I have been reading Liz Pulliam Weston’s MSN Money columns for a couple of years. Although Liz writes about a lot of different topics, her main focus tends to be credit-related issues, which is a topic I don’t usually cover. She’s even written a couple of books on the topic (Easy Money* and Your Credit Score*). So, when I get credit-related questions, I send them to Liz and she answers them for me.
Below is an interview I conducted with Liz via email. I thought her answers were very thoughtful and I’m very appreciative of her taking the time out of her busy schedule to answer them for me.
How long have you been writing about personal finance? How did you get started?
Iâ€™ve been writing full-time about personal finance since 1994, when I was a reporter at the Orange County Register. Iâ€™d done a stint previously as a business writer at the Seattle Times and had a degree in economics, but Iâ€™d taken a few detours (as a feature writer and a political reporter) before deciding that writing about money was what I really wanted to do. To get up to speed, I took the Certified Financial Planner training course after work at University of California, Irvine, which was grueling but well worth the effort. I covered personal finance for the Los Angeles Times for four years before leaving to write for MSN Money in 2002.
Besides writing your columns and books, what else do you do? Or, do you have time to do anything else?
I chase around after my 5-year-old and try to pay attention to my husband once in awhile.
I actually do a lot of radio and TV stuff these days, which is part of promoting the columns and the books. I have a regular hit on Fox Business and talk to the folks at Marketplace Money fairly frequently. The credit crunch and foreclosure crisis have offered a lot of opportunities to be a talking head!
Iâ€™m also co-hosting a savings contest, which is the first time Iâ€™ve done anything like this. Itâ€™s sponsored by FNBO Direct [more about that here], the online bank, and itâ€™s kind of similar to the â€œAmericaâ€™s Biggest Loserâ€-style weight loss challenges. To enter, people submit a short video explaining what they want to save for, and the bank will pick five contestants and track their progress for six months. The five contestants will get dollar-for-dollar matching funds, up to $5,000, and the winner gets a spa vacation. The Web site for more details is Pay Yourself First Challenge, if youâ€™re interested in checking it out.
You write a lot about credit-related issues. In your opinion, what is the number one reason why people get into trouble with credit?
I think itâ€™s a tie between naivety and optimism.
Most people are basically optimisticâ€”they think things will turn out all right. Thatâ€™s a good thing, except when they stick blinders on and refuse to consider that things can (and will) go wrong. So they live paycheck-to-paycheck, or worse, and have no savings or cushion for the bad times. They use plastic or loans to pay for a lifestyle they canâ€™t actually afford. They pile up debt and keep hoping something (a pay raise, a handsome prince, a lottery ticket) will come along to bail them out.
And many people are astonishingly naÃ¯ve when it comes to lenders. They think if a lender approves them for a loan, they must be able to afford it. Or they carry balances on their credit cards and then are shocked when the issuer doubles or triples the interest rate on any excuse, or no excuse.
While weâ€™re talking about credit, can you tell us a little about FICO 08? How is it different from the previous FICO version?
There are three big differences:
Authorized user information is no longer considered. With classic FICO, you could benefit from somebody elseâ€™s good credit history by being added as an authorized user to that personâ€™s credit card. Credit repair outfits figured out they could persuade people with good credit to â€œrent outâ€ their authorized user slots to complete strangers, and charge those strangers hundreds of bucks for the privilege. Lenders didnâ€™t like that, so the formulaâ€™s been changed in FICO 08 to ignore that informationâ€”but it could wind up hurting folks who have little other history on their own except the card they share with a spouse or parent.
FICO 08 is less sensitive about opening new accounts. Fair Isaac (FICO creator) figured out that many of us have rather active credit lives: we refinance our loans or switch from reward card to reward card. Fair Isaac realized that such behavior doesnâ€™t necessarily mean weâ€™re riskier borrowers, so the new version of the formula punishes such behavior less.
FICO 08 is more sensitive about how much credit we use. I recommended in my book Your Credit Score* that people use 30% or less of their credit card limits at any given time. (It doesnâ€™t matter to the scores whether you pay off your bills in full every month; what matters is how much of your limit youâ€™re using when your issuer reports your account to the credit bureaus, and thatâ€™s typically the balance on your latest statement.) I think thatâ€™s going to be even more important as FICO 08 is adopted. You definitely donâ€™t want to come close to maxing out your accounts.
In your opinion, what is the biggest misunderstanding people have about their credit score?
Another tie: people think they have just one score, and that itâ€™s static. In reality, there are more than 100 different credit scoring formulas in use, and your scores change all the time, based on the underlying data in your credit reports.
The most-used scoring formula is the FICO. You generally have to pay to see your credit scores, and my opinion is that if youâ€™re going to shell out hard-earned cash, you might as well get the same formula that lenders use. You can get your FICO scores for all three bureaus at one place: MyFico.com. Only one bureau, Equifax, sells FICO scores directly to consumers. The two other major bureaus, Experian and TransUnion, typically sell consumers something else, either their in-house consumer education score or a VantageScore.
Talk about the mortgage crisis is starting to die down somewhat. Do you think the worst is over?
No, I donâ€™t. There are still a ton of exotic mortgages made to supposedly prime credit borrowers that have yet to reset. These are generally the option ARMs that allowed people to make payments that didnâ€™t even cover the interest owed, let alone any of the principal. At some point, usually several years into the loan, these mortgages forcibly reset the payment much higher if you have been making only minimum payments.
As a result of the credit crisis, are credit-worthy people having a more difficult time obtaining mortgages?
If youâ€™ve got good credit and a decent down payment, you should be fine. And â€œdecentâ€ seems to be getting smaller; for awhile during the worst of the crunch folks who had less than a 5% down payment were having trouble, but Iâ€™ve heard that with a good-enough credit score (700 or above) 100% financing has once again become available.
But itâ€™s still true that mediocre scores will cause you problems. If your scores are in the mid-600s, youâ€™re not going to have as many choices and youâ€™re likely to wind up with a more expensive mortgage than you might have gotten before the bubble burst.
You wrote awhile back about how you and your husband had become millionaires based on your net worth. Has becoming a millionaire changed your attitude towards money?
Not at all, as far as I can tell. My husband jokes once in awhile about waiting for his Porsche 911 to show up in the driveway, but thatâ€™s not gonna happen any time soon!
Who are some of your favorite personal finance gurus? Who do you pay attention to?
You know this: we personal finance writers are as independent as cats. The list of gurus I ignore is a lot longer than the list of the folks I follow!
But I respect John Bogle a lot; he speaks the truth about investing and the enormous impact of fees on your returns.
Others I like include Chuck Jaffe of MarketWatch, Ilyce Glink of ThinkGlink.com and my former colleague Kathy Kristof at the Los Angeles Times. All three are longtime journalists with deep knowledge of the topics they cover. Theyâ€™re also friends, and I know them well enough to know theyâ€™d be a little appalled at being referred to as â€œgurus.â€ But theyâ€™re smart and they know their stuff.
I donâ€™t invest in individual stocks, but if I did Iâ€™d pay attention to what Jim Jubak has to say. Heâ€™s my colleague at MSN Money and his track record is impressive. Heâ€™s also a seriously smart guy.
I have been blogging about personal finance for nearly four years. Since I started, personal finance blogging has exploded in popularity (at least in the number of personal finance-related blogs). Have you seen a surge in popularity that can be traced back to bloggers?
Iâ€™m not sure I can answer this one. Iâ€™ve seen a steady increase in interest in personal finance over the whole time Iâ€™ve been writing about it. How the advice is delivered has definitely changed, from books/magazines/newspapers/newsletters to personal finance sites and blogs.
I know that traffic to MSN Money keeps growing stupendously year after year. (It doesnâ€™t hurt that MSN is the default home page for the browsers shipped on most PCs!)
I think people really like the interactive nature of blogs. Although most people who read donâ€™t comment, they know that they can. A blogger also may seem more like a â€œreal personâ€ and someone they can emulate, compared to an expert up on some pedestal.
What Iâ€™d like to see is more change in the macro money metrics that would tell us our message is getting through. Most people are saving for retirement, which is a good thing and something we may be able to take partial credit for. But there are still too many people carrying balances on their credit cards and too few who have adequate financial flexibility (which I define as emergency funds plus access to credit). People still use payday lenders, get their furniture from rent-to-own outlets and cash out their 401(k)s when they leave their jobs. As long as thereâ€™s that kind of behavior going on, weâ€™re going to need to keep working to get the message across.
That concludes the interview.
I have to agree with her last thought. We have a lot more work to do! As Americans, we have to inspire people to take an interest in their financial wellbeing. Unfortunately, the people who need to be reading this stuff don’t typically hang out on personal finance blogs or read finance-related articles. What can we do to change this? That’s a good question.
Once again, thanks to Liz for the interview.