Good financial management includes knowing how to spend, how to save and how to make credit work for you. LoveToKnow Credit Cards tapped the expertise of financial expert Mike Schiano, known as "The Debtbuster," to get the answers you need.
Schiano is a certified professional manager and credit counselor, as well as the author of the book, Spend Your Way to Wealth. Through his financial workshops, Web site and multi-media "Money Minutes," Schiano spreads a message of smarter consumer spending and savvy money management.
Interview with Mike Schiano
Your primary slogan is "This Ain't Your Granddaddy's Money Talk." How are our money matters different today from what we may have grown up with?
The main motivation behind that slogan is the fact that there are several money "gurus" giving out advice today that really is not realistic for today's consumer, such as "always pay cash for a car," "cut up all of your credit cards," "only take a 15-year mortgage." While this advice might be smart financially, it is virtually impossible given today's prices and average income.
So we feel that rather than lecture to people about what they should be doing with their money, why not work with them in the environment they currently live in and help them manage their money today as smartly as possible.
Do we spend more than previous generations?
I do think we spend more since we have more opportunities to spend money. Just take cell phones as one example, or malls and online buying.
But more to the point, we borrow more than past generations. Credit is so easily available to us that we can borrow to buy things we really cannot afford.
What are the top three questions people want answered about money management and the solutions you offer?
- Where do I start? I tell them to create a spending plan. This is different from a budget, which is like being on a diet. Plan out each month of the year, with your income and anticipated expenses. Families should run their finances like businesses - and that takes planning ahead.
- How can I pay off my debt more quickly? First, you have to decide you really want to get out of debt. Then start with paying more than the minimum payment. Prioritize debts with highest interest rates firsts, attacking the highest debt with as much as you can. Then move on down the line. Another technique is when something big is paid off, like a car, apply that former payment to paying off other debt.
- Should I start to save money or pay off debt first? No question in my mind - pay off the high interest rate debt first, especially double-digit interest rates. With money, it's really all about bigger numbers - it's a motivator to see that balance come down.
What advice do you have for parents regarding teenagers/college students obtaining credit cards?
This is very dangerous territory for parents. The average college student is graduating with about $3,000 in credit card debt. While it's a good time to begin to build credit, I believe parents should stay closely involved with the student's use of credit and help them manage its use properly.
- Add a child to an existing credit card account to monitor charges.
- Pre-paid cards help parents stay in control of expenditures, but fraud is a possible issue if the card is lost.
- Hold the child accountable for expenditures: have the student review the bills each month and be responsible for paying a certain portion, if not all, of the bill.
Is a "credit card gift card" a good gift for teens, or is it sending the wrong message?
We are all being trained to use plastic more and more. I have interviewed experts who predict we will be a cash-less society within 25 years. Gift cards are not great teaching tools for teens but their efficiency and popularity means they are here to stay, so parents need to change the way they teach their kids about money to include plastic money.
Let's talk about credit scores for a moment, as there is a lot of advertising about that these days.
A: Please explain the premise behind a credit score.
A credit score is a number that is assigned to you based on information in your credit report. It is a fast way for lenders to judge your risk level and credit worthiness for their products.
- Your score can range from a low of 300 which is really bad, to a high of 850, which is a perfect credit score and very difficult to achieve.
- People with credit scores in the mid-700s to over 800 generally can qualify for the lowest interest rates.
B: What is a "false hit"?
- 35 percent of the credit score comes from how you manage credit. So if you see a sudden shift without experiencing financial problems, there's probably been a mistake made on the report.
- About 15 percent of the score has to do with longevity of accounts. Closing an account in good standing does not benefit you. If you go through hard times on a credit card account, but don't plan on using it, still leave it open. Check on the account or use the card for a tank of gas every so often. And check your annual report.
C: Is there a flaw in the system because of inconsistencies?
Recent reports indicate that half of all credit reports contain errors and 25 percent contain errors bad enough to deny someone credit.
Consumers must understand that it is their responsibility to monitor their credit reports at least once a year to make sure that the information reported is correct.
In your book Spend Your Way to Wealth, you talk a lot about various ways to save when spending. Why did you take that approach?
My position is that you can't stop spending money but you can be smarter about how you spend and plan your spending better so you lessen the number of financial surprises each year. It's all about managing the cash flow you have to work with.Did you ever get into any "money trouble" and if so, what lessons did you learn?
As a young couple, my wife and I faced financial challenges like many young couples do when they are trying to get careers and families started. I wrote about what we learned in my book because I want readers to know that I'm not up in the ivory tower talking down to them. I have been in tough financial situations and worked through them.
The main lesson when it comes to money issues: deal with them in a professional, businesslike manner and try to leave as much emotion out of it as possible. Set aside some time each day or week to deal with money issues and then go about enjoying the rest of your time.
What question about money management would you like to answer that you are never asked?
Where is the best place to start a savings account. I don't get this question much because so few people are saving money these days. The American savings rate has been below zero percent for more than a year.
Everyone should be looking at online savings accounts. You can open a savings account at FDIC-insured banks offering online services that pay above 5 percent interest. Compare that rate of return to traditional "brick and mortar" banks that are paying 1-to-3 percent for savings accounts, and it is one of the smartest moves anyone can make.
Mike Schiano's book, Spend Your Way to Wealth is available through Amazon or his Web site, In Charge Radio, where you'll also find other free financial information and credit education. His new book, Credit Booster: Ultimate Guide to a Better Credit Score, comes out in the fall of 2006.
The site Young Money is a financial management resource for young adults.