Beth Troost :: Blog

The credit market is tightening, and not just for big corporate borrowers.  Consumers are facing a whole new set of lending standards and are finding that the days of easy credit have come to an abrupt halt.  Lenders are no longer freely offering credit to consumers as they have been in the past, often in larger amounts than a prudent borrower should take on.  New lending standards in some areas are restricting loans to all but the most credit worthy borrowers. 

Experian reports that the average credit score is 692, but today that average score may not be enough to get approved for an auto loan.  The Free Press reported today in the Auto News Section that “Some dealers have reported loosing 20% of their sales as buyers get turned down for loans after agreeing to purchase vehicles. GMAC Financial Services said earlier this month that it would make auto loans only to customers with prime credit scores of 700 or above.”   (Full article:  http://www.freep.com/apps/pbcs.dll/article?AID=2008810230340)

It is important for our members to realize the scope of this tightening and pay attention to protecting and improving their credit so that they are able to borrow when they want and need to.   Credit education for all members, even those with above average credit scores is important.  A good way to do this is to invite members into your branches for a complementary credit report review.  Help them check their report for errors and suggest strategies to improve their score.   Of course, the most effective way to protect and improve a credit score is to make all credit payments on time every month.  Credit can also be improved by keeping credit balances to 35% or less than credit limits, evaluating the number of open credit accounts and the levels of unsecured credit.  Average consumers are not used to worrying about the ability to get a loan when needed, but times are changing. 

Over the last few weeks reports of the economic crisis and poor financial outlook are all over the news.   I have seen several media segments in which money management “experts” are advising people to keep a portion of their money in “cash” as a safety net.   

By this they don't mean actual cash, they mean cash equivalent accounts – insured deposit accounts that are liquid or immediately accessible – like credit union share savings, checking, and money market accounts. But they don’t actually say this on the air and I worry that they are sending the wrong message. 

People who work in the financial industry understand what a “cash“ account means, but we should not assume that all of our members and the public watching those money management segments also understand this.  I have heard from a credit union employee that members are coming in wanting to withdrawal large amounts of cash from their accounts in a misguided attempt to keep their money safe. 

Front line staff need to be sure to understand and communicate that money held in these credit union “cash “ accounts are safe and liquid, they are insured by the National Credit Union Share Insurance Fund (NCUSIF).  The NCUSIF is a federal fund that insures member’s deposits in a credit union up to at least the $100,000 federal limit. 

When the media does talk about insured accounts, they most often mention the FDIC and fail to mention that credit union accounts are also insured.  Like the FDIC, the NCUSIF is backed by the full faith and credit of the U.S. government. 

Sometimes financial education involves very basic information communicated in person and through signage, website and statement messages.  For more information to share with staff and members, visit  NCUA at http://www.ncua.gov/ShareInsurance/index.htm 

A fundamental concept in financial education is distinguishing between needs and wants.  Consumers tend not to discriminate between the two and could save money to meet their obligations or save for their goals by realizing that often they want something but they don’t really need it.   The opposite is true for financial advice and education; many people realize that they do need it, but they don’t really want it.  Credit unions should focus some of their financial education efforts on influencing their members and community members to “want” financial education assistance as well as “need” it. 

  According to a study by the National Adult Financial Institute at Indiana State University, less than 30% of U.S. adults view their personal financial knowledge as very good or better, and 8 in 10 think it is important that financial literacy be taught; however the majority of U.S. adults (65%) have not received any financial literacy instruction in the past 12 months.  Participants in the study cite the lack of funds, time, access and materials as reasons for not learning more about financial topics.  In addition, some 6 % responded that they are uncomfortable with financial literacy. 

A similar study, conducted by Princeton Survey Research Associates International on behalf of the National Foundation for Credit Counseling, Inc. finds a similar lack of financial savvy and a tendency not to turn to professional financial educators for help.  This study finds that only 59% of participants pay their credit cards in full each month and 28% don’t know that they can get a free copy of their credit report each year, but that 68%  are “not too interested” or “not interested at all” about learning more about financial issues or seeking professional advice in the next year.  Many participants report that they did not receive financial education at home or at school to help prepare them; responses of learning “not too much” or “nothing at all” about financial issues totaled 55% at school and 35% at home.  Yet, 64% of these people have never received professional advice about financial issues from an individual or an organization. The study finds that most people seek the advice of family members and friends.  Of those that sought professional advice, only 5% went to a credit union. 

 As consumers, it is fairly easy to convince ourselves to spend money on things we want but don’t really need.  On the other hand, it is really hard to spend time and effort on things we know we need but do not really want, like financial education.  Links to the research:  http://www.networksfinancialinstitute.org/Finance/facts-figures/Pages/default.aspx http://www.nfcc.org/NFCC_SummaryReport_ToplineFinal.pdf 

“Touch point” financial education is an effective way to reach members with money management advice and referrals.   Front line staff are in the best position to recognize these touch points and deliver financial education but they need to be trained and empowered to do so.  This advice comes from Lois Kitsch, NCUF’s Real Solutions National Program Manager.   Lois discussed the need for financial education in an audio conference about payday loan considerations for credit unions.  

We all agree that financial education is an important component to member service (and especially to any payday loan alternative), but what is the best way to deliver that information so that it is actually helpful to members?  Lois advises providing small amounts of appropriate information and referrals to financial counseling at “touch points” when interacting with a member one-on-one.   The best time would be when the member is not in a stressful situation and after you have established trust with them.  For example, provide information and referrals when dispersing a loan that helps a member out of a financial bind, not when they are applying.   Lois suggests educating members about the difference between credit unions and payday lenders, and the value of saving for emergencies.  Money management advice can help members evaluate and improve their financial situation; they should be encouraged to determine the cause of their financial stress and make changes in their expenses, earnings, or lifestyle.  Front line staff can use these touch points to refer members to one-on-one financial counseling to help them improve their financial situation.  To do this, employees must know basic money management concepts and be aware of the warning signs of financial distress.

  Sounds great, but how many front line staff have the knowledge and are empowered by their credit union to do this? 

Financial education is a natural and major part of credit union service to members and community members.  It is “people helping people” in a way that we know best – financial management.  Does your mission statement and core values include your commitment to financial education? 

The goal of financial education is financial “literacy”.  A financially literate person has the ability to make appropriate choices regarding money to improve their life.  This requires understanding the choices; making conscious and informed decisions; and being able to apply money management skills.  Financial literacy is not a static group of tools and facts that one can learn once and be done.   That just won’t cut it in our fast paced, ever-changing world. 

I'd rather see the word  "skilled" added instead of "literate" to reflect this need to be able to adapt and apply financial knowledge.  It sounds so much more positive and reflects ability.  Yes, all people need to aquire basic financial literacy as a start, but in order to keep up and prosper, we need to be skilled.  CUNA’s recently published Model Youth Program Guide states that financial literacy depends on acquiring a set of skills rather than a body of facts. These skills include knowing how to get and use information necessary to make sound financial decisions as personal financial circumstances arise and change.

It is important to offer both youth and adult financial education.  Youth need to learn early about savings, goal setting, and financial choices.  Because today’s economic challenges and financial choices come quickly, they can outpace the ability of adults to handle their money.  Adults need to continually update their knowledge and skills to keep pace, and credit unions are a natural partner to help them stay "financially skilled". 

There are so many negative financial buzzwords bombarding the consumer:  “foreclosure crisis”, “troubled economic times”, “the credit crunch”, etc.  Consumer anxiety (and mine!)  rises each time we turn on the TV or pick up a paper and are faced over and over again with the news of economic doom and gloom.  Economic hot topics come and go with various new buzzwords; but the personal financial management practices to deal with these challenges remain the same.  These basic concepts include spending less than you earn; protecting your credit; documenting income and expenses; creating a spending and saving plan; avoiding financial fraud and scams; and being a smart consumer of financial services.   Let’s combat the negative economic buzzwords with basic money management advice and help members feel competent and capable of weathering these “challenging economic times”!

Today's Detroit Free Press, and I'm sure countless other publications, reported the gloomy first quarter results from the Mortgage Bankers Association report.  Foreclosures and late payments are at record high rates.  Michigan's delinquency rate for all loans was at 7.84% for the first quarter, the second highest rate in the nation. 

http://www.freep.com/apps/pbcs.dll/article?AID=/20080605/BUSINESS07/80605058/1020

So many (16%) homeowners now have no or negative equity in their homes.  That percentage is expected to continue to increase to affect almost one in four homeowners! 

Credit unions can help with financial education for members and community members who are are anxiously watching their equity drop and wondering how to weather the storm.  Helpful at this time are basic money management and budgeting techniques as well as help with financial/housing counseling and information about community services.  There is an abundance of misleading information and for-profit foreclosure "assistance".  Credit unions need to let their members and the community know that they are a trusted source for real financial education and assistance.    

I'd like to showcase the ways that Michigan credit unions are helping with financial education... What are the best ways to reach and assist members and community members?  Please let me know what your credit union is doing for financial education in this area.  You can post a reply on this blog and share your ideas, successes and challenges.  We didn't create this mess but we can help clean it up!

The President's Advisory Council on Financial Literacy is seeking comments on five questions.  The first question is how to improve financial literacy for youth.  Anyone can post a comment.  The questions and e-mail address for comments can be found at this link:  http://www.treasury.gov/offices/domestic-finance/financial-institution/fin-education/council/032008_SolicitationofPublicComments.pdf

I've posted the following response to be incluced in the comments:

The single most important message to teach our youth is the importance of saving.  A simple and powerful concept, saving is the key to financial well being.  Today’s youth are bombarded with “spend” messages in our current culture of consumption.  Saving is a learned habit that should be started young. One way of improving financial literacy is to encourage community involvement in helping youth learn the value of saving.  Credit Unions throughout the country dedicate staff and time in school classrooms teaching about saving and operating student credit unions that encourage the habit of saving.  In Michigan, there are more than 300 in-school, student-run branches facilitated by 48 credit unions.  During the 2006-07 school year, 42,000 Michigan children were educated in the areas of saving, budgeting, credit and money management. The Michigan Credit Union League’s (MCUL) web site www.mcul.org offers free, in-class financial literacy presentations to any credit union for use in the classroom as well as a comprehensive “Credit Union Student Branch Handbook” available for a free download.   Credit unions are reaching youth with “save” messages and helping them form the important habit of saving. 

What ideas do you have? 

Check out this video of Art Konotopskiy, Money Smart Ambassador, and Denise van Des Ster from METRO Credit Union at the Fitzgerald High School Student Credit Union on the MCUL You Tube site: 

http://www.youtube.com/user/MCUL6.

Great news! 

Art, a member of the METRO Credit Union student branch at Warren Fitzgerald High School has been named "Money Smart Ambassador" and won the coveted $10,000 college scholarship!  This award is given out as part of the annual Money Smart Week coordinated by the Federal Reserve Bank of Chicago, Detroit Branch. 

Art is a very well spoken young man and he thanked METRO Credit Union for letting him know about the scholarship opportunity and for operating the student branch in his acceptance speech at the kick-off breakfast on Monday. 

Look for more information about this exciting event in the Monitor and on the MCUL website.  Michigan credit unions make a difference in the financial lives of students with youth financial literacy and student-run credit unions!