank bailouts for none. We will end bank bailouts once and for all. We will replace bailouts with bankruptcy,” Rep. Jeb Hensarling (R-Texas), House Financial Services Committee chairman, said in a press release. “We will replace economic stagnation with a growing, healthy economy.”

What’s at stake with the Financial Choice Act, and how does it impact your finances? We’ll explore these questions in this post.

What did the Dodd-Frank Act do, anyway?

Bailouts: After it was implemented in 2010 by President Barack Obama, one of the law’s main pillars was enacting the “Orderly Liquidation Authority” to use taxpayer dollars to bail out financial institutions that were failing but considered “too big to fail” — meaning their collapse would significantly hurt the economy. In addition, Dodd-Frank created a fund for the FDIC to use instead of taxpayer dollars for any future bailouts.

Consumer watchdog: Dodd-Frank also created the Consumer Financial Protection Bureau, an independent government agency that focuses on protecting “consumers from unfair, deceptive, or abusive practices and take action against companies that break the law.”

In one of its most high profile cases to date, the CFPB in 2016 fined Wells Fargo $100 million for allegedly opening accounts customers did not ask for.

The CFPB’s actions against predatory practices in a number of industries, including payday lending, prepaid debit cards, and mortgage lenders, among others, have won the agency many fans among consumer advocates.

“In fewer than six years, [the CFPB has] returned $12 million to over 29 million Americans, not just harmed by predatory lenders or fly-by-night debt collectors, but some of the biggest banks in the country,” says Ed Mierzwinski, director of the consumer program for the U.S. Public Interest Research Group, a Washington, D.C.-based nonprofit that advocates for consumers.

And how would the Financial Choice Act change Dodd-Frank?

No more bailouts: The Financial Choice Act would replace Dodd-Frank’s Orderly Liquidation Authority with a new bankruptcy code. So financial institutions would have a path to declare bankruptcy in lieu of shutting down completely.

Fewer regulations for banks: The act will provide community banks with “almost two dozen” regulatory relief bills that will lessen the number of rules small banks need to comply with, making it easier for them to operate.

A weaker CFPB: It would convert the CFPB into the Consumer Law Enforcement Agency (CLEA) and make it part of the executive branch. The Financial Choice Act also gives the president the ability to fire the head of the newly created CLEA at any time, for any reason, and gives Congress control over it and its budget. These changes will take away much of the power the CFPB holds to monitor the marketplace and pursue any unfair practices.

“It not only took the bullets out of [the CFPB’s] guns, it took their guns away,” Mierzwinski says.

Specifically, he says the CFPB would no longer be able to go after high-cost, small-dollar credit institutions, such as payday lenders and auto title lenders.

However, some experts see benefits from taking the teeth out of the CFPB.

“I personally think that’s a good thing because I think the way that the CFPB is structured is fundamentally flawed,” says Robert Berger, a retired lawyer who now runs doughroller.net, a personal finance blog. “You basically have one person with very little meaningful oversight that can have a huge impact on the regulations of the financial industry.”

The bill also would roll back the U.S. Department of Labor’s new fiduciary rule, which isn’t part of Dodd-Frank, but requires retirement financial advisers to act in their clients’ best interests. It went into partial effect on June 9.

What does this mean to consumers?

If the Financial Choice Act becomes law, opponents say it could mean that consumers will have to be even more careful with their financial choices and who they trust as a financial adviser because there will be less government oversight.

“If you’re a consumer, you’re going to have to watch your wallet even if you have a zippered pocket with a chain on your wallet,” Mierzwinski says.

If the bill passes the Senate, it could still face some hurdles. Any changes to Dodd-Frank regulations would need to be approved by the heads of the Federal Reserve System and Federal Deposit Insurance Corp. and the Comptroller of the Currency.

Jana Lynn French
Jana Lynn French |

Jana Lynn French is a writer at MagnifyMoney. You can email Jana Lynn here

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Building Credit, Featured, News

Average Credit Score in America Reaches New Peak at 699

Editorial Disclaimer: The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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In late 2016, American consumers hit an important milestone. For the first time in a decade, over half of American consumers (51%) recorded prime credit scores. On the other side of the scale, less than a third of consumers (32%) suffered from subprime scores.1 As a nation, our average FICO® credit score rose to its highest point ever, 699.2

Despite the rosy national picture, we see regional and age-based disparities. A minority of Southerners still rank below prime credit. In contrast, credit scores in the upper Midwest rank well above the national average. Younger consumers struggle with their credit, but boomers and the Silent Generation secured scores well above the national average.

In a new report on credit scores in America, MagnifyMoney analyzed trends in credit scores. The trends offer insight into how Americans fare with their credit health.

Key Insights:

  1. National average FICO® credit scores are up 13 points since October 2009.3
  2. 51% of consumers have prime credit scores, up from 48.1% in 2007.4
  3. One-third of customers have at least one severely delinquent (90+ days past due) account on their credit report.5
  4. Average Vantage® credit scores in the Deep South are 21 points lower than the national average (652 vs. 673).6
  5. Millennials’ average Vantage® credit score (634) underperformed the national average by 39 points. Only Gen Z has a lower average score (631).7

Credit Scores in America

Average FICO® Score: 6998

Average Vantage® Score: 6739

Percent with prime credit score: 51%10

Percent with subprime credit score: 32%11

Credit Score Factors

Percent with at least one delinquency: 32%12

Average number of late payments per month: .3513

Average credit utilization ratio: 30%14

Percent severely delinquent debt: 3.37%15

Percent severely delinquent debt excluding mortgages: 6.9%16

The Big 3 Credit Scores

Credit scoring companies analyze consumer credit reports. They glean data from the reports and create algorithms that determine consumer borrowing risk. A credit score is a number that represents the risk profile of a borrower. Credit scores influence a bank’s decisions to lend money to consumers. People with high credit scores will find the most attractive borrowing rates because that signals to lenders that they are less risky. Those with low credit scores will struggle to find credit at all.

Banks have hundreds of proprietary credit scoring algorithms. In this article, we analyzed trends on three of the most famous credit scoring algorithms:

  1. FICO® 8 Credit Score (used for underwriting mortgages)
  2. Vantage® 3.0 Credit Score (widely available to consumers)
  3. Equifax Consumer Risk Credit Score (used by the Federal Reserve Bank of New York)

Each of these credit scores ranks risk on a scale of 300-850.

In all three models, prime credit is any score above 720.

Subprime credit is any score below 660. All three models consider similar data when they create credit risk profiles. The most common factors include:

  1. Payment history
  2. Revolving debt levels (or revolving debt utilization ratios)
  3. Length of credit history
  4. Number of recent credit inquires
  5. Variety of credit (installment and revolving)

However, each model weights the information differently. This means that a FICO® Score cannot be compared directly to a Vantage® Score or an Equifax Risk Score.

American Credit Scores over Time

Average FICO® Credit Scores in America are on the rise for the eighth straight year. The average credit score in America is now 699.

We’re also seeing healthy increases in prime credit scores. In the three major credit scoring models, a prime credit score is any score above 720.

According to the Federal Reserve Bank of New York, 51% of all Americans have prime credit scores as measured by the Equifax Risk Score. Following the housing market crash in 2010, just 48.4% of Americans had prime credit scores.20

Credit Scores and Loan Originations

Following the 2007-2008 implosion of the housing market, banks saw mortgage borrowers defaulting at a higher rates than ever before. In addition to higher mortgage default rates, the market downturn led to higher default rates across all types of consumer loans.

To maintain profitability banks began tightening lending practices. More stringent lending standards made it tough for anyone with poor credit to get a loan at a reasonable rate.

Although banks have loosened lending somewhat in the last two years, people with subprime credit will continue to struggle to get loans. In February 2017, banks rejected 85% of all credit applications from people with Equifax Risk Scores below 680. By contrast, banks rejected 8.74% of credit applications from those with credit scores above 760.22

Credit Scores and Mortgage Origination

Before 2008, the median homebuyer had an Equifax Risk Score of 720. In 2017, the median score was 764, a full 44 points higher than the pre-bubble scores. The bottom tenth of buyers had a score of 657, a massive 65 point growth over the pre-recession average.23

Some below prime borrowers still get mortgages. But banks no longer underwrite mortgages for deep subprime borrowers. More stringent lending standards have resulted in near all-time lows in mortgage foreclosures.

Credit Scores and Auto Loan Origination

The subprime lending bubble didn’t directly influence the auto loan market, but banks increased their lending standards for auto loans, too. Before 2008, the median credit score for people originating auto loans was 682. By the first quarter of 2017, the median score for auto borrowers was 706.26

In the case of auto loans, the lower median risk profile hasn’t paid off for banks. In the first quarter of 2017, $8.27 billion dollars of auto loans fell into severely delinquent status. That means the owners of vehicles did not pay on their loans for at least 90 days. Auto delinquencies are now as bad as they were in 2008.28

Consumers looking for new auto loans should expect more stringent lending standards in coming months. This means it’s more important than ever for Americans to grow their credit score.

Credit Scores for Credit Cards

Unlike other types of credit, even people with deep subprime credit scores usually qualify to open a secured credit card. However, credit card use among people with poor credit scores is still near an all-time low. In the last decade, credit card use among deep subprime borrowers fell 16.7%. Today, just over 50% of deep subprime borrowers have credit card accounts.30

The dramatic decline came between 2009 and 2011. During this period, half or more of all credit card account closures came from borrowers with below prime credit scores. More than one-third of all closures came from deep subprime consumers.

However, banks are showing an increased willingness to allow customers with poor credit to open credit card accounts. In 2015, more than 60% of all new credit card accounts went to borrowers with subprime credit. 25% of all the accounts went to borrowers with deep subprime credit.

State Level Credit Scores

Consumers across the nation are seeing higher credit scores, but regional variations persist. People living in the Deep South and Southwest have lower credit scores than the rest of the nation. States in the Deep South have an average Vantage® credit score of 652 compared to a nationwide average of 673. Southwestern states have an average score of 658.

States in the Upper Midwest outperform the nation as a whole. These states had average Vantage® Scores of 689.

Unsurprisingly, consumers across the southern United States are far more likely to have subprime credit scores than consumers across the north. Minnesota had the fewest subprime consumers. In December 2016, just 21.9% of residents fell below an Equifax Risk Score of 660. Mississippi had the worst subprime rate in the nation. 48.3% of Mississippi residents had credit scores below 660 in December 2016.35

These are the distributions of Equifax Risk Scores by state:37

Credit Score by Age

In general, older consumers have higher credit scores than younger generations. Credit scoring models consider consumers with longer credit histories less risky than those with short credit histories. The Silent Generation and boomers enjoy higher credit scores due to long credit histories. However, these generations show better credit behavior, too. Their revolving credit utilization rates are lower than younger generations. They are less likely to have a severely delinquent credit item on their credit report.

Gen X and millennials have almost identical revolving utilization ratios and delinquency rates. Compared to millennials, Gen X has higher credit card balances and more debt. Still, Gen X’s longer credit history gives them a 21 point advantage over millennials on average.

To improve their credit scores, millennials and Gen X need to focus on timely payments. On-time payments and lower credit card utilization will drive their scores up.

A report by FICO® showed that younger consumers can earn high credit scores with excellent credit behavior. 93% of consumers with credit scores between 750 and 799 who were under age 29 never had a late payment on the credit report. In contrast, 57% of the total population had at least one delinquency. This good credit group also used less of their available credit. They had an average revolving credit utilization ratio of 6%. The nation as a whole had a utilization ratio of 15%.39

Sources

  1. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  2. Ethan Dornhelm, “US Credit Quality Rising … The Beat Goes On,” Fair Isaac Corporation. Accessed May 24, 2017.
  3. Ethan Dornhelm, “US Credit Quality Rising … The Beat Goes On,” Fair Isaac Corporation. Accessed May 24, 2017.
  4. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  5. 2016 State of Credit Report” National 2016 90+ Days Past Due, Experian, Accessed May 24, 2017
  6. 2016 State of Credit Report” State 2016 Average Vantage® Credit Score, Experian. Accessed May 24, 2017.
  7. 2016 State of Credit Report” National 2016 Average Vantage® Credit Score, Experian. Accessed May 24, 2017.
  8. Ethan Dornhelm, “US Credit Quality Rising … The Beat Goes On,” Fair Isaac Corporation. Accessed May 24, 2017.
  9. 2016 State of Credit Report” National 2016 Average Vantage® Credit Score, Experian. Accessed May 24, 2017.
  10. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  11. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  12. 2016 State of Credit Report” National 2016 90+ Days Past Due, Experian. Accessed May 24, 2017.
  13. 2016 State of Credit Report” National 2016 Average Late Payments, Experian. Accessed May 24, 2017.
  14. 2016 State of Credit Report” National 2016 Average Revolving Credit Utilization Ratio, Experian. Accessed May 24, 2017.
  15. Quarterly Report on Household Debt and Credit May 2017” Percent of Balance 90+ Days Delinquent by Loan Type, All Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  16. Calculated metric using data from “Quarterly Report on Household Debt and Credit May 2017” Percent of Balance 90+ Days Delinquent by Loan Type and Total Debt Balance and Its Composition. All Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.Multiply all debt balances by percent of balance 90 days delinquent for Q1 2017, and summarize all delinquent balances. Total delinquent balance for non-mortgage debt = $284 billion. Total non-mortgage debt balance = $4.1 trillion $284 billion /$4.1 trillion = 6.9%.
  17. 2016 State of Credit Report” State 2016 Average Vantage® Credit Score, Experian. Accessed May 24, 2017.
  18. Ethan Dornhelm, “US Credit Quality Rising … The Beat Goes On,” Fair Isaac Corporation. Accessed May 24, 2017.
  19. Ethan Dornhelm, “US Credit Quality Rising … The Beat Goes On,” Fair Isaac Corporation. Accessed May 24, 2017.
  20. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  21. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  22. Survey of Consumer Expectations, © 2013-2017 Federal Reserve Bank of New York (FRBNY). The SCE data are available without charge at http://www.newyorkfed.org/microeconomics/sce and may be used subject to license terms posted there. FRBNY disclaims any responsibility or legal liability for this analysis and interpretation of Survey of Consumer Expectations data.
  23. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Mortgages, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  24. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Mortgages, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  25. Quarterly Report on Household Debt and Credit May 2017” Number of Consumers with New Foreclosures and Bankruptcies, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  26. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  27. Quarterly Report on Household Debt and Credit May 2017” Credit Score at Origination: Auto Loans, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  28. Quarterly Report on Household Debt and Credit May 2017” Flow into Severe Delinquency (90+) by Loan Type, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  29. Quarterly Report on Household Debt and Credit May 2017” Flow into Severe Delinquency (90+) by Loan Type, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  30. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed May 24, 2017.
  31. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed May 24, 2017.
  32. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed May 24, 2017.
  33. Graham Campbell, Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw, “Just Released: Recent Developments in Consumer Credit Card Borrowing,” Federal Reserve Bank of New York Liberty Street Economics (blog), August 9, 2016. Accessed May 24, 2017.
  34. 2016 State of Credit Report” State 2016 Average Vantage® Credit Score, Experian. Accessed May 24, 2017.
  35. 2016 State of Credit Report” State 2016 Average Vantage® Credit Score, Experian. Accessed May 24, 2017.
  36. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  37. Community Credit: A New Perspective on America’s Communities Credit Quality and Inclusion” from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed May 24, 2017.
  38. 2016 State of Credit Report” National 2016 Vantage® Credit Score, Experian. Accessed May 24, 2017.
  39. Ethan Dornhelm, “US Credit Quality Rising … The Beat Goes On,” Fair Isaac Corporation. Accessed May 24, 2017.
Hannah Rounds
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Hannah Rounds is a writer at MagnifyMoney. You can email Hannah at hannah@magnifymoney.com

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What the New DOL Fiduciary Rule Means For You

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Geeting advice on future investments

Seven years in the making, the Department of Labor’s long-awaited Fiduciary Rule finally went into effect June 9.* The full breadth of the rule’s impact won’t officially be felt until January 2018, when advisors must be fully compliant with the rule’s requirements.

The rule survived an upheaval by the Trump administration, which had hinted earlier this year that it might seek to block the rule’s implementation.

Aimed at saving consumers billions of dollars in fees in their retirement accounts, the Department of Labor’s new fiduciary rule will require financial advisers to act in your best interest. However, the final rule includes a number of modifications, including several concessions to the brokerage industry, from the original version proposed six years ago.

Here’s what you need to know about these new rules and how they may affect your money.

*This story has been updated to reflect the rule’s successful release.

What is a Fiduciary?

So what exactly is a fiduciary? According to the Certified Financial Planner (CFP) Board, the fiduciary standard requires that financial advisers act solely in your best interest when offering personalized financial advice. This means advisers can’t put personal profits over your needs.

Currently, most advisers are only held to the U.S. Securities and Exchange Commission’s suitability standard when handling your investments. This looser standard allows advisers to recommend suitable products, based on your personal situation. These suitable products may include funds with higher fees — with revenue sharing and commissions lining their own pockets —  which may not reflect your best possible options.

What is Changing Exactly?

Affecting an estimated $14 trillion in retirement savings, the Department of Labor’s new fiduciary rule is meant to help you receive investment advice that will aid your nest egg’s ability to grow. Many investors have been pushed toward products with high fees that quickly eat away at profits.

All financial professionals providing retirement advice will now be required to act as fiduciaries that must act in your best interest. This applies to all financial products you may find in a tax-advantaged retirement accounts. Because IRAs offer fewer protections than employment-based plans, the Department is concerned about “conflicts of interest” from brokers, insurance agents, registered investment advisers, or other financial advisers you may turn to for advice.

Despite these new protections, the Department of Labor also made some key concessions. Previously, brokers were required to provide explicit disclosures about the costs of products to their clients. This included one, five, and ten year projections. However, this requirement has been eliminated. After heavy pushback from the industry, the Department of Labor also agreed to allow the use of proprietary products.

Additionally, the Department of Labor has pushed the deadline for full implementation of their new rules. Firms must be compliant with several provisions by June and fully compliant by January 1, 2018.

Despite all of these concessions, the Department of Labor’s highest official insists the integrity of their rule is still in place.

Exceptions You Should Know About

Although advisers working with retirement investments will no longer be able to accept compensation or payments that create a conflict of interest, there’s an exception many brokers will likely pursue.

Firms will be allowed to continue their previous compensation arrangements if they commit to a best interest contract (BIC), adopt anti-conflict policies, disclose any conflicts of interest, direct consumers to a website that explains how they make money, and only charge “reasonable compensation.” The best interest contract will soon be easier for firms and advisers to use because it can be presented at the same time as other required paperwork.

How These New Rules Might Affect Your Investment Options

Although these new rules don’t call out specific investment products as bad options, it’s expected advisers may direct you to lower-cost products, like index funds, more regularly. New York Times also predicts the new regulations may also accelerate the movement toward more fee-based relationships. They also suggest complex investments like variable annuities may soon fall out of favor.

What Will the Larger Impact of These Changes Be?

Backed by extensive academic research, the Department of Labor’s analysis suggests IRA holders receiving conflicted investment advice can expect their investments to underperform by an average of one-half to one percentage point per year over the next 20 years. Once their new rules are in place, they are anticipating retirement funds will shift to lower cost investments, savings consumers billions of dollars.

What You Can Do To Protect Yourself

Although these new rules are a positive step for consumers, it’s important to remember there are still a wide variety of financial professionals out there. And the quality of the advice you receive can vary greatly based on their level of education, experience, and credentials. In order to find someone who is equipped to handle your unique financial situation, you will still need to do your homework.

You may want to start by looking for a fee-only financial planner. Due to the nature of how they are compensated, fee-only financial planners operate without an inherent conflict of interest. They are paid a fee for the services they provide and they don’t earn commissions from product sales.

Once you’ve narrowed down your options you’ll want to ask about their credentials, what types of clients they work with, what types of services they offer, while carefully checking their background and references. Like any professional working relationship, you’ll want to feel comfortable with someone you are receiving financial advice from, so it’s important to make sure your personalities and priorities are aligned. Remember, no one cares more about your money than you do. That’s why it’s essential to carefully vet anyone who is working with you to secure a healthier financial future.

Kate Dore
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Kate Dore is a writer at MagnifyMoney. You can email Kate at kate@magnifymoney.com

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1 in 5 Americans Will Go into Debt to Pay for Summer Vacation

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With summertime right around the corner, millions of Americans will pile into cars, planes, and trains and head off for summer vacation.

In a new nationwide poll, MagnifyMoney asked 500 U.S. adults planning to take a summer vacation how they will pay for their getaways.

Alarmingly, we found a significant number of vacationers are willing to drive themselves into debt for some fun in the sun.

Key findings:

  • The average American will spend $2,936 on their summer vacation in 2017

  • 1 in 5 vacationers (21%) will go into debt to pay for their summer getaways

  • People who already have debt are twice as likely to use debt to cover some vacation expenses as people who are debt-free: 30% vs. 13%

  • Vacationers who plan to use debt to pay for their vacation will also spend nearly twice as much as the average vacationer: $4,351 vs. $2,936

  • Summer vacation FOMO is real: 31% of people say they feel pressured to go on vacation even though they’d rather pay off debt.

—————————————

Summer Vacation: The Ultimate Debt Trap?

Summer vacation will set the average American back nearly $3,000 this year, according to the survey.

But an alarming number of travelers will be going into debt to finance their getaways.

One in five (21%) of respondents said they plan to go into debt to pay for vacation, according to the survey.

Among those who said they plan go into debt to pay for vacation, a whopping 71% admitted to already carrying some credit card debt.

People who already have debt are more likely to turn to debt to pay for vacation (30%) than those who are debt-free (13%).

 

Using debt to pay for a big trip may not seem like a big deal. But our survey shows using debt can lead people to spend more than they might spend otherwise.

When we looked at respondents who said they are planning to take on debt to pay for their vacation, we found that they were likely to spend significantly more on vacation than their peers.

On average, survey respondents said their vacations will cost $2,936 this year. And they plan to cover 20% of that expense ($595) with some form of debt.

On the other hand, people planning to go into debt said they will spend nearly twice that amount on their vacation — $4,351. And they’ll use debt to cover an even larger share of their total vacation expenses — 38% vs. 20%.

On the flip side, vacationers who have no debt will spend the least on vacation and plan to cover just 14% of their total vacation costs with new debt.

Vacation debt can easily stick around for months or even years to come, depending on how much debt a consumer already has to contend with.

Let’s say a person pays for their vacation expenses on a credit card with an average APR of 16%. They spend $1,670. If they make only minimum payments each month, it would take them over five years to pay off the debt, and they would pay $822 in interest charges.

When it comes to vacation, credit cards are king

The vast majority of respondents who said they will use debt to pay for some of their vacation expenses will use credit cards.

 

FOMO + Vacation Debt

It’s evident from our survey that outside societal pressure to take a big summer vacation can push someone to spend outside of their means.

Nearly one-third (31%) of people who already have debt say they felt pressure to go on vacation anyway.

The pressure is even worse for people who said they are planning to go into debt for vacation. Nearly half (46%) said they felt pressure to go on vacation even though they’d like to pay down some of their existing debt.

People who planned on taking on debt to pay for their summer vacation were also less likely to say they would be willing to skip a summer vacation to pay off their debt.

More than half (53%) of people planning to go into debt for vacation would be willing to skip vacation to pay off debt.

Meanwhile, 60% of people who have no debt said they’d be willing to skip a vacation to pay off debt.

Millennials Rack Up the Most Vacation Debt

Millennials may spend more on vacations than older generations, but it’s Gen Xers and Boomers who are more likely to fund their vacation expenses with plastic.

On average, 18-35 year olds said they will spend $3,163 on vacation and take on $725 of debt in the process. By comparison, respondents age 35 and older will spend $2,761 on vacation and cover $495 of it with debt.

Millennials were slightly more susceptible to peer pressure as well. Just under half (49%) of 18-35 year olds who plan to go into debt for vacation said they feel pressured to vacation rather than pay off debt. Comparatively, 44% of those age 35 years and older who said they plan to go into debt for vacation also said they felt pressure to do so.

Methodology: MagnifyMoney commissioned Pollfish to conduct an online survey of 500 U.S. adults who plan to take a vacation this summer and are responsible for most of the cost of the vacation. Responses were collected April 15 – 26, 2017.

Mandi Woodruff
Mandi Woodruff |

Mandi Woodruff is a writer at MagnifyMoney. You can email Mandi at mandi@magnifymoney.com

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This Brooklyn Grandmother Fought Back Against a Shady Used Car Dealer and Won

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Rhoda Branch, 52, lost thousands of dollars and her mobility when a used car dealer took her for a ride. But with the help of a consumer protection group, she fought back — and won.

This story is Part II of a MagnifyMoney investigation into the risky business of subprime auto lending. Read Part I here

Rhoda Branche’s rocky road began with Superstorm Sandy in 2012. After the hurricane totaled her car, she turned to Giuffre Motors in Brooklyn to shop for a new vehicle.

“They said they would help me,” recalled Rhoda. “They were very friendly – and then they just starting pushing the papers through.”

She said the dealership promised her $4,000 in incentives to buy a used 2004 Volvo SUV – and offered to arrange a loan for her.

According to a copy of the contract obtained by MagnifyMoney, the incentives were missing from the sales contract Rhoda signed. The financing was no bargain either – a subprime loan with an annual interest rate of 23.5%.  Subprime customers are typically high-risk borrowers who pay more in finance charges because of poor credit histories.

Worst of all, Rhoda’s $13,000 SUV would soon stop running. Instead of repairs, the dealership gave her the runaround.

“It was a vehicle that shouldn’t be on the road,” Rhoda said. “They just said the vehicle was fine. It looks good on the outside, but it was a lemon.”

In desperation, she took the Volvo to other mechanics and spent $3,000 from her own pocket, but the SUV kept breaking down. As a last straw, she surrendered the title of ownership to the finance company that held her loan.

Without a car, it often takes Rhoda two buses, a subway ride, and 90 minutes to travel nine miles from her apartment in Coney Island, N.Y., to a hospital where she frequently seeks treatment.

“I have to take public transportation,” said Rhoda, who suffers from injuries that required operations on both knees. “It is very time-consuming. It causes a lot of pain. I have pains all over my body because I had surgery.”

Not the Only One

“Many sellers of cars to people with subprime credit sell you junk. And they know they’re selling you junk,” said Remar Sutton, a former car dealer turned consumer advocate. He wrote about the tricks of the used car trade in his book, “Don’t Get Taken Every Time.”

“They sell you a car they know you cannot pay for, or they know will break down, and they repossess it because you can’t pay for it or it breaks down,” said Sutton. “And then they sell it again.”

Rhoda did not know she was the latest in a long line of customers who were victims of the dealership’s unethical sales tactics.

The New York attorney general sued Giuffre in 2010 on behalf of 42 customers who claimed they were cheated. In Kings County Supreme Court, a judge ordered the dealership to pay more than a half-million dollars in fines and restitution for its illegal business practices.

Giuffre had “a common practice of strong-arm sales methods and unethical conduct,” wrote Judge Bernard Graham in his 2011 decision. “The list of grievances is extensive and unsettling.”

Rhoda was one of at least one dozen consumers who filed complaints against Giuffre with New York City’s Department of Consumer Affairs. Under pressure from the DCA, Giuffre agreed to pay $180,000 in fines plus $100,000 into a restitution fund as part of a consent order in April 2014, nine months after Rhoda’s complaint.

From the settlement, Rhoda confirmed she received roughly $4,600 in restitution. And two months after the consent order, Kings County Civil Court dismissed a $5,000 claim against Rhoda by a finance company that tried to collect the unpaid amount of her car loan.

Owner John Giuffre could not be reached for comment. His lawyer did not respond to MagnifyMoney’s interview requests.

As a result of the DCA consent order, Giuffre was forced out of the car business in New York City. His last dealership closed in December 2014; its doors and windows remain boarded shut. But consumers have plenty of reasons to remain cautious.

“There are, unfortunately, thousands of companies in America that will deliberately sell you cars that they know are going to break down,” said Sutton.

Rhonda hopes she can afford to buy another car someday. But she’s afraid of being ripped off again.

“Now I’m very skeptical going to other places because I remember what I went through,” she lamented. “I don’t know what dealership I should trust when I’m ready to buy another vehicle.”

How to Buy a Used Car Without Being Cheated

Shop for financing before you look for a vehicle: The subprime interest rate a credit union can offer may be half of what a car dealer charges you. Don’t assume that your poor credit history means you won’t have a shot at getting a loan from a reputable lender. It’s perfectly fine to get your own financing outside of a dealer — and, as our story shows, it’s often much more affordable. To make matters better, if you come in with a verified offer from another lender, the dealer has an incentive to try to beat their offer.

Check your credit score yourself: Don’t take a dealer’s word on it when it comes to your credit. Your score may be good enough to qualify for a better rate on a loan elsewhere, but the dealer may not want you to know that.  You can check your credit score on a number of sites for free, including the Discover Scorecard. And again, if you shop around for rates before you go to the dealer, you will know exactly what rates you deserve — and when they are offering you a bad deal.

Buy a car that works: Bring a mechanic or a knowledgeable friend to check it out before you decide. You can also check the vehicle’s background by getting a vehicle history report through resources such as the National Motor Vehicle Title Information System, CARFAX, and AutoCheck.

Buy a car you can afford: If a dealer makes promises, be sure to get it in writing. Go in with a firm idea of what kind of car you want and how much you can afford to pay.

And slow down: Never sign a contract in a hurry. Dealers may be friendly, but they’re not really your friend. To double-check a dealer’s reputability, check out their reviews and rating on the Better Business Bureau website.

Additional reporting by Mandi Woodruff

Mark Lagerkvist
Mark Lagerkvist |

Mark Lagerkvist is a writer at MagnifyMoney. You can email Mark here

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This Woman Fell Into a Used Car Loan Trap — Now She’s Fighting Back

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Mary McDuffie Morton, 31, was sued by an auto financing company after she stopped making payments on a used car that had mechanical issues. Now the mother of four, who said she was misled by the company, is fighting their claims in court.

This story is Part I of a MagnifyMoney investigation into the risky business of subprime auto lending. Read Part II here.

In the summer of 2013, Mary McDuffie Morton, 31, needed money to buy a car. At the time, the recently divorced mother of four had a poor credit history. So she was excited to hear she could get a subprime loan at a used auto dealership in Bronx, N.Y.

“It [seemed] too good to be true,” Mary recalls. “As long you have a job, you’re approved. It’s like wow, OK, I’m guaranteed approval.”

Nationwide, customers like Mary owe more than a quarter-billion dollars in high-interest, high-risk subprime auto loans. A recent report by Moody’s Investors Service found that Santander Consumer USA Holdings Inc., a major originator of subprime auto loans, has been slacking when it comes to verifying the income reported by loan applicants, according to Bloomberg. This can make it easier for car buyers to take on more debt than they can afford to repay.

But big banks aren’t the biggest problem in auto lending. About three-fourths of subprime auto loans do not originate in banks or credit unions. Instead, they are often signed at car lots like the one in Bronx, N.Y., where Mary was lured by the promise of easy credit.

In many cases, those customers are taken for a ride by predatory dealerships and finance companies alike.

“Their main job is not to care for you. It’s to care for their pocketbook, and that’s all they’re there for,” says Remar Sutton, a former car dealer turned consumer advocate.

“How many of you have seen the ads that say, ‘No credit, bad credit, no worries, we’re the credit fixer’? That is not why those ads are running. Those ads are running because they know if you think you have bad credit, you will pay anything for a car, and they’ll knock a home run on you,” warns Sutton.

That’s what happened to Mary. To buy a used 2003 GMC Envoy XL, the dealer told her she needed to first borrow roughly $7,000.

“The dealership told me they were going to shop around for lenders for me – and they were going to call one and get back to me,” Mary says.

The dealer selected Dependable Credit Corp. of Yonkers, N.Y. The interest rate on Mary’s loan was a whopping 24.9% – just one-tenth of a point below the threshold of criminal usury in New York State.

Mary signed the contract, despite an interest rate so high that it was nearly illegal.

“I was scared that if I didn’t go along with that deal, I wouldn’t get a car, ” she says.

The Secret Bonus

Like many lenders that work with auto dealers, to get business from dealers, Dependable offers them a secret bonus. It’s called a “Dealer Reserve Advance,” and it can add an extra two points of interest to the consumer’s loan. The dealer keeps 70% of it as a reward for making the referral to the finance company.

“When you go into that dealership, do you think they’re going to point you in the direction of a cheap loan? Of course not. They’re going to send you to the finance source that will pay them cash up front on the loan,” says Sutton.

Dependable executives did not respond to multiple requests for an interview or comment.

On its website, the finance company claims it does business with 250 used car dealers in seven states – Massachusetts, Connecticut, Pennsylvania, New Jersey, Delaware, Maryland, and New York – and has financed more than $200 million in loans.

“They’re in hundreds of dealerships because they’re making millions of dollars, because people who are poor, people who are worried about their credit, are being taken advantage of by that business,” says Sutton, a co-founder of FoolProof, a nonprofit website devoted to consumer education.

Mary said the vehicle she purchased had mechanical problems that the dealer refused to fix. Sensing that she was being cheated, the former Bronx resident refused to make loan payments until she received a title proving she owned the car.

“They sold me a lemon,” complains Mary. “I knew that the deal was just a big scam.”

A Long Fight in Court

Dependable repossessed the Envoy when Mary’s payments were five weeks delinquent. By the time she received the title, the car was gone – and she was thousands of dollars in debt.

According to records obtained by MagnifyMoney, the finance company sold the vehicle to an undisclosed owner for $4,200 – a price that was $5,000 less than what Mary paid just four months earlier.

Then Dependable sued her in Bronx County Civil Court for a bill packed with extra charges. The tally includes nearly $1,200 in repairs by Westchester Auto Center and more than $1,700 in storage fees charged by Saw Mill River Realty.

The three businesses are located at the same address. State records show that all three share the same chief executive.

Dependable continues to charge Mary 24.9% interest on a loan for a car it repossessed and sold to someone else three years ago. Last year, the company told the court Mary owes nearly $11,000.

“Unfortunately, most places that want to make you a subprime loan simply want to make more money on you,” says Sutton.

With the help of a legal aid group, Mary is countersuing. She alleges she was cheated through deception and illegal business practices by the finance company and the dealer.

In a counterclaim filed by Mary’s attorney, Shanna Tallarico with the New York Legal Assistance Group, in October 2016, Mary claims that the dealer also required her to trade in her 2004 Cadillac CTS in order to purchase the used Envoy.  The dealership agreed to give her just $1,900 for the vehicle, citing “a significant problem with the Cadillac’s engine,” according to Mary’s counterclaim. Days later, she claims the dealership listed that same Cadillac for sale for $9,999.

Efforts to reach the dealer for comment were unsuccessful. Mary’s case is still pending, Tallarico says.

“I felt like I had just thrown money in the garbage,” says Mary. “The whole experience was a waste of money.”

How to Buy a Used Car Without Being Cheated

Shop for financing before you look for a vehicle: The subprime interest rate a credit union can offer may be half of what a car dealer charges you. Don’t assume that your poor credit history means you won’t have a shot at getting a loan from a reputable lender. It’s perfectly fine to get your own financing outside of a dealer — and, as our story shows, it’s often much more affordable. To make matters better, if you come in with a verified offer from another lender, the dealer has an incentive to try to beat their offer.

Check your credit score yourself: Don’t take a dealer’s word on it when it comes to your credit. Your score may be good enough to qualify for a better rate on a loan elsewhere, but the dealer may not want you to know that. You can check your credit score on a number of sites for free, including the Discover Scorecard. And again, if you shop around for rates before you go to the dealer, you will know exactly what rates you deserve — and when they are offering you a bad deal.

Buy a car that works: Bring a mechanic or a knowledgeable friend to check it out before you decide. You can also check the vehicle’s background by getting a vehicle history report through resources such as the National Motor Vehicle Title Information System, CARFAX, and AutoCheck.

Buy a car you can afford: If a dealer makes promises, be sure to get it in writing. Go in with a firm idea of what kind of car you want and how much you can afford to pay.

And slow down: Never sign a contract in a hurry. Dealers may be friendly, but they’re not really your friend. To double check a dealer’s reputability, check out their reviews and rating on the Better Business Bureau website.

Additional reporting by Mandi Woodruff

Mark Lagerkvist
Mark Lagerkvist |

Mark Lagerkvist is a writer at MagnifyMoney. You can email Mark here

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Why the “Do Not Call Registry” Can’t Protect You from Spam Phone Calls Anymore

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If you’re afraid to answer your phone, you’re hardly alone. Spam calls have become so common that they’ve basically rendered the “phone” part of “smartphone” useless. Or at least, very dumb. But help might, finally, be on the way.

The Do Not Call list, which debuted in 2004, was perhaps the most popular program operated by the U.S. government in decades — 50 million numbers were entered before the list even took effect. Since then, another 170 million numbers were entered into the registry. U.S. telemarketers quickly learned to abide by the list or face multi-million dollar fines the Federal Trade Commission could impose — and there have been more than 100 enforcement actions.

It worked…for a while. But the combination of internet-based telephones and cheap long-distance calls have made it easy for telephone scofflaws to operate overseas, far beyond the reach of U.S. authorities. Unwanted calls have returned with a vengeance, making some wonder if the Do Not Call list works at all.

How bad is the problem? A firm called YouMail Inc. tries to count the number of robocalls that pester Americans, and the statistics are staggering. YouMail claims that 2.5 billion unwanted calls were placed just in April 2017, equaling 7.7 calls per person.

For fun, YouMail breaks down its data by ZIP code, and found that Atlanta wins for most robocalls received, with about 50 million placed just to the 404 area code in April. Another 35 million arrived at Atlanta’s 678 area code. Houston and Dallas area codes came in second and third. New York City’s 917 area code was fifth, with 29 million.

The robocall problem has been intractable for a series of reasons — mainly, because it makes the criminals who run scams like fake IRS debt collection like these a lot of money. But two other technology reasons stick out.

1. Criminals can “spoof” caller ID numbers.

First, it’s become easier for criminals to “spoof” caller ID numbers. That not only keeps consumers from blocking numbers, it can also make them more likely to answer. Calls that appear to come from the recipient’s own area code — or even share the same first six digits of their phone number — suggest a local call, so consumers are tempted to answer.

2. The telecom industry has a hard time stopping suspicious calls.

Second, the telecom industry has avoided implementing technology that would stop many suspicious calls because the firms claim they are legally required to connect calls, and they don’t have the authority to decide what is spam and what isn’t.

Years of frustration and consumer complaints finally nudged the Federal Communications Commission toward action last year, and it created the Robocall Strike Force. In August, tech heavy hitters like AT&T, Google, and Microsoft gathered in Washington, D.C., to discuss ideas.

Then in March, with the FCC under new leadership, Chairman Ajit Pai indicated he would go ahead with proposals from the task force. Specifically, he would call for a change in rules that explicitly gave telecom firms the right to cut off spammers.

“Under my proposal, the FCC would give providers greater leeway to block spoofed robocalls. Specifically, they could block calls that purport to be from unassigned or invalid phone numbers — there’s a database that keeps track of all phone numbers, and many of them aren’t assigned to a voice service provider or aren’t otherwise in use,” he wrote in a Medium post explaining the change. “There is no reason why any legitimate caller should be spoofing an unassigned or invalid phone number. It’s just a way for scammers to evade the law.”

Later in March, the FCC approved the proposal. The work isn’t done, however. There’s now a public comment period; a vote to enact the new rules won’t happen until later this year. Then there will be a transition period as carriers implement their spoofed-call-blocking technologies.

How to stop unwanted spam phone calls

Relief is in sight, but it’s not time to turn your ringtone back on just yet. For now, consumers can investigate third-party services like Nomorobo ($2/month, iPhone only, see a review here) or Hiya (free, see iTunes reviews here) that claim to help by using blacklists and other methods to identify spam callers. Some providers and smartphones offer their own free call-blocking options, but they are cumbersome to use. Consumers can Google phone numbers that call, just to see if others have complained online about them. Or simply keep screening those calls for a bit longer.

Bob Sullivan
Bob Sullivan |

Bob Sullivan is a writer at MagnifyMoney. You can email Bob here

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What Trump’s Budget Means for Public Service Loan Forgiveness

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Confirming the fears of many, President Donald Trump’s recently proposed federal budget calls for the defunding of the Public Service Loan Forgiveness program. While those currently enrolled in the program would not be affected, anyone taking out loans after July 1, 2018, would not be eligible.

Proponents of the program, designed to attract candidates to the public sector by forgiving student loans after 120 consecutive payments, fear this cut would incentivize teachers, lawyers, nurses, and other professionals to seek out careers in the private sector where the salaries are significantly higher. Opponents say the program is too costly, and the proposed cuts would save taxpayers billions.

What Does This Mean?

Adam Minsky, a Boston, Mass.-based attorney who specializes in student loans and consumer issues, cautioned that President Trump’s budget proposal is just that — a proposal.

The president can propose a budget, but it’s up to Congress to finalize and ratify it. The Republicans currently have a majority in both the House of Representatives and the Senate, and the federal budget only needs to have a simple majority for it to pass. Still, that would require about eight Democrats to vote yay, something they’re unlikely to do unless the final draft takes a more bipartisan turn.

The process of getting a budget approved through Congress is a long road. Each chamber of Congress has to approve the bill internally, then the bill goes to a committee that looks at both the Senate and House of Representatives bills to reconcile any differences. Finally, the bill is sent to both houses of Congress for a final vote.

Budget proposals rarely make it through Congress unaltered. Trump’s proposal is more like a polite nudge from the executive branch, not a firm decree.

Budget talks will continue throughout the summer and fall, and it’s not clear when a final proposal will be announced.

What Is the Public Service Loan Forgiveness Program?

Started in 2007, the Public Service Loan Forgiveness program allows borrowers who took out federal student loans to have their loans forgiven after 120 consecutive payments (10 years), as long as they served in a government or nonprofit role while all those payments were made. Graduates who utilize the program are on a mandated income-based repayment plan, so their payments are often much lower than they would be on the standard plan.

Careers such as law, nursing, social work, teaching, law enforcement, firefighting, and the military would all be affected by this shift. Many who choose to enter these professions have the option of working for the private sector where salaries are higher, but choose the public route because of this program. Not having the PSLF program could mean a dearth of candidates entering these fields.

“You have people making major life decisions based on the existence of this and other programs,” Minsky said.

The program incentivizes people to work in the public sector where salaries are lower and the demand is greater. If people don’t have a reason to take a lower-paying job, some experts worry that the gap between the rural and urban communities and other low-income areas will continue to increase.

Who Is Affected by This?

Only borrowers who take out federal student loans after July 1, 2018, would be affected by this change, and anyone who took out loans before this would be grandfathered in. The first crop of students who will have their loans forgiven will be this fall. Currently, over half a million people are enrolled in the PSLF program.

What’s the Problem?

The problem with Trump’s proposal is that the Public Service Loan Forgiveness program is a federal law. A budget proposal can’t change the law, but it can defund the program. That’s where the legal confusion arises.

“That’s the million dollar question,” Minsky said. “How can you have a program that is legally allowed to exist without funding it?”

He anticipates that if a budget passes defunding the PSLF program, several lawsuits would immediately come about.

“The way they’re going about doing it is problematic from a legal point of view,” Minsky said.

What Can People Do?

If you oppose the president’s proposal, you should contact your local representatives to tell them how you feel. Each citizen has one House representative and two Senators. Minsky recommends calling, writing a letter, and setting up a meeting with their spokesperson.

When you call, “you want to identify yourself as a constituent and as a voter,” he said.

If you have coworkers who would also be affected by this, try to rally them to take action. Ask your boss if the organization you work for can take a public stand on these issues. Post about it on social media and encourage your friends to reach out to their elected officials. Strong public opinion could sway politicians to listen to the people and not include this proposal in their own budget.

Zina Kumok
Zina Kumok |

Zina Kumok is a writer at MagnifyMoney. You can email Zina here

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More Rich People Are Choosing to Rent Than Ever Before — Here’s Why

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Renting a home or condo has become a status symbol for some wealthy Americans.

Karen Rodriguez, an Atlanta, Ga., real estate agent, says people frequently contact her who are interested in condos renting for $10,000 to $15,000 a month in properties such as the Ritz-Carlton Residences, which have floors of condos above upscale hotel rooms.

“I do see a lot of high-net-worth renters,” says Rodriguez, with Berkshire Hathaway HomeServices Georgia Properties. “They have the disposable income to pay top dollar.”

Renter households increased by 9 million during 2005-2015, reaching nearly 43 million in 2015, according to the State of the Nation’s Housing report, an annual study by Harvard University’s Joint Center for Housing Studies that analyzes U.S. Census Bureau data. Of those, 1.6 million renter households earn $100,000 or more, representing 11% of all renters.

“Indeed, renter households earning $100,000 or more have been the fastest-growing segment over the past three years,” the report stated.

Here are four reasons why high earners are choosing to rent.

They’re frustrated with market trends.

stock market numbers and graph

Rob Austin, a biotech account manager in the Los Angeles area with a household income of over $350,000, rents a 1,700-square-foot townhome with his wife and two children.

In the last 10 years, 1.2 million households that earn $150,000 became renters, up from 551,000 in 2005. Using data from the U.S. Census Bureau’s 2015 American Community Survey, RentCafe.com reported in late 2016 that “wealthy households” that earn more than $150,000 annually increased by 217%, compared to an 82% rise in homeowners in the same income bracket.

The $150,000-and-up dollar amount served as the benchmark for “wealthy” renters because that’s the top of the bracket used in the American Community Survey to identify renters and homeowners.

Even when they had their second child in 2016, Austin says they were more steadfast to keep renting the two-bedroom, two-and-a-half bath townhome instead of buying. Prices are increasing so much that they’re “priced beyond perfection,” he says.

“It’s gotten worse,” he says. “Everything is mispriced at this point.”z

They want the next best thing.

Some buyers’ mindset is, “I don’t love it, so I’m just going to go rent a house,” says Atlanta, Ga., real estate agent Ben Hirsh.

Some may be bored with what’s on the market and are holding out for a home or condo with even more extravagant features or amenities. “They’re not happy with what’s out there,” says Rodriguez, also founder of Group Kora Real Estate Group, which sells new and luxury condos.

If they’re in a location or price range that’s hot, they could get more for their home if they sell now. Some wealthy homeowners take advantage of the resale market by going ahead and selling a home or condo and biding their time while renting. For example, if they’re sold on news about ultraluxe condos that have been announced, but are not under construction, they don’t mind renting in the interim.

“People think there’s more coming,” Rodriguez says.

Some clients have so much wealth that they’re willing to pay for the entire year up front for an unfurnished condo, she adds. Investors also have noticed the market trends and are buying condos for $1 million to $2 million with the intention to rent them out.

They don’t want a long-term commitment.

retirement retire millionaire happy couple on the beach

Some wealthy homeowners are ready to sell their million-dollar estates for a lock-it-and-leave-it lifestyle, but aren’t sold on townhome or condo living.

Instead, they’re willing to spend what can amount to the down payment on a starter home for monthly rent to experience the luxury condo lifestyle with privacy and ritzy amenities, like 24/7 room service and spa access.

“They want to test out a high-rise,” Rodriguez says. “They are people who definitely can afford to buy.”

A 2016 report by the National Association of Realtors identified the top 10 markets in the U.S. with the highest share of renters qualified to buy. The study analyzed household income, areas with job growth above the national average, and qualifying income levels (a 3% down payment in each metro area’s median home price in 2015) in about 100 of the largest U.S. metro areas. The markets that are above the national level (28%) were:

  • Toledo, Ohio (46%)
  • Little Rock, Ark. (46%)
  • Dayton, Ohio (44%)
  • Lakeland, Fla. (41%)
  • St. Louis, Mo. (41%)
  • Columbia, S.C. (41%)
  • Atlanta, Ga. (40%)
  • Columbus, Ohio (38%)
  • Tampa, Fla. (38%)
  • Ogden, Utah (38%)

The short-term mentality also may be the nature of the industry that brings people to a city. Some prospective renters whom Rodriguez meets are planning to live in Georgia for a couple of years because of work, such as jobs in the growing entertainment sector. Films such as the “Avengers” and TV shows such as “The Walking Dead” shoot in metro Atlanta.

They don’t want to live out of a suitcase in a hotel and have the income to afford high-priced rentals, joining political figures and international executives who also are among those making the same choice, Rodriguez says.

They want cash in the bank.

Townhomes sell for about $800,000 in Austin’s neighborhood in California. To make a 20% down payment, he’d have to shell out $160,000 up front.

“Why would I want to tie up $160,000 in cash in an asset that most likely is not going to go up a lot more — and more than likely has topped and has nowhere to go but down in the next cycle?” Austin asks.

Austin says he’s not wavering from his decision, although he’s “taking heat” from friends since he has the income to purchase a home.

“We’re bucking the trend by saying, ‘No thanks, we don’t want to play (the real estate market),’” he says. “We’ll just wait.”

Lori Johnston
Lori Johnston |

Lori Johnston is a writer at MagnifyMoney. You can email Lori here

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