Financial CPR: P is for Protect Yourself

This post is the second installment in the Financial CPR series. Financial CPR comprises a set of tools to use in the event of a sudden crisis, such as unforeseen unemployment. The following information should be seen as general education and is not intended to constitute individual financial advice.

Anticipate problems.
Look at your Cash Flow Plan and determine which bills you’re going to be late on or unable to pay.

Educate yourself.

• Use your Cash Flow Plan as a guide to all your actions;
• Understand your position as a consumer (How valuable is my business? How long have I been a customer? What rates are fair for other people in my circumstances?);
• Have a copy of the Fair Debt Collection Act;
• Read your lending agreements;
• Learn about your repayment options;
• Know the terms of default and consequences of default.

Prioritize.
Put your bills in order of their importance in terms of consequences for non-payment. For example, not paying your mortgage could result in eventual foreclosure and losing your house. Not paying your credit card bill in full could damage your credit but will not otherwise threaten your security.

Know what you’re asking for.
Before you dial the phone, have a plan for what you want. Do you want to skip payments? Do you want to make interest-only payments for a period of time? (Remember to research what your repayment options are ahead of time.)

Contact your creditors.
Taking the initiative to contact your creditors will keep you in the driver’s seat. These companies are much more willing to work with you if you don’t make them chase you down after payments have already been missed.

Know what you can deliver.
Your credibility is absolutely priceless. Never promise something you know you can’t follow through on. It destroys your credit and may lead to harsh penalties and punitive action on the part of the lender or service provider. Even if you think what they’re offering you is a “good deal,” DO NOT accept it if you are not able to deliver. It is better to get off the phone without reaching an agreement than to agree to the impossible.

Negotiate.
Try to get the best deal for yourself. Remember, credit terms are not about your value as a person or how likeable you are. This is a business transaction, and you will only get as much as you’re willing to ask for. If you feel like the person you’re talking to is not willing to negotiate, ask to speak with someone else.

Go up the chain of command.
Oftentimes the people you get on the phone the first time are not authorized to make a deal. Ask to speak with a supervisor (several times if you need to) and keep going until you get to someone who has the authority to make a decision.

Don’t take it personally.
Creditors have been known to use every trick in the book to get you to make an emotional decision if it means they get their money. They will try to make you feel guilty for not being able to make your payment. They will try to manipulate you into prioritizing their payment over your other (more vital) obligations. Do not be fooled. Know your rights and know what you can realistically and reliably deliver.

Be accessible.
Even if you can’t make any payment at the present time, you still earn credibility points by staying in touch with your lenders and apprising them of your situation. This doesn’t mean you have to take the time to talk to every single collections agent who calls your house. Make appointments to return their calls, and then follow through.

Borrow judiciously.
During a financial crisis there is always a temptation to hold on to your cash and to live on credit. Sometimes this is inevitable, but you always want to think carefully about how you go about it. Get the facts. Credit cards offer flexibility but high interest rates make revolving debt very expensive. Tapping into home equity can be lower cost but puts your property at risk. Retirement accounts are protected from judgment even during bankruptcy – don’t touch them if you can possibly avoid it!

Think about the long-term.
Carrying debt should never be the long-term plan. There is too much inherent risk for debt to become unmanageable if anything interrupts your ability to pay. Try to minimize how much new debt you’re incurring during this time by keeping your expenses as low as possible.

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Financial CPR: R is for Recovery

This post is the third installment in the Financial CPR series. Financial CPR comprises a set of tools to use in the event of a sudden crisis, such as unforeseen unemployment. The following information should be seen as general education and is not intended to constitute individual financial advice.

This situation does have an end.
At some point, the unemployment crisis will be resolved and it will be time to think about how to get back on your feet. Ideally you will have:
o Kept your monthly deficit to a minimum;
o Protected yourself from penalties due to non-payment of accounts;
o Incurred as little new debt as possible.

Don’t zone out!
When you have been through a period of high stress it’s normal to want to decompress once the worst is past. You may feel an overwhelming “urge to splurge” and buy yourself those comforts you’d been denying. But before you throw out your budget, take a deep breath and pause.

Create your Recovery Cash Flow Plan.
Now that your income is back on track, you will need to move forward with paying your regular bills and addressing any debts you accumulated during the interruption. Your Recovery Cash Flow Plan should allow for the following:

Net Income
(minus) Fixed Expenses (reg. housing payment, reg. car payment, utilities, etc.)
(equals) Discretionary Fund

Take the Discretionary Fund and subtract your necessary out of pocket costs. Then try to budget for one non-necessary treat if you can, such as a monthly movie with the family.

Discretionary Fund
(minus) Out of Pocket (groceries, gas, parking, etc.)
(minus) ONE treat (if you can afford it)
(equals) Repayment Fund

Resume payment on your regular bills.
Once you have income again, begin making on-time payments on all of your regular bills. This does not necessarily mean that you return to all of your pre-unemployment expenditures. If you reduced your cable package for example, you may need to continue with the lower-priced plan for awhile until you’ve paid off some debts.

Determine your proposed repayment plan.
Divide the amount in your monthly Repayment Fund by the number of creditors for an equitable repayment strategy, or direct more of your resources toward certain accounts to give them priority.

Re-connect with your creditors.
Using your Recovery Cash Flow Plan as ammunition, contact your creditors and propose the terms of repayment. You may need to negotiate like crazy to get your creditors to accept the plan, and you may not be able to budget for the “treat” at this time. But try to resist at all costs having to miss payments on any of your regular bills in order to repay debts.

Be secure for the future.
Once you’ve paid up all of the debts, convert your Repayment Fund payments into a Contingency Fund payment. Try to have three to six months of financial reserves for any future disruption in income.

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Fight, Flight, or MasterCard

There is a lot of buzz right now in the mental health field about advances in neural imaging and the growing application of brain scans. It used to be that the only “topography” clinicians cared about was that of the conscious (pre-, sub-, un-, and regular), but now there is a surge in collaboration between those who study the brain and those who study the mind.

Including, it seems, those who study how the mind dictates economic behavior. This brings us the relatively new field of neuroeconomics.

The Economist just published a fascinating article about a Carnegie Mellon study where researchers mapped the brain activity of subjects evaluating a product and deciding whether or not to buy it.

In the experiment, subjects were shown a series of products flashed on a computer screen for four seconds. After each product was shown, its price was displayed for four seconds. Finally, the subject had four seconds to decide whether or not to “purchase” the product out of the $40 fee they were given for participating in the study.

The researchers discovered that different parts of the brain handled different sub-tasks. The nucleus accumbens, which processes potentially rewarding stimuli such as food or monetary gain, was activated when the subject was viewing the product. When the price appeared, activity switched to the insular cortex. The insular cortex is associated with expectation of pain or presentation of upsetting material.

The more attractive the product, the greater the activity in the nucleus accumbens. The more prohibitive the price, the more fired up the insular cortex became.

These reactions were synthesized by the medial prefrontal cortex, the part of the brain involved in rational calculation and predicting outcomes. The prefrontal cortex had to make the “choice” between balancing the desire for the product with the anxiety created by the price.

Here’s what’s interesting about these findings. First of all the evidence contradicts one of the most fundamental tenets of classical economics, namely that when we trade something (i.e., money) we must decide if the value of the trade is worth more than the future value of what is being given up. The Carnegie Mellon study shows that we’re not so much concerned about future utility as we are about the present pain of paying for something.

If you think about this in your own life it makes sense. When you are in a store and really want to buy something, the strong desire to possess the item can often override the more sensible (but abstract) idea of “I should save this money toward my long-term goals.” It’s the same principle when you have to spend a lot of money on something that is necessary (say car repair or health insurance). Even though you know it’s good for you (high utility), the pain of paying a relatively high price causes you to seize up with anxiety.

Let’s go back again to the prefrontal cortex for a moment. In this choice scenario, the prefrontal cortex is charged with being the mediator between the impulse for pleasure and the instinct to avoid pain. But this part of the brain has another vital function. It is one of the most important mood centers as well. Disturbances in the activity of the prefrontal cortex are linked to Major Depressive Disorder, Bipolar Disorder, and all types of mood dysthymia.

It makes one wonder how this part of the brain can execute its dual role. I’m no neurobiologist, but it seems like the “rational” function might be compromised when one is also in an affected mood state. I would venture to bet I’m not the only person on the planet who has ever tried to spend her way out of a bad mood.

The other implication of the study is that it explains why we love our credit cards, despite repeated demonstration that using them can be dangerous or even downright harmful to our economic security.

If when we buy something we’re choosing between pleasure and pain, then the biggest allure of charging something is that it removes pain from the equation. It obscures the anxiety of parting with actual money and makes the experience more abstract. After all, what is “future money?” Of course we will pay that off in the future! We always have the best of intentions about what our future self will do.

It’s only when debt becomes a problem that charging will once again engage the insular cortex in deciding a purchase. And then suddenly there is the desire for the product contending with the pain of parting with money and anxiety about how to manage the debt. Not a pleasant mood state to be in.

Studies like this one are incredibly valuable because they illuminate the process behind our most “irrational” choices. Hopefully as we better understand the fundamental workings of the brain, we can stop seeing ourselves as flawed beings for operating the way we do.

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Debt, It's Not Me, It's You.

“I’ve kept up with the debt payments as long as I can. I mean, I charged the stuff and I agree that it should be my responsibility to pay it off. But in 6 months my rate has gone from 0% to 12 to 23 and now it's at 33%. Credit card companies have become worse than loan sharks. I don’t think it’s right that they can charge so much interest that you can never pay off your debt. And when you’re struggling they call your house night and day and treat you like some deadbeat! I’ve tried and tried, but if I pay them what they ask I won’t even be able to afford to feed myself. So forget it. They’re not getting a penny more of my money.”

Most people agree that if they borrow money they should pay it back. They will even agree that it is acceptable for a lender to charge interest on the amount borrowed (unless their religion forbids it). But what happens when the terms of repayment go beyond a person’s idea of what is fair and reasonable, or when the borrower feels powerless to meet the lender’s demands?

As terms become more unbalanced in favor of the lender, the borrower’s sense of ownership for the debt decreases.

Call it the consumer's APR: Adjusted Personal Responsibility.

I’ve said before that lending is a business, and right now the lenders are holding a lot of cards. Regulatory caps on interest rates and fees have been eroded in recent years, and consumers live in a world where the 0% APR on your Visa can jump to 23% (or higher) just because you’re late paying the electricity bill. These are pretty tough terms. Factor in the aggressive practices of collection agents and you have a situation where the besieged borrower, already stressed, now feels attacked and victimized.

In these situations, the mind will reframe the circumstances in a way that preserves the borrower’s sense of his own self-worth (“goodness”) and will recast the lender as predatory, unfeeling, and downright evil.

Part of the problem is the way that consumer goods in general, and credit in particular, are marketed and sold. In order to ease consumers through the anxiety that comes from parting with their money, they are presented with the option of buying on credit. And in order to get the consumer to override their natural aversion to debt, they are flattered and told that this credit is something they’ve actually “earned,” something available only to people who are “worthy.”

So when a lender switches from acting like a loving parent or an approving friend to acting like a wronged lover, this can come as somewhat of a shock to the consumer. The consumer may experience the lender’s escalating (punitive) interest hikes as erratic and unreasonable behavior.

First, the borrower is wounded:
Creditor, I thought you loved me!
Next, the borrower reproaches himself:
Maybe I’m not as great as Creditor said I was.
Then the borrower’s sense of self-preservation kicks in:
This Creditor is acting like a real creep.
Finally, the borrower rejects the negative message:
Creditor, we’re through.

The “break up” can take a number of forms depending on the situation. Maybe the borrower stops answering the creditor’s calls or opening their letters. They may transfer the balance to another card (if they’re able), or take steps toward filing for bankruptcy.

Since you cannot actually break up with a creditor, all of these scenarios are bound to cause more grief for the borrower than they will for the lender. Trust me, you can't punish MasterCard by throwing their bills in the trash. Eventually they will get your attention.

However, I do feel that creditors are taking the wrong tactic with their penchant for ever higher fees and interest rates. I’ve spoken with many consumers who feel personally betrayed by the actions of their creditors. Having experienced extreme consequences for what they perceive as relatively minor missteps, they are bound to be wary of exposing themselves in the same way again if they can possibly avoid it.

Creditors should be concerned about the rising tide of consumer anger. When creditors hold all the power in a relationship, they also hold a higher proportion of responsibility. Even in Shakespeare's day, nobody cried for the money lender.

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Are You In (Over Your Head)?

You may be surprised to hear that I’m actually pretty temperate on the topic of credit. Though I’ve seen how debt can cause serious strife, I don’t believe that the lending industry exists to deliberately wreak havoc in the lives of its customers. Profits are profits, and for better or worse this industry profits by siphoning off the earning power of all those who carry a balance. Caveat emptor, cardholders. At least read the Schumer Box before you’re seduced by the suggestion you’re “worthy” of “platinum status.”

My general neutrality ends when lenders cross the line between offering a product and enabling an addiction. Arriva is being positioned as a card designed for the gaming lifestyle. How so? Because the major selling point of the Arriva is the fact that you can get a cash advance of up to 100% of your credit limit. You know, because throwing your car keys or the deed to your house on the table after you’ve lost all your money is only really done in movies.

I won’t belabor the facts about how Arriva charges you 3% on every transaction (makes the $5 fee on casino ATMs seem like a downright bargain), or how Arriva’s interest rates, from 15.49% to 24.49% are significantly above the current industry average of 13.16%. The terms and conditions page lays it all out for you in black and white (and red, with pictures of pretty girls and guys having loads of fabulous fun).

So why does this product fill me with outrage? Because it’s primary attribute is that it enables a problem behavior. “Enabling,” in the addictions world, is defined as depriving the addict from the consequences of their behavior in a way that prolongs the cycle of addiction. Labels can sometimes distract from the point at hand, and I want to be clear that I’m not labeling all Arriva customers gambling addicts. But when you choose to borrow money at 15%+ so that you can continue to gamble, it might be time to take a hard look in the mirror.

For the non-problem gambler, it hurts to lose money. It hurts, but the non-problem gambler uses this environmental feedback to enter a healthy decision-making process that goes something like this:

“I came to the casino with $500 to gamble with. I’ve lost my $500. That sucks. I’d really like to continue gambling – maybe I could win my money back! No, I should step away from the tables (slots, etc.). Five hundred was my limit, and I can’t afford to lose any more.”

The difference between the problem- and the non-problem gambler is that the problem gambler’s persistent impulse to continue gambling overrides the negative environmental feedback. He/she engages in progressively more risky behaviors in order to continue gratifying the impulse.

The Arriva is the enabler here, because this card's entire premise implies that it’s perfectly okay to borrow money to continue gambling. And Arriva is hardly a disinterested enabler. The parent company of Arriva, Global Cash Access, is "a leading provider of cash access products and related services to approximately 960 gaming properties..."

The message that it's okay to borrow to gamble is also obscured by offering rewards and points that seem almost like the consumer is getting a deal.

This is a gross distortion of reality. A person who borrows $5,000 – oops, make that $5,150 because you have to tack on the 3% transaction fee – will pay back $463.59 a month for an entire year, and Arriva will collect $563.08 in interest and fees above the $5,000 you withdrew. That's a great deal for Arriva.

What do you get? Well, you get a chance to gamble with that $5,000 and you get a whopping $37.50 in cash-back rewards (redeemable for food or merchandise on the casino floor). And don’t make a late payment over the course of the year – I computed the above example using 15.49%, the lowest rate offered.

Arriva is a product that profits from the poor choices and limited options of its customers. It might even be subject to products liability regulation because offering high-cost credit for gambling purposes is inappropriate and predatory.

Bottom line: it feels bad to lose money. It feels bad to have to walk away from an activity that’s fun and exciting. It feels bad that this is your vacation, and you don’t want to have to stop having fun on your vacation.

Sometimes things happen in life that are difficult and unpleasant. When we can’t face this, we enter a process of denial that takes away our ability to make good choices. Arriva promises escape (or delay) from the pain of loss or anxiety in much the same way one might use opiates. It’s important that potential consumers examine the dangers of this product, and try to limit their exposure to risk before they’re in an emotionally-charged situation.

When it comes to using Arriva to gamble, just say no!

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