Ask Dr. Per Cap

Ask Dr. Per Cap is a program funded by First Nations Development Institute with assistance from the FINRA Investor Education Foundation. Nimiipuu Community Development is happy to share this column as partner with Native Financial Learning Network funded by Northwest Area Foundation.

Is FICO Fair?

Dear Dr. Per Cap: 

I made some mistakes a while back that appear on my credit report as collection accounts.  Since then I’ve been careful managing credit but my low FICO score makes it hard to borrow.  How can I prove to lenders I’m better than my credit score?

Signed, 

FICO Failure

Dear FICO,

Don’t be too hard on yourself.  Contrary to how banks and lenders might make you feel there is much more to life than having a great credit score.  Please don’t give a number on a credit report the power to define who you are.

If it makes you feel better many consumers are in the same boat – stuck with bad credit scores from old missteps even though their recent credit history is clean.  I always tell people that a FICO score, which ranges from 300 to 850, is not a perfect measure of one’s financial character and people can be unfairly burdened by a low score. For example, delinquent accounts can be factored into a credit score for up to seven years making them really tough to live down, even though a person can make a lot of positive changes during that time.  

Some good news is that banks and creditors are beginning to rely less on FICO scores when making lending decisions because they’re learning FICO isn’t always the best measure of creditworthiness.  More are turning to in-house credit scoring models which factor in stuff FICO doesn’t consider like bank balances, overdrafts, and a borrower’s lending history with their specific bank.  They argue their methods are more accurate than FICO.

Moreover regulators are asking banks to rely less on FICO scores so fewer folks turn to payday loans.  Even Fannie Mae and Freddie Mac, the federally backed home mortgage companies, are looking into allowing lenders to use credit scores other than FICO, such as VantageScore which was created by the credit bureaus as an alternative to FICO.

Meanwhile the Office of the Comptroller of the Currency, a federal bank regulator, recently determined that its own credit score guidance to banks was negatively impacting minorities and people of color.

So hopefully we’re in the beginning stages of a major shift that will enable more consumers to access affordable credit.

In the meantime I recommend shopping around the next time you need credit by asking different lenders what types of credit scoring models they use and if they consider information not factored into a traditional FICO score.

A good place to start is a Native led community development financial institution.  I’ve written about CDFI’s in this column before.  They’re non-profit lenders with a social mission geared toward underserved communities.  Many tribal communities have locally managed CDFI’s but if your community doesn’t have one, there are regional Native CDFI’s that might be able to work with you.

For more info check out the Native CDFI Network website at www.nativecdfi.net.

Investing Apps for Newbies

Dear Dr. Per Cap: 

Are investing apps like Robinhood and Acorns the best way for a first time investor to buy stocks?

Signed, 

Eager Beaver

Dear Eager

There’s no denying investing apps are taking the world by storm.  New investors are pouring into the market in record numbers and their influence is felt in meme stocks, cryptocurrencies, and other fast paced trends.

Let me say I’m a fan of any movement that encourages people to invest.  Moreover, many financial technology or fintech apps make it very easy for a novice investor to get started with little or no money upfront.  Consider this.

  • Individual investors in the U.S. now own more stocks than any time in history.
  • Millions of new brokerage accounts were created during the pandemic.
  • The stock market has hit more than 50 record closing highs this year alone.
  • Lockdowns and stimulus provided people with time and money to invest.

This all sounds great but I worry some apps are oversimplifying the investing process by turning it into more of a video game and entertainment experience than an investing mindset.  Spend a few minutes scrolling the investing apps mentioned above and you’ll know exactly what I mean.

Another trend we’re not hearing about as much is the fact that margin debt to buy stocks is also at record levels.  This means many new investors are speculating using borrowed money and that’s had bad consequences for more than a few.

The first step before investing any money is always to take time to learn what you’re doing.   I know you’re raring to go but really – slow down.  Set some goals, identify an investing time frame, and establish your risk tolerance.   Unfortunately some investing apps are a little light on this part.  For example, I’ve used Robinhood and it has educational tools, but you have to search for them.

So before making any trades please do some homework and check out other investing apps and websites before picking one.  There are some older, more established online brokerages that offer similar features while also providing more resources to help you make investing decisions.  I’m not saying one is better than another.  Just that different apps approach investing differently and each has pros and cons.  Pick the one that best suits your needs.

To learn more check out this video I made with Sequoyah Fund, a really cool tribally led financial services provider.   It explores the investing app craze and some alarming trends.

Wills Made Easy

Dear Dr. Per Cap: 

Is there a cheap way to write a will?  I don’t want to hassle with an attorney.

Signed, 

Need a Will

Dear Need

Depending on your situation writing a will doesn’t have to be a major undertaking.  In fact it can be pretty straight forward.  However, as a Native person there are questions to consider.  For starters do you live on the rez or are you an urban dweller?  Do you have individual ownership in any trust land?  If so, does your tribe have a probate code?

I’m told the only tribe with its own probate code is Sisseton Wahpeton Oyate so unless you’re rocking that Santee Dakota blood, your tribe is subject to the American Indian Probate Reform Act of 2004.  AIPRA supersedes state laws when determining how trust lands on reservations pass from one generation to the next.

I reached out to a colleague for timely advice on this topic who explained that many people don’t realize a written will is only effective upon a person’s passing.   So you can change or edit a will any time before then.  Major life changes like marriage, divorce, birth of a child, or a death in the family are common situations when a person might rewrite a will.

You also don’t need an attorney to write a will and it doesn’t have to be fancy. Heck, you can write one on the back of an envelope with a purple Sharpie as long as you are 18-years-old and the will is witnessed by at least 2 disinterested parties of sound legal mind.  That’s legal speak for a level headed person who isn’t a close relation who might benefit from your estate; so no children, grandkids, husbands, wives, significant other, or anyone else who stands to inherit any of your assets.

Next step is to safeguard your will.  Nope, a coffee can under the bed doesn’t cut it.  And the BIA isn’t in the business of storing wills so don’t hotfoot it to your local agency office.  Better to buy a small home safe or open a safe deposit box at a bank so your will can’t be stolen or altered without your knowledge.  Then make sure a trusted person can access the document if necessary.

I’m glad you’re looking ahead and taking ownership because there’s more to personal finance than bank accounts, budgets, and credit reports.  Life in Indian Country would also run a whole lot smoother if more folks paid attention to estate planning.

For more info about wills and AIPRA, check out this handy guide created by Montana State University Extension and its tribal partners. 

Hot Job Market

Dear Dr. Per Cap: 

I work a tribal job that requires a college degree.  However, I see listings for delivery drivers that offer wages and bonuses that pay better.  I’m really tempted to switch but my friends say I’m crazy to leave a real job.  What should I do?

Signed, 

Debating

Dear Debating:

Millions of Americans have similar thoughts.  The U.S. is currently undergoing a labor shortage of epic proportions.  In fact the country is more than 4 million workers light of a well-staffed labor force.

Economists are puzzled over the exact reason.  However, many point to a growing movement during the pandemic called The Great Resignation which has inspired people to reexamine their lives and careers.  Early retirements, scaled back work hours, and dramatic career shifts have been the result.

Employers are responding with big pay hikes and hiring bonuses like the ones tempting you.  There’s a McDonald’s near me that’s offering new hires as much as $20 an hour.  That’s forty thousand bucks a year.  Pay that competes with some “real jobs” your friends talk about.

For someone who spent years working in the service industry that label of a job not being real if it doesn’t require a degree or gets your hands dirty always ticked me off.  And if there’s one thing the pandemic has taught, hard working folks in supermarkets, shipping companies, and warehouses are vital to the economy and our modern way of life.  Don’t let peer pressure influence your decision.

You need to ask yourself what’s more important?  A paycheck or the nature of the work you do to earn it?  Higher pay is great but only if you enjoy what you’re doing.  Then again a meaningful career is a tough road if you can’t pay your bills.

I recommend a thorough review of your current expenses along with your current income.  Then compare how much a new job with higher pay will impact that bottom line.  If you see a significant jump in your disposable income, like 20% or more, a switch might make sense.

Then follow up with some soul searching to see if you’re emotionally ready for a very different type of work experience.  Also talk with your spouse, significant other, children, and any other family stakeholders who will be impacted by your career change.  You’ll find your answer when you think it through.

Auto Pay Pros and Cons

Dear Dr. Per Cap: 

I have all of my bills set to auto-pay.  I also use auto-pay for monthly subscriptions for streaming apps and razor blades, but my money wise girlfriend tells me auto-pay is a bad habit.  Is that true? 

Signed, 

Auto-Pay Ray

Dear Ray:

I get it.  Auto-pay is handy technology that enables consumers to pay bills on time with automatic withdrawals from a bank account, mobile payment app, or digital wallet.  But I understand your girlfriend’s concern because out of sight, out of mind isn’t always the best practice when managing money.

And there lays the good and the bad with auto-pay.

Auto-pay can certainly save time, effort, and even money if you’re someone who still mails payments like me.  Hey I admit – I like writing checks and I’m a sucker for Scooby-Doo stamps.  However, managing money is not a spectator sport and what might feel like a hassle, repeatedly dealing with bills and transactions, is actually a great way to keep finances on track.

Unfortunately, people who rely on auto-pay run the risk of completely ceasing to pay attention to their bills.  The hands off approach can sometimes prevent them from seeing the big financial picture and taking action.  Here are some examples.

  • Electricity bill is significantly higher in June than last year?  Maybe the AC needs servicing or the thermostat is set too low.
  • Water bill keeps creeping up two months in a row?  There could be a leak somewhere.
  • What about that free one month trial to Cheese of the Month Club?  Yeah, nobody noticed that high end cheddar the last time you made Indian tacos so cancel the subscription before monthly auto-payments kick in.

Many people today have so many auto and digital payments draining money from their accounts they can’t keep track and it ends up costing them more in the long run.  Here are a few tips to avoid being that person who flies exclusively on autopilot finance only to find it’s a bumpy ride.

  • Set up text alerts from your bank to notify you when auto-payments are made.  This will remind you when, where, and how much of your money is leaving your accounts.
  • Limit the number of auto-pay providers you use.  Pick one, such as a bank account or a single payment app, and use it for all of your auto-pays.
  • Pay attention to subscriptions that automatically renew and their costs.  Many subscriptions, like my daily newspaper, reel you in for a low teaser rate for the first twelve months.  After that the subscription automatically renews every month and the rate can increase too.

And lastly – hang on to your money wise girlfriend.  She sounds like a keeper!