Financial Literacy versus Financial Life Building Skills

Financial Literacy Post1 Financial Literacy versus Financial Life Building Skills

Google financial literacy and it turns up over 9,540,000 results.  Results vary from articles like Financial Literacy for the College Student to organizations like 360 Degrees of Financial Literacy , to thousands of personal blogs dishing out advice!  To summarize, they all pretty much cover the same thing;

  • Debt
  • Budgeting and Savings
  • And Money Management

The Meaning of Financial Literacy

So what exactly does financial literacy really mean anyway?  The National Financial Educators Council (NFEC) defines financial literacy as: “possessing the skills and knowledge on financial matters to confidently take effective action that best fulfills an individual’s personal, family and global community goals.”

Wikipedia defines it as the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources.

And finally, Investopedia defines it as possession of knowledge and understanding of financial matters and mainly used in connection with personal finance matters.

The Most Over-Used Financial Term in History

I would argue that the most overused financial term in history has to be Financial Literacy!  Let me give you an example:  This past weekend I attended Broward County’s Title I & Head Start Annual Parent Seminar.  The Keynote Speaker was Dr. Boyce Watkins, one of the most highly sought after African-American scholars in the world and Finance Professor at Syracuse University who specializes in financial psychology.

I was given the opportunity to ask him a question during a group session and could think of no better question to ask than this; “Given the last 5 or 6 years of turbulent economic times we have just gone through, the fact that the room is full of many Title I parents and educators, and how little is actually being done nationally to make financial literacy a part of our children’s education, do you think financial literacy should be an important component in education?

The Financial Literacy Answer

When Dr. Watkins took the mic back, he stated he absolutely believed financial literacy was important and that schools were clearly lacking this component.  However, he made sure to tell the parents in attendance to take it upon themselves to teach their kids these valuable lessons.  But what happens when parents themselves aren’t financially literate?  How then can they teach their children these Life Building Skills necessary to ensure a successful transition from school to life?

Upon Dr. Watkins finishing his statement, one of the presiding executive members of the Parent Advisory Council for Title I immediately asked for the mic to set me straight(I think :))  She said that in Broward County they had a Junior Achievement Program that taught financial literacy to students and that my kids just haven’t made it there yet since they were only in Kindergarten and Second Grade.  Hmmm; I’ll have to investigate!

Responding to Criticism without Being Defensive

As a member of our school advisory council who interacts with educators and administrators, why is criticism or suggestions always followed with defensiveness?  Another parent chimed in stating there were also programs where the kids could go to the bank and learn about using checking and savings accounts and how to write checks and use a debit card.  Of course I had to ask for the mic back – just to set the record straight of course icon smile Financial Literacy versus Financial Life Building Skills

Dr. Watkins was kind enough to allow me a rebuttal.  I added that I was not talking about simply using a checking account, how to use a debit card, or to learn about understanding the free enterprise system as the Junior Achievement Program does.  I was talking about “Building Life Skills” that would serve the children later in life such as learning the difference between a want and a need when making a purchase, the psychology of consumerism, and the mindset needed to achieve balance and happiness in life for our children’s long-term future.

And this is where the rubber meets the road!

Without a doubt, financial literacy is a very important component and I believe students should be required to pass a comprehensive course in high school in order to graduate!  But financial literacy is much more than just learning how to budget,  save, and money management; it also means learning the psychology of consumerism and how to protect yourself from becoming a part of our Debtor Nation…and this is where the rubber meets the road!

The fact is; consumerism is as American as baseball and apple pie.  But in the process, consumerism has also made us a nation of debtors.  If you want it, you’ll get it whether you actually have the cash to buy it or not!

A Nation of Debtors

Did you know that personal debt at the end of the nineteenth century was illicit, illegal, and always personal (between family and friends), and became by the end of the twentieth century, legal and institutional (between a person and a lending institution)?

Louis Hyman, Author of Debtor Nation: The History of America in Red Ink says the growth of consumer credit re-framed the largest business narratives of the twentieth century as the second industrial revolution.  Sounds like this was a very well thought out strategy of capitalism and is definitely a topic and blog post for another day!

Comprehensive Financial Literacy Needed

So the question is not; which is better?  The question is; should  financial literacy be redefined and made more comprehensive to include financial life building skills?  I believe the answer is an unequivocal and resounding YES!  Here are the components I would add:

  • The Psychology of Consumerism:  The why’s, how’s, and when of making purchasing decisions and why the deck is stacked against you as an amateur consumer!
  • Critical Decision Making: How to analyze and compare purchases as well as how and when to consider “alternatives” to making new purchases such as buying used or second-hand or re-purposing an existing resource, or simply coming to the conclusion that you really can do without .
  • The Art of Frugality:  Being frugal does not mean being cheap or having to settle for less!  Frugality, as I have been living it for the last several years, is a virtue!  Learning how to be frugal will free our kids from the chains of debt that many of us have been enslaved to and free them to pursue their dreams!

As parents, could we ask for anything more?  For the record: since my financial and credit meltdown, financial literacy has become a huge part of my family’s life. Critical thinking and analysis is an everyday process we all use and we always discuss finances.  I truly want my kids to be free to pursue their dreams before they get in the game of life – not during or after!

What about you?  Are you teaching your kids Comprehensive Financial Literacy?  Do you feel schools are doing enough to prepare our kids to participate in this ever increasingly credit economy?  Please leave your comments below and share this story with your friends!

Credit Made Simple For the Amateur Consumer

Credit Made Simple Pixel 1024x681 Credit Made Simple For the Amateur Consumer

The following post comes from my Free Better Credit Blueprint Video Lecture Series available on the Udemy Platform

One of the first things you need to know is that a credit score and a credit report are two entirely separate things. Your credit report is raw data, while your credit score is what a lender makes of that raw data using one of dozens of credit scoring models that we, as Amateur Consumers, are really clueless about.

Unfortunately, a lot of you reading this post or viewing the video don’t even know that a credit score is a number that reflects your credit worthiness… at a given point in time.  It’s not just sitting there in some computer with a number already assigned to it.  It just doesn’t work that way.  Your credit score is based on the information contained in your personal credit report at the time that your credit report is pulled.

Different Scoring Models

To determine a credit score from your credit report, lenders use credit scoring models. As I say in earlier videos, there are dozens of these, but FICO is by far the most common and for sure you’ve probably heard the term Fico Score.

Different scoring models stress different aspects of your credit history. For example, one model might tell a bank how likely you are to default on a mortgage while another scoring model might tell how likely you are to let your credit card payments go 90 days late. Depending on what bank you apply for credit with, what type of loan you’re getting, and what model they use, you’ll wind up with different credit score from each one.

Not Just One Credit Score

What this means is that your credit score will change depending on what model is being used to generate it.  In other words, you don’t have just one stable credit score, but rather a range of scores depending on the information contained in your credit report by Experian, Equifax, and TransUnion.  The difference can be as much as 50 points and I’ve personally seen reports that differed by 100 points!

And yes; that is most definitely a wide enough range to push you up or down on a lenders interest rate scale or to just flat out get you denied. So now that you know this fact, think your credit report and credit scores are worth keeping an eye on?  You better believe it!

Building a Credit File

A lot of the information that I personally have learned throughout the years about credit reporting came from researching and reviewing numerous court proceedings, depositions, and testimony.  One of these court cases I reviewed was from January 2005 in the court case of Kirkpatrick vs. Equifax.

In this court case, Equifax Vice President Phyllis Dorman said that when “building a file” after receiving data from a creditor, or when deciding what data to include on a credit report that will be disclosed to a creditor, the first factor considered by the Equifax system was geographic region.

Then its “matching algorithm,” which is known as L90, relies on 13 matching elements. Two of the elements that constitute a distinct category are: (1) exact Social Security number (SSN) and (2) partial SSN (meaning that most, but not all digits are the same).  The remaining elements are (3) last name, (4) first name, (5) middle name, (6) suffix, (7) age, (8) gender, (9) street number, (10) street name, (11) apartment number, (12) City, state and zip, and (13) trade account number.

Credit Attributes

The summary variables that are generated from the raw data are referred to variously as “credit attributes,” “credit variables,” or “roll-ups.” Each of the CRAs has hundreds of attributes that have been created at various times for various purposes, but a typical scoring algorithm uses far fewer.  The primary factors that affect credit scores include:

• payment history, including late payments and collection items;

• balances, available credit, and the percentage of existing credit lines being utilized;

• negative public records such as bankruptcy, judgments, and liens;

• length of the credit history and the mix of credit types; and

• evidence of taking on new debt, such as new accounts or inquiries.

“Generic” Scores and “Industry” Scores

When credit scores are designed and sold to predict payment behavior on a wide range of credit products, they are referred to as “generic” scores. When they are designed to predict performance on a specific type of credit, such as automobile loans, they are referred to as “industry” scores. Some lenders, especially larger lenders, receive credit reports from a CRA and calculate scores themselves using models developed to predict the performance of their own customers and these scores are called “custom” scores.

Now be truthful with yourselves; how many of you reading this post or whom have watched the video knew all or any of what I just went over?   The simple fact is, not only is credit misused but it’s misunderstood by millions of people who don’t know or understand the credit system that they are participating in on a daily basis.

It’s almost like a foreign language to them and some people find the topic confusing or too intimidating to understand but again, you have to get over your fears and challenge yourself to be a better- more informed consumer for the betterment you and your family!

Amateur Consumers vs Credit Professionals

Remember, at the end of the day, we are all amateur consumers.  The banks, creditors, and the credit bureaus? They are all professionals!  The more you learn, like you’re doing by reading this post or watching the Free Better Credit Blueprint Video Lecture Series, the better you will manage your credit and finances moving forward.

Now, I’ve talked to hundreds of people that truly believed that after going through  financially devastating events like bankruptcy, foreclosure, or divorce to name a few, that they were powerless to recover their credit; almost as if their credit controls them, when in fact; nothing could be further from the truth.

Without a doubt, these events will hurt your credit and no one knows that better than me, but you need to understand how credit works so you can make it work for you – that’s the key so please… don’t be a mindless consumer.  Credit is a powerful tool that you can use in your financial life and affects you more than you know beyond having purchasing power.

Knowledge is Power

However again, if you don’t understand the world of credit you participate in every single day, then in fact, you are powerless!  You need to know, at the very least, the credit basics and you need to figure  meaning how to stay out of debt, manage your credit, and then create a new mindset or as I call it; a new “money consciousness” in order to be successful in life!

And for the record; I haven’t used credit in over 2 years which is why I say it affects you in more ways than being a consumer looking to perhaps – make a purchase… you shouldn’t make!

If you haven’t already done so, please read my 4 New Year’s Resolutions That Will Ensure Your Financial Success in 2013 !  So what about you?  Are you setting out to create a new “money consciousness” for 2013?  How much of the information I covered in this post did you even know about?  I’d love to hear your thoughts and comments icon smile Credit Made Simple For the Amateur Consumer


How I Define C.R.E.D.I.T.

Loving Life How I Define C.R.E.D.I.T.

Credit is defined as the ability to obtain goods or services before payment is made, based on the trust that payment will be made in the future.  But here is how I define the word credit by each letter of the word:

(C) Is for Consumerism:

The reason I named my blog The Amateur Consumer is because, in fact, we are all amateurs when it comes to consumerism!  By definition, consumerism means the theory that an increasing consumption of goods is economically desirable.  It also means a preoccupation with, and an inclination toward, the buying of consumer goods.  How exactly is consumerism economically desirable?

In a recent guest post titled “The Psychology of Consumerism”, David M. Carter, a graduate of the master of applied positive psychology program at the University of Pennsylvania wrote “Consumerism can be a devastating psychological addiction that saps our financial resources, well-being, and hope”.  This article is a must read in order to understand the Intrinsic and Extrinsic Motivation behind consumerism.  Believe me; you’ll be glad you did!

(R) Is for Responsibility:

Responsibility is defined as moral, legal, or mental accountability.  For me, the key word in that definition is accountability.  Mr. Carter goes on to say “If your consumerism is motivated by extrinsic values, as you continually seek financial gain and recognition by others in a seemingly never-ending display of profligate consumption (read; keeping of with the Jones’), you find that you have become addicted. “

He said “You are not even aware that this vicious cycle is happening and continue to ramp-up your acquisitive lifestyle, constantly seeking that which will make you feel fulfilled. It just never seems to happen, and you become depressed and often describe being lost.”  I know exactly what Mr. Carter is talking about because I have lived it.  Be accountable for becoming a better, more informed guardian of your own life!

(E) Is for Education:

Education is the key to avoiding credit and financial mistakes!  And without a doubt, the time to have a map is before you enter the woods, right?  So why are so many people truly amateur consumers?  Why do so many of us lack the basic financial “common sense” it takes to manage our lives so that we may live a happy and more fulfilling one?  Now, when I say common sense, what I mean is having a basic fundamental understanding of what it takes to be truly happy living your life, day in and day out.  Not knowing the difference between simple and compounding interest!

So many people confuse lack of financial literacy for lack of “life literacy”!  Understanding what it takes to live a life “debt-free” and on your own terms is something we should all strive for.  I know through my personal journey of surviving credit and financial hell that the biggest epiphany I have had has not been learning how to accelerate the process of credit recovery (yes, this is a fundamental shift in my blog), rather, it has been learning that income, savings, and frugality are the basic staples of “life literacy” if you want to live life on your terms, free from the chains of consumerism!

(D) Is for Discipline:

Every financial guru, credit and debt expert, or personal finance blogger has espoused the view that besides financial literacy, self- discipline is the key to managing credit and debt.  And while there is certainly truth to that statement, the real way to put the “ED” into C.R.E.D.I.T., is to first develop the mindset it will take to live that happy and fulfilling life and then applying self-discipline to that knowledge!

Self-discipline starts with the ability to change and create new habits and refrain from practicing old ones that in my case, led me and my family down the path toward credit and financial hell.  Again, if you can create the mindset necessary to learn how to become “life-literate”, you will never travel the bi-ways of credit and financial hell like I did!

(I) Is for Independence:

Independent is defined as; free from outside control, not depending on another’s authority.  Let’s look as some synonyms for the word independence; self–sufficiency, self-dependence, self-reliance, self-subsistence, self-support.  WOW!

If you are free from consumerism, debt, and the misuse of credit, and then apply self-discipline to your new “life mindset”, imagine what that life would look like?  I know, I know; it sounds like the cure for all your credit and financial ills; doesn’t it?  I can’t answer that question for you, but for me, this is exactly what it has meant.

Now I don’t want to mislead you; for sure, my $1.6 million dollar bankruptcy was a huge burden lifted off my shoulders. Unfortunately for me however, my epiphany came as a result of what I went through. It is my sincerest hope for anyone reading this blog that you can avoid going off that proverbial “financial cliff” and develop the mindset it will take to find that ‘Zen’ in your life.  To know what is truly important!

(T) Is For Transformation:

Transformation is defined as; an act, process, or instance of transforming or being transformed.  So the question here becomes; if you can understand consumerism, the psychology behind it, define what is important in life for you and your family, and then apply the self-discipline it will take to live it day in and day out, could you become independent from outside control and transform your current life into a more fulfilling and rewarding one?  As living proof, my answer is unequivocally YES!

What’s your answer? Please let me know below.  If you liked this article, please share it with your friends by clicking “Like”, tweeting it, adding it to your Google+ topics, or sharing it on LinkedIn icon smile How I Define C.R.E.D.I.T.