Wednesday, January 27, 2016

There Is No Financial Conspiracy

There is no shortage of conspiracy theories on the internet, but one I see time and time again is the popular “financial companies are out to get you” theme. Just look at some of these headlines:

I understand the thought behind them. First, they are definitely clickbait-y and are meant to drive people to websites. Everyone wants to hear secrets! And if you are in over your head in debt, it can certainly feel like everyone is conspiring against you. Add to this the whole Wall Street-caused housing market collapse which wiped out trillions of dollars in home equity across the nation and you can see how people might become angry and want to “stick it” to banks and credit card companies.

There Are No "Secrets"

But the reality is there are no secrets. There are no conspiracies by banks to keep you in debt. You’re in debt, in most cases, because you bought more than you could afford! It’s not the job of a credit card company to make sure you live within your means. That’s your job. With the exception of unforeseen things like medical emergencies and such, you are in debt because of the conscious choices you made. Take responsibility for that.

Look, banks and credit card companies are in business to make money. They provide a service that you use. They provide that service subject to certain terms -  namely they will lend you money at a certain interest rate with the expectation that you will pay it back on a certain schedule. If you miss a payment, you violated those terms and they will charge you penalties.  If you stopped paying your electricity bill, the power company would cut off your service. Why would you expect banks and credit card companies to be any different? If you don’t repay them the money they loaned to you, they will foreclose on your house or charge you penalty fees and raise your interest rates. Again, they are in business to make money. Yes, they hide sneaky charges and fees in the fine print and hope you won't see them, but they are disclosed to you. If you aren't going to take the time to read that fine print, don't apply for the product. You need to take some personal responsibility.

But here’s the thing.. all these “secrets” these websites claim companies don’t want you to hear about aren’t secret. Something like paying half your mortgage very two weeks to pay it off faster is no secret - it's math. Granted, it's calendar-based math, so it may seem tricky, but there's no great trick to it. Making a half payment every two weeks results in 26 half payments a year - or 13 full payments a year instead of the 12 you would make paying once a month. That extra payment each year can shave years off your mortgage.

Banks Don’t Care!

Banks don’t care if you make extra payments on your mortgage and pay it off in 23 years instead of 30. The bank still made money on that loan for 23 years! And with the low interest rate environment, most banks want those low interest rate mortgages paid off quicker so they can write new mortgages at higher interest rates when rates go up. They would rather lend money for 30 years at 7% interest than for 30 years at 3.5% interest. Trust me. I work for a credit union and this is simply a fact of the business. We actually have meetings about this. In fact, we would rather lend money on shorter term auto loans than long term mortgages right now because when interest rates do rise, we'll be able to re-lend our money at a higher interest rate quicker.

Furthermore, most banks don’t even hold your mortgage anyway. If the loan was backed by Fannie Mae or Freddie Mac, your bank almost certainly sold the mortgage to them soon after you signed the paperwork. The bank still services the loan – meaning they still send you the bills and you still make your check out and mail it to the bank. From your point of view, the bank still owns the mortgage, but the actual “company” who owns it is likely the government. The bank already got their money back when they sold the loan and now your payments get passed on to the government. That way, banks can turn around and lend their money out on a new loan to someone else. (They do make a small fee on servicing the loans they sell and they typically don't sell loans of people with high credit scores and a solid credit history - those less likely to default, in other words.)

Credit Card Companies Don’t Care Either!

Credit cards don’t care if you pay off your balance each month. Yes, they’d like you to carry a balance because you’ll end up paying them more money. If someone wanted to give me $100 a month extra, I wouldn’t turn them down either. But they’d rather you pay off your balance each month than carry a balance when you can’t afford to and possibly default on your debt. A default would cause them to lose money. Charging you interest is not the only way credit card companies make money. They also receive a merchant fee when you use their credit card. This fee is paid by the store that accepted your card. So even if you pay off your balance in full each month, you are still making them money every time you use their card. They aren’t going to be mad at you for that.

Can’t We All Just Get Along?

You and banks can have a mutually beneficial relationship. They will loan you money and you can repay it responsibly. They will give you perks for doing so – cash back deals, frequent flyer miles, whatever. Go ahead and pay off your mortgage early if you want to, but do it because it makes financial sense for you, not because you think it will somehow "hurt" the bank. There is no need to be adversarial with each other. Life is too short to be mad at people or companies all the time. You just need to uphold your part of the bargain. Be a responsible borrower.


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