AYF 102 | Borrower Education

 

There is no shortage of financial literacy resources out there, but do they really teach you what you need to know if you’re looking to get fundable as a borrower, especially in these tough times? In this episode, you’ll find out that there is a vast difference between what we consider to be financial literacy and what borrower education really should be. Join Merrill Chandler as he analyzes some of the most commonly-used resources that people use to teach financial literacy. Merrill takes each of them apart and shows us where they got things right, where they aren’t quite relevant and where they got things blatantly wrong. If you want to get fundable, your credit ratings are everything and you should learn how to plan well ahead into the future about how you can keep them as tidy as you need them to be. Real borrower education should reflect that need – something that financial literacy isn’t exactly doing a good job of providing right now.

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Financial Literacy vs. Borrower Education

I’ve got something for you that I’m going to help you dive into where I’ve been over the last few months, the mental space of the difference between financial literacy and borrower education. We’re going to be exploring what is each, how they relate together. You’re going to be very surprised at some of the things we discovered, some of the research my team has done. We’re going to have fun with this. Everybody’s got to know what’s going on with this particular event. What we’re establishing is the difference between financial literacy and the opportunity to become an educated borrower. There’s a huge difference. Let me back up a little bit and give you some insight as to where I have been.

Some time ago, both in the social channels for FICO as well as an invite to previous attendees of FICO World, there was a call for presenters. These presenters were being vetted for presenting in April of 2021 for the FICO World 2021 event. The funny thing was is in this event, they are branching out. I’ve been an attending for three years. This is the first time that they have called to expand their presenter base. I went through the application with my team. I spent a lot of time because I wanted to know if I could have a roomful of 30, 50, 100, 200 underwriters and lenders, C-level lender executives, what would I want to say to them. What it came down to is it is time to level up financial literacy. Financial literacy programs are not enough given this environment for automatic underwriting and the entire lending environment, especially as a result of the COVID thing that we have experienced.

I prepared the initial bullet point. They had me outline what my presentation would be about. The main points of this presentation, I don’t even know if they are ready to allow a borrower-facing organization, a borrower educator in front of lenders. There’s going to be a lot of great things come as a result of this. If they’re ready, if FICO says, “We want to ramp up borrower education among our lenders,” you bet your sweet patukis since they’ve invited me three previous times in a row, I’m likely to be accepted as one of the presenters. Remember FICO is a lender. Their clients are lenders. If FICO isn’t ready yet for borrower education, then it’s likely that they’re not going to choose me as one of the presenters. It’s going to be interesting to see what happens here over time.

What Financial Literacy Doesn’t Teach You

When I was doing my research of what I wanted to present to lenders is that I did a complete review of the top four lenders, all the tier 1 lenders, Bank of America, Citi, Chase and Wells Fargo, and looked at what their financial literacy programs were. Chase has the Credit Journey. Each one of them has a particularly branded version. I have an account with all but Citi. I only have three credit cards, all tier 1 and 3 out of the 4 represented. One of the things that came to me was what do lenders provide and why do they provide it? What would happen if everybody seemed to level up if they started taking borrower education more seriously? That’s what my presentation was about.

I did some initial numbers and research about how that when individuals are committed to increasing their borrower awareness, becoming professional borrowers, becoming schooled in what underwriting criteria are required and how to align their borrower behaviors and their borrower profile with what lenders are looking for, when they are educated that way, their success goes through the roof. All of this will be presented and documented. Part of this conversation was what is borrower education compared to financial literacy? Because every single one of the lenders refers to financial literacy. That’s the catchphrase. That’s the phrase that’s being used to educate consumers. The second I use the word, consumers, this is how I want to frame it.

AYF 102 | Borrower Education

Borrower Education: Financial literacy doesn’t effectively teach you how you can grow your credit profile so that you can leverage other people’s money to grow revenue.

 

Consumers need financial literacy. Borrowers need borrower education. One of the things that I look at here, one of the things that I establish is how would I approach these FICO presentations to give lenders some valuable intel that they may not be aware of right now. We have the borrower and we have the lenders. There’s this vast chasm that exists between the two of them. That chasm we call fundability or lack of fundability. Are you fundable or not fundable? The bridge between here is fundability. I’m going to show you some examples of what things have been used to outline financial literacy. They’re the biggest voices in the marketplace. I hesitate to use the word thought leader because they’re not leading us forward. They’re teaching us old, dilapidated and sometimes outright wrong information. These are the opposing cliffs that I wanted to show you.

This is from Dave Ramsey’s website. Dave Ramsey is a proponent of being debt-free. Let’s look at exactly what he describes as financial literacy. Financial literacy by his definition is the possession of skills that allow people to make smart decisions with their money. I would concur, but which people? When you talk about budgeting or you talk about preparing for emergencies, you’re talking about people and consumers, people who need to plan for the use of money. He has some very interesting and very well-thought-out strategies for the use of cash. When he talks about debt, he immediately goes on the warpath. I’ve spoken about Dave Ramsey before because we have completely different positions. If you are a Dave Ramsey follower, at some point, his market are individuals who buy a home and want to stay in that one home forever.

They buy a car with cash. You save up your money and then buy your car with cash. Get rid of any debt that you have as quickly as possible. Little to no use, preferably in his world, of credit cards, all cash or debit cards would count for that. The problem is that financial literacy teaches people about the terms. What is debt? What is credit? He’s talking about a big part of financial literacy focuses on understanding how the time and money people spend paying off debts hurt their ability to invest in the future. On its face, that is a reasonable definition. I have no problem with the definition except where it comes to what I call leverage. The idea is that if the use of other people’s money allows you to leverage your time and your money in a way that creates greater results, even for investing in your future.

I have many clients, real estate investors, entrepreneurs, small business owners of every kind and the vast majority of them, I can’t say all because I don’t know, 99% of them have used other people’s money to leverage, to grow their business, and to expand. That requires a credit profile that a potential lender would look at and say, “How do they rank? Do I want to give them money?” If someone does not ever plan on making more than your W-2 income ever in your life, it is likely you’re going to want to use Other People’s Money, OPM, in order to leverage, to create a bigger life and more opportunities for yourself. Here’s the problem. When it comes to financial literacy, teaching people how to save money, what percentage of your paycheck to save, his recommendation of 10% to 15% is awesome. Saving 10% of your paycheck of whatever remains does not allow you to invest in other opportunities or grow your life in ways that may be more fulfilling for you.

Think of it this way. If you want to leverage, then other people’s money is the only way to do it. Therefore, if we’re going to use other people’s money, we have to engage in a significant way in the credit system. The credit system, especially since 2008, has moved significantly, universally for many banks into what we call and what we’ve discussed in the past as Automatic Underwriting Systems, AUS. These Automatic Underwriting Systems are measuring 40 borrower behaviors and your personal credit profile to see if whether or not they want to give you money. How you treat old money, the money you’ve already borrowed is indicative of how you would treat new money. If we’re not sending a message that you know how to manage somebody else’s money, no one else is going to give it to you. That’s where financial literacy and borrower education diverge.

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Bad Consumer Education

Let’s take a look at another website that we have here. This is a financial literacy test from a debt consolidation company. Debt consolidation company, be very careful, these guys are using this as a way to hook you into seeing how much debt you have and then doing a consolidated payment. These are not consolidation loans. These people right here will ruin your credit. It’s like a homegrown Chapter 13. FICO measures the use of consolidation companies, not loans to consolidate, where they bring all your payments into one lower payment and negotiate with your creditors that is going to kill your credit profile and yet they have a financial literacy test here. How much money should you put into a savings account every month? I gave that one away from the Dave Ramsey section, but approximately 10%.

Notice what are the five factors that add up to make your credit score? I know what these are. Many people do not, but it’s payment history, utilization ratio, new credit, and length of use. It’s number D. It’s not a nice smile, a winning attitude and a promise to be more responsible. These five factors are what FICO is willing to give to the public. It isn’t their algorithm. These areas are counted, but in each one of these areas, there are 5 to 15 different trackable measurements. Payment history, what type of payment history are you talking about? Is it by the due date and time? It’s utilization ratio, every new application but over the last 3, 6, 12 and 24 months, the 24-month look-back period. Each one of these has a myriad of other measurements. This is true, but it’s not the whole story. What’s the most income you should use on monthly credit card payments? Some of these are not even correct.

No more than 10% of what you bring home, as much as it takes to pay your debts every month, no more than 30% of your gross income. That’s indicative of what they’re saying is the maximum debt-to-income ratio. They say that it should be no more than 41%, but a mortgage is 35%. Some unsecured credit cards are 30%. They say 41, but we would get that question wrong because I’ve filled this out before. I said no more than 27% because that’s the conservative estimate. They say 41%. You’re in a yellow zone, not a green zone if you have a 41% debt-to-income ratio. One of the things that are striking and that is very different, they say, “How often can you check your credit report for free?” AnnualCreditReport.com don’t tell you it’s your consumer disclosure files. They say it’s once a year but as we know, because of COVID, we can do it weekly. We can get a credit check from AnnualCreditReport.com, but there are no scores there or no legitimate scores that are associated with it.

How much money do you need for a down payment on a traditional mortgage? They’re saying that is something you need to know for financial literacy. You don’t need to know it because if you walk in, you talk to any mortgage broker, they’re going to tell you it’s 20% and then you can plan from there. What I’m trying to share with you here is that some of these things are completely irrelevant. Financial literacy is relatively meaningless when it comes to building a personal borrower reputation where lenders are going to lend money to you. Everything that they’re talking about, what does APR stand for? You need to know what APR means so that fits in financial literacy. Annual credit report, if you’re building an awesome profile, we don’t care if you have 700% APR because we’re not going to carry personal balances on the personal profile. That’s not part of how to be fundable and attract other people’s money, lender money.

We care about the APR on the business side, but we don’t want to carry balances on the personal side, especially revolving accounts. We only want a mortgage or an auto loan and installment loans. How is net worth calculated its assets and liabilities? That’s a great question for financial literacy. How should you check your credit prior to making major purchases? At least six weeks because 30 days or 4 weeks is a reporting cycle. It gives you two weeks to make a change. That’s a good question. Is it enough? Is this what you need to know to be a reputable borrower? No, it’s not enough. How many payments do you have to make before a penalty APR can be removed? At least consecutive payments. What they don’t tell you is this is a lender policy that varies from lender to lender. There is no law or statute that governs that at least six consecutive payments.

AYF 102 | Borrower Education

Borrower Education: Some of the things that financial literacy teaches are completely irrelevant when it comes to building a personal borrower reputation.

 

I don’t know where they got that one from. I know that it’s true for some banks. When you google financial literacy, this test comes out and they’re not helping you by giving you even the questions to ask. What are the three Cs of creditworthiness? It’s capacity, character, and collateral. If we’re doing this right, the character is what they’re calling your borrower behaviors. There are 40 characteristics. All they do is lump all that into the word character, not enough. What are the three types of expenses in your budget? There are fixed expenses. They’re like a monthly payment for an installment loan or mortgage or otherwise. Flexible payments like a revolving account might be flexible. I can pay a minimum payment or I could pay it all off. Discretionary, what’s left over after my debts?

That’s good in theory to help if you’re teaching high schoolers about how to plan to use money. Notice this one, what kind of credit card can you get with bad credit or no credit score? First of all, you can get secured, but that’s not necessarily true. If you have bad credit and you burned one of the sister banks, you’re not going to get a secured credit card from Wells Fargo if you burned Chase. It’s not going to happen. They’re saying, “Secured cards are an option,” but you have to vet the banks. You’ve got to find out what those banks are offering. It’s not good education. What federal law protects your rights for abuse of collection taxes? You don’t need to know that. It’s the Fair Debt Collection Practices Act, but you don’t need to know what that is because only collection agencies have changed radically in my lifetime as part of this business. They’re far more legitimate collection agencies that abide by the Fair Debt Collection Practices Act than ever before as a percentage. There are high penalties for violating the law.

As a functional piece of intel that you need, you don’t necessarily need to know the Fair Debt Collection Practices Act because you’re going to go look it up and enforce it on your own. If you’ve been egregiously injured, you’re usually going to use a credit counselor or an attorney to assist you. How long does it take for an account to go into collections? This is a complete BS. They’re going to tell us that it’s after 30 days of nonpayment. No, that’s when it goes 30 days late and goes delinquent on your credit report. It doesn’t go to collections usually for most tier 1, 2 and 3 banks for 90 days. You’re going to get a 30, 60 and a 90 before it gets sent to collections. It says, “Go to collections.” They’re going to be trying to collect from you every minute that you missed. How many of you have received a phone call after five days past the due date? Not 30 days late, not delinquent, but one day past the due date. You get an email, “By the way, you missed your payment.” This is bad consumer education.

What are the names of the three credit bureaus in the United States? It’s Experian, TransUnion, and Equifax. It’s worth a tidbit of knowledge to know if you need to dispute or otherwise. What are the two types of personal bankruptcy filings you can make? It’s Chapter 7 and Chapter 13, but they’re never going to file one of those without consultation of a bankruptcy attorney. Notice how some are very relevant questions. Some are completely irrelevant to any consumer. Every one of these is based on a consumer perspective, not a borrower, much less a professional borrower perspective. How long do credit inquiries affect your credit score? It’s for twelve months, but they say that it’s for six months. Remember, as we talk about in the bootcamp, as we talked about in my book, it affects your credit score for twelve months. It will affect your fundability for the full 24-month look-back period.

What’s the retirement plan you get through your employer called? It’s a 401(k). That’s good to know for those people who have them or are employed such that they would have this as one of their benefits. What debts cannot be discharged by bankruptcy? It’s student loans, child support alimony and some court judgment. All those are true for most states, except for court judgments. You can do a bankruptcy against court judgment but federal tax liens, which is not even on here is one of the things that cannot be discharged by bankruptcy. We check our answers. I got 17 out of 20 correct. They’re saying an account goes to collections after 30 days of nonpayment. It’s nonsensical. I selected after 30 days and it’s usually after six months without a payment.

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The next one, I said six weeks before and they’re saying at least six months prior. Do you know how much time six months are on a credit profile? I tell my clients all the time, if you’re going for a major purchase, check your credit profile, the poll to see if there are any problems before you file. My clients, my students and all my readers, if you’re wise, you’re already subscribed to MyFICO.com, where you’re getting daily updates of balances, etc. and you’re getting quarterly updates of the status of all 28 of your scores. The last one that I got wrong was how much income? I said no more than 30%. They’re saying no more than 10% of what you bring home. I bring this up as an example of what they consider to be financial literacy. That financial literacy, however, is scary.

What We Should Teach Our Children

The last thing I want to show you is a fascinating teacher’s guide. This is high school and what they are teaching and some of the questions that they’re asking. Remember, I’m not teacher shaming or making fun of what’s being taught out there. What I’m saying is it is enough. I’m going to bring it back to what lenders need to see here. First things first, let’s go down to Section 1. Let’s look at a well-organized presentation. List five things you can do to build a credit history. Establish a steady work record, pay bills promptly, open a checking account and don’t bounce checks. I teach the background of all of that in my bootcamp about not having a checking account, but we talk about having a zero. We talk about how bouncing checks ruins your fundability.

Pay all bills promptly is too nebulous. We teach that you must by the due date and time, not before, not after. They say bills promptly so that means I can be 2 or 3 days late and still be prompt. The language is vital here and we’re teaching high schoolers within a couple of days. If you know any awesome Gen Z-ers or Millennials like I do, promptly is going to mean ballpark it. We need to teach them more and better because not paying this on the due date and by the due time is going to harm their long-term fundability. Don’t bounce in checks, open a savings accounts and make regular monthly deposits. I would keep that in the financial literacy section. Number 2 and 3 are borrowers because they directly impact your borrower reputation. Apply for a small loan using your savings account for collateral and then pay it back as agreed. There are easier ways. There is a difference between secured and unsecured when it comes to lenders.

We want unsecured loans. If this is the very first thing, that is a possibility, but there are some landmines associated with that very thing that is not talked about and not taught. If we don’t cover what those landmines are, a high school student, the college students going to go out and try and do that very thing. They very well may harm rather than improve their fundability. Get a co-signer for a loan and then pay it back as agreed. That is a viable option. I teach co-signers that they need to be prepared financially to cover every one of those payments. Many people come to me, children stop paying a loan, they stopped being employed and parents are covering a car loan. I’ve had parents come back and say, “I have bad credit because my child didn’t pay the bill,” and the parent didn’t know to get on the notifications.

That may sound like it makes sense but unless you ask for it, generally speaking lenders don’t say, “Do you want to be notified as well?” Unless you know specifically to answer that question, you may end up with a 30, 60, or 90-day late if your child hides from the fact, they’re embarrassed that they’re not making the payment. They don’t know the negative impact against your profile and your borrower fundability. That’s what we need to teach children is that if you don’t pay back this loan as agreed and you have a co-signer, you’re going to ruin your parents or your guardian’s fundability. That’s going to directly impact their ability to buy more cars, get another house or move forward in their financial lives.

AYF 102 | Borrower Education

Borrower Education: We need to teach our children that if they don’t take responsibility for their loans, they would ruin their co-signer’s fundability.

 

We don’t teach in our financial literacy the responsibility that you can destroy somebody else by being too embarrassed to speak about the truth. All through here, how much can they carry safely? They’re teaching good principles. One of the things was a way to build your credit was to get retail, a mall store card to help start building your profile. If you’re going to be a consumer, that’s typical consumer behavior, but what we don’t teach sixteen-year-olds in high school, eighteen-year-olds and college students and adults is that you need to start planning now for what you want to do in 2, 3, 5, 7, 10 years from now because that’s how long your credit stays.

Your open accounts stay on forever and closed positive accounts stay on for ten years. If you don’t choose the right accounts, if they don’t have the borrower education that tells them, “You’re eighteen now, but in five years, you’re going to be 23. In ten years, you’re going to be 28 and you need to be prepared because you have no clue what you want to do with your life. Here are the principles to be a powerful borrower and we’re going to set you up.” I always use the story. You may have already seen the show with my daughter, Sharon. I’ve set up my credit accounts with my children and built their profiles, knowing that they would need good profiles and good borrower behaviors long before they knew that they would need them.

My daughter finished on her second live-in flip. She’s got her first rental property and her and her husband have spectacular profiles all over 800 and they’re now financing their second home or their next live-in flip. She didn’t know she was going to do that when she was eighteen years old. Your children do not know. You as a Millennial, you as a Gen Z-er, you might be twenty years old right now. You have no clue what you’re going to be doing ten years from now. The lenders, if you do the right choices and it doesn’t take any more time, any more money, any more effort than what you do with Venmo right now. If you make the right decisions and you move forward with your borrower education, instead of financial literacy and knowing the annual percentage rate for APR interest, if you get the education, you’re going to have open doors for the rest of your life.

One of the things I say in my bootcamp is you never know when the next opportunity has come up and you never know when your priorities will change. My whole point, my mission from start to finish is to provide an inexpensive to free borrower education platform that millions of people can use to prepare themselves and their loved ones to be fundable now, in the near and in the distant future. That’s my end game, a platform. I’m working every day relentlessly. These blogs are the precursor to that financial platform. Tell me you haven’t learned a whole grip of stuff from the last 100 episodes or so. I am committed to this. That’s my end game with FICO. I’m looking forward to the moment. I would love to receive an email from FICO saying, “You’ve been chosen to present these things. Please prepare your deck. Please prepare your presentation in full so that we can review it with you. We’re excited to have you present to FICO World ‘21.”

If they do that, then that means lenders may be able to take advantage and provide our borrower education to all of their cardholders and customers. Imagine the top tier banks, all providing real borrower education instead of credit path, pay your bills, promptly, pay your bills on time. There are so many things they’re not saying that they could if they were committed to true borrower education. That is my goal at FICO World ‘21. If I have the chance, that is my purpose for speaking with you. This show is 100% about borrower education trumping the wonderful attempts, a lackluster education for our high-schoolers, our college people, for you and me. We need to be fully educated as borrowers so that we can make our financial dreams come true. That makes the rest of our personal dreams follow suit right afterward. I’m telling you right now, get educated and get fundable.

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