Greenville Business Magazine 2010 April issue : Page 54
››executive lifestyle Manage Debt Instead of Letting it Manage You BY MARY ANN HESTER finance personal
>>executive lifestyle - Personal Finance
Mary Ann Hester
Personal debt is now as American as apple pie. Yet it is a hole into which many people plunge headfirst without understanding there is a difference between good and bad debt. Debt is a complex calculation and either good or bad obligations can add up fast.
According to Ken Harper, CEO and President of Greer State Bank, “responsible borrowing is what you can afford now…with our concept of linear thinking, we have assumed that there is an unwavering, upward-sloping trend that means your income and house value will always increase. Borrowing on future value has been the standard but is now disconnected with reality with the downsizing of the American workforce.”
Homes have always been considered “good debt” as their values have risen and risen – until recently. In some parts of the country home price devaluations have resulted in mortgages that are higher than the current value of the home and homeowners have gone into foreclosure or just walked away. Mortgage rates tend to be lower than other forms of debt, are tax deductible and are still an important part of the “ownership” part of the American dream. John Windley, President of South Carolina Bank and Trust says “it is critical that the homebuyer be realistic. When a buyer gets a mortgage from local lenders, it is a much more personal relationship and we can help guide our customers toward what is reasonable.”
The Cure for Bad Debts:
Education and Then Self Control
Experts have a general rule of thumb that all your monthly debt should not exceed 35-40 percent of your gross income. Many individuals do not know what percentage they owe, but they know that it is too much.
According to John Waskin, CEO of Bill Free/American Credit Counselors, “we are stupid people when it comes to financial education. Only 40 percent of high school students receive any economic training. We don’t teach kids how to balance a checkbook, what a credit card is, paying rent. We just say ‘figure it out.’”
To counter this problem, Greer State Bank offers high school students a course called “All About Credit” twice a year, along with a course for younger students on “Teaching Children to Save.” (For more information on either of these programs, contact Judy Edwards at jedwards@greerstatebank.com.)
Robert D. Manning, a professor of finance at Rochester Institute of Technology adds, “Education is important. We used to encourage kids to save, and that has been missed. Students now refer to their credit cards as yuppie food stamps. They see the card as entitlement and they will be in debt all their lives.”
According to John Windley, “college students do not realize that their credit score follows them all through life and can affect the rate they pay on car insurance and even renting an apartment. This is your adult permanent record.”
But what if you are already over your head in debt? Ken Harper recommends, “talk to your banker early and first. We want to help you out of the hole you find yourself in.” John Windley reiterates, “we need to sit down and talk this through with you. There are non-profit credit counselors that can also help. Unfortunately, the natural tendency is to run and hide instead of addressing the issue. That is never the answer.”
But the best solution for a healthy relationship with credit is to have a plan. Set a goal and treat it like your personal business plan. As Ken Harper astutely put it, “hope is not a strategy.”
Who are Fair and Isaac and why does my FICO™ score matter?
In 1956 engineer Bill Fair and mathematician Earl Isaac founded Fair Isaac Corporation. In 1958 they started building a credit scoring system that by 1981 became the standard of measurement for the three US credit bureaus. They use five categories with these weights: 35 percent payment history, 30 percent amount owed; 15 percent length of credit history; 10 percent new credit; and 10 percent types of credit used. In 1997, the American Bankers Association honored the two founders with the Distinguished Service Award for their works in assisting lenders assess credit risk. They became a public company in 1986 and in 2009 they officially adopted FICO (Fair Isaac Corporation) as their corporate identity. As FICO CEO Mark Greene says, “The use of the name FICO is a simplification of company’s identity, not a change in strategy…our commitment remains as strong as ever to our clients’ businesses. We will continue to offer the full breadth of analytical and decision management products and services…” They are a public company with the NYS ticker symbol FIC and they have a website that can assist consumers in judging their credit health named www.myFICO.com.
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