Financial Infidelity Part 1: Why We Lie About Our Finances

Money is one of the leading causes of stress in relationships, however, it’s not necessarily money itself that causes the pain, but rather the lack of communication and transparency around money. Whether you are the financial cheater, the victim or just looking for ways to avoid it all together, it leads us to the same question – How do we prevent and overcome financial infidelity?
Often times our shame around money can lead us to behave in ways that are totally outside of our character. The shame of not being able to afford our lifestyle, the shame of being irresponsible with credit cards, the shame of not being as “together” as everyone thinks we are. You may be the ‘responsible’ person in your family. You stayed out of trouble, you got through school, you got a good job, but no one knows that even with your salary, you are barely getting by – and no one sometimes includes your significant other.
Often times in relationship arguments, there is the paradigm of the perpetrator (the person that did something wrong) and the victim (the unknowing recipient of the wrongdoing). We strongly suggest that perpetrator/victim could be the wrong paradigm in most cases of financial infidelity. First, let’s define financial infidelity and then talk about reasons why the perpetrator/victim model may not help you overcome it.

Financial Infidelity – The willful and deliberate concealment of financial transactions from a partner in a relationship in which there is financial interdependence.

Financial interdependence can be as simple as splitting the cost of a meal or complex as completely combining your finances. When people in a relationship begin to have joint financial transactions, it creates expectations which require communication and transparency.

The Perpetrator/Victim Paradigm

If someone is walking down the street and gets robbed. The victim has no responsibility to the thief. Anything the victim could have done differently to prevent the thief from robbing them is irrelevant. The thief committed the crime, gets 100% of the blame and goes to jail. Financial infidelity is often not that cut and dry, so before you condemn your significant other to relationship jail, consider there may be a different way to approach the problem.

We Are Often Irrational When it Comes to Money

We are constantly making irrational decisions with our money. For example, if a $100 item is on sale for $40, we’ll convince ourselves we saved $60. We actually spent $40 and saved $0. We spend hundreds of dollars per year on bottled water that in most cases are not measurably better in any significant way to the water in our kitchen sinks. So let’s begin with the idea that we are not purely rational beings when it comes to money.
According to recent studies, the median lifetime earnings for a U.S. college graduate is $2.3M (average of $57K/year for 40 years). That’s almost $5 million for a couple who are both college graduates. $10K in credit card debt or $100K in student loan debt may seem overwhelming, and definitely not helpful in building wealth, but let’s also keep it the context of a larger perspective of $5 million.
 

We Have Different Money Personalities

We also bring different habits and perspectives to money in our relationships. ‘Opposites attract’ also applies to perspectives with money. Many times in relationships you may have a rebel and a conformist dynamic. The rebel lives in the present, appreciates spontaneity and enjoys the discovery. So one of the reasons they didn’t tell you about the $500 purchase beforehand is because they literally decided to make the purchase in that moment. The conformist, on the other hand, is more likely the planner, the one that actually likes to budget and craves organization and doing things ‘a certain way.’ (a.k.a. My way is right and your way is wrong)
Even without financial infidelity, those different perspectives are bound to create conflict. In order to mitigate some of those inevitable conflicts, communication and transparency need to be at the forefront.
 

Our Foundation for Financial Transparency is Faulty

The foundation of financial transparency and communication is the responsibility of both parties. Have you had “The Money Talk” in your relationship? A few questions to assess your relationship’s financial communication:

  1. Have you recently (within the past year) seen each other’s credit reports (not just the score, but the detailed report)?
  2. Do you sit down together and discuss your budget monthly? quarterly?
  3. Do you have a dollar limit that you cannot spend without your partner’s prior knowledge/approval? (even out of your individual account)

In many cases of financial infidelity, the answer to those questions will likely be no, thus the seeds of deceit were planted. In heterosexual relationships, for example, there are often rules of conduct regarding interactions with people of the opposite sex. As an example, dinner and drinks solely with a co-worker of the opposite sex may be inappropriate. Those boundaries will typically be made clear in the course of a relationship. Financial boundaries, however, are less likely to be addressed and without those boundaries, both parties are setting themselves up for failure.
 

Shame and Guilt Can Cause Us to Rationalize Deceit

If lack of communication and transparency are the seeds of financial infidelity, guilt and shame are the fertilizer.

“Shame is a soul eating emotion.” – C.G. Jung

Shame is a very difficult emotion to overcome and can often be at the heart of financial infidelity. For example, if the way one presents themselves to the public is connected to their financial success, admitting financial trouble is like admitting one is a complete fraud. This is another reason why the perpetrator/victim model is flawed. There may actually be multiple victims. It is often difficult to admit failure to yourself, much less a partner or spouse.

“The difference between shame and guilt is the difference between “I am bad” and “I did something bad” – Dr. Brene Brown

Shame can make a liar out of even the most honest person. The extent to which we internalize our actions makes it more difficult to discuss with others. If racking up credit card debt in our mind makes us a terrible human being (as opposed to someone that made poor financial decisions), we are much less likely to admit to someone we are a terrible human being.
Shame lives in hiding, through secrets and deceit. Anger, judgment, blame and contempt only make it worse. The only real way to overcome shame is through vulnerability in an environment of empathy, understanding, kindness and respect. If that sounds too mushy for you, then ask yourself two questions:

  1. Who have you revealed your deepest secrets to?
  2. Were they someone who you knew would be empathetic, kind, understanding and still love you regardless?

If you haven’t created a loving and open environment for your significant other, then you should have no expectation your significant other will be transparent about their shame.

It Takes Two

The perpetrator/victim model doesn’t often work with financial infidelity because the victim doesn’t have any responsibility to the perpetrator. There are certainly extreme cases of gross deceit, identify theft, fraud and financial abuse where perpetrator/victim model does apply (many of these cases are actually illegal). However, in most cases of financial infidelity, both parties have a responsibility to develop a foundation of open communication and financial rules of the road for their relationship. Both parties also have a responsibility to create an environment of mutual respect and empathy from which shame cannot grow.
Financial infidelity, particularly early in a relationship, can be a wake-up call and catalyst for both parties to grow together with their finances. That was certainly the case in my relationship with my wife, which we will share in Part 2.

What You Need to Know About Credit Scores: Part 2

Credit scores are an important piece of your overall financial puzzle. In Part 1, we demystified credit scores by discussing what they are, who uses them and where to find them. Now we’ll describe the best ways to improve your credit score.
In order to improve your score, you need to understand the rules of the game, so you can play it effectively. First, let’s review the five elements of a credit score and then we’ll discuss the best ways to improve your score.

  1. Payment History (35% of the total score) – This element measures whether you have paid your past accounts on time (e.g credit cards, retail store cards, car loans, mortgage loans, student loans)
  2. Amounts Owed/Credit Utilization (30% of the total score) – This element measures the total amount of debt owed on all of your accounts. It looks at different types of debt like installment accounts with a fixed payment schedule (e.g. car, mortgage) as well as revolving accounts (i.e. credit cards).
  3. Length of Credit History (15% of the total score) – This element measures the time since your credit accounts have been established. The longer the credit history, the better. It will consider an average length of your credit accounts.
  4. New Credit (10% of the total score) – This element measures the number of recent credit inquiries in the prior 12 months.
  5. Credit Mix (10% of the total score) – This element simply measures the different types of credit accounts you have.

Note that the first two elements represent nearly two-thirds of your overall credit score. This is where you get the biggest bang for your buck. So let’s get right to it. Here are five tips to improve your credit score.

  1. Review Your Credit Report and Dispute Errors

This may be obvious, but you don’t want to be held responsible for transactions that aren’t yours. Reporting errors happen with regularity, so you should check your credit reports from all three bureaus every few months. By law, you are allowed one report per year from each of the three credit bureaus from annualcreditreport.com, so you can stagger them and check one every four months.
If you see an error (e.g. accounts that don’t belong to you, paid off collection accounts showing as unpaid, incorrect name or address listed) you are able to dispute it online and it is the obligation of the creditor to prove to the bureau that the report is valid 30-45 days from receipt.
 

  1. Pay Bills on Time (Payment History)

    Late payments can significantly impact your credit score, particularly if you do not have much credit history. Even if you can only make the minimum payment, always try to stay current. This includes bills like rent, utilities, medical bills and student loans. If you can’t make the minimum payment, notify your creditor beforehand and see if you can work out a payment plan. Communication in advance is preferable to simply not paying and ignoring them. Creditors will typically report late payments to credit bureaus for balances that are 30+ days past due (180+ days for medical bills).
    Bonus Tip: Recent late payments affect your score more that older late payments, so if you have multiple accounts that you’re behind on, consider getting current on the more recent one first. Also, note that you have a longer window (180 days vs. 30 days) with medical bills before they are reported to get current.

 

  1. Keep Balances Low on Revolving Debt (Amounts Owed)

    A credit utilization ratio (Amount Owed/Credit Available) above 30% will begin to negatively affect your score. Even if you’re paying minimum payments, if your credit cards are maxed out, your credit score will be impacted. Also, trying to reduce your credit card balances while still using the credit card is a losing game. Stop using the card if you are trying to significantly reduce your balance.
    Bonus Tip #1: If your credit card is in good standing and you’ve made on time payments for 12 consecutive months, contact the creditor to see if they will increase your credit limit without a hard pull credit inquiry. If they are willing to increase your limit, you can improve your utilization ratio with little effort.
    Bonus Tip #2: If you have a spouse or close family member you trust who has a credit card in good standing, they can add you as an authorized user on their credit card. They don’t have to give you the card (it’s preferable if they didn’t), but they are simply extending their credit to you, which increases Credit Available and decreases the Utilization Ratio.
    Caution: Being an authorized user goes both ways, so any negative behavior (late payments, collections, etc.) on that account (by either party) can negatively impact your credit just like your individual account.

 

  1. Don’t Close Old Credit Card Accounts (Length of Credit History)

You may have heard advice in the past that if you have old credit cards on your credit report, you should call them and close them out to keep your credit report “clean.” That’s likely bad advice for two reasons. First, even if you don’t use the card, the credit limit adds to your Available Credit and helps your Credit Utilization. Second, the Length of Credit History takes an average of all of your open accounts. The more old accounts you have the longer that average will be. Closing the account simply eliminates the history from benefitting your score.
Bonus Tip:  You can request creditors remove negative incidents from your report. For example, if you had a late payment a year ago or more and you’ve been current, you can contact the creditor and request they remove that incident. They are not obligated to (until after 7 years), but they may oblige as a courtesy for customer satisfaction and to keep your business.
 

  1. Don’t Apply for New Credit Cards Solely to Increase your Available Credit (New Credit)

    Even though New Credit is only 10% of your score, credit inquiries (also called hard credit pulls) stay on your credit for a full year. So applying for a new credit card solely to increase your available credit is counterproductive. You get dinged for the hard credit pull and you’ve reduced the average length of your credit history. If you’re looking more long-term and not concerned about the short-term impact on your score, this is less of a concern.
    Bonus Tip: Checking your own credit is not considered a hard pull credit inquiry (it’s called a soft pull inquiry). Soft pulls are typically for background checks, opening utility accounts, and open a checking or savings accounts. Soft pull inquiries will not affect your credit score.

 
Those are some of the best ways to improve your credit score. Remember to be patient as scores don’t shift dramatically overnight and account changes often lagged by 30 days or more. If you’re looking to make dramatic changes to your score (100+ points) it may take 6 months or more depending on your situation. Credit scores are much easier to pull down than to bring up, so it’s important that you stay diligent. Finally, remember your credit score is just a number, a debt management score. It doesn’t measure your overall financial health and it is a point-in-time metric that can be improved.

What You Need to Know About Credit Scores: Part 1

Credit scores are an important aspect of your financial life and unfortunately, there is quite a bit of confusion about what credit scores are, how they work and who uses them. There’s also a ton of shaming involved with credit that is unjustified. In this two-part series, we will clear up some confusion about credit scores and help you improve your scores.
 

What is a Credit Score?

A credit score is a three-digit number (typically from 300-850) calculated to assess an individual’s credit-worthiness. Said another way, a credit score is based on multiple factors which allow a lender to determine how risky it may be to lend to an individual. The lower the credit score, the riskier (theoretically) to lend.
Remember when you were a kid and you lent your friend a few dollars for lunch or you let them borrow one of your video games. You may actually still remember some of your “ex-friends” that didn’t pay you back or return your possessions! What if you had a way to determine the likelihood of your friend paying you back or returning your item in advance based on their history of borrowing from others in the past? THAT’S the goal of credit scores and while it is flawed, it is important to understand how you are being measured.
There are many companies involved in the business of measuring credit-worthiness. The most widely known and used score in the U.S. is called a FICO Score and there are three major credit bureaus which the majority of lenders access to obtain individual FICO credit scores. TransUnion, Equifax, and Experian are the three major credit bureaus that hold your credit data and calculate your credit score.

Why is a Credit Score Important?

Clearly, credit scores are important for financial lenders because it helps them make decisions on whether or not to lend money and how much to charge. However, even if you are debt free and don’t borrow money, your credit score can still impact you. Increasingly more companies are using credit scores to make decisions including landlords for renting apartments, home and auto insurance companies, and utilities such as cell phone and cable companies.
The ranges on the credit score allow lenders charge you more (i.e. higher interest rates) for the same products. Of course, these ranges can vary by lender, but here’s an example:

  • 720 – 850: Excellent ‘A’ Credit – This score range typically qualifies the best rates on mortgages, credit cards, and car loans.
  • 680 – 719: Good ‘B’ Credit – This score range will qualify for different types of credit, but may not always get the advertised or premium rates
  • 630 – 679: Fair ‘C’ Credit – This score range may or may not qualify for different types of credit and will have higher interest rates.
  • Under 629: Poor ‘F’ Credit – This score range will typically not qualify for different types of credit and may require a cosigner or collateral (i.e. a secured deposit). This is also referred to as ‘subprime’ credit.

For a benchmark, the average credit score in the U.S. is about 690. What is important to understand is not to personalize or internalize your credit score. You are not wonderful and successful if you have an 800 score and you are not a failure if you have a sub 600 score. It is simply a point-in-time metric of your past interactions with credit and fortunately, you have some level of control to significantly impact that score over time which we will discuss in Part 2.

What Credit Scores Do NOT Consider

As mentioned, credit scores are flawed. They can be based on inaccurate or even fraudulent data and there are also important factors that are not taken into consideration. Credit reports (different from credit scores) list the details of financial accounts upon which the credit score is based. Personally, I have found errors on my credit report simply because I share a name with my father. In a separate instance, my father discovered identity theft when checking his credit report and found a $20,000 loan for dentistry school taken out in his name that he had no connection to. These errors are YOUR responsibility to correct which is why you should check your credit score and credit reports regularly.
Credit scores neither take income nor savings into account and credit scores are not a complete measure of how well you are doing financially. Many refer to the credit score as a ‘debt management score’ because it simply measures how well you borrowed money and paid it back. Net Worth is a much better measure of financial success. For example, two individuals (Person A & B) could have the same credit history and the same credit score even though person A makes $1 million in income per year and has $1 million in savings and Person B makes $30,000 per year and has $0 in savings. As a lender, I would likely prefer to lend to Person A, but the scores will show the exact same number. Keep in mind lenders can ask about income and savings before lending, but it is not a factor in your credit score. Also, for those coming out of high school or college that do not have a credit card and have not borrowed money in the past, they may not even have a credit score. So if you diligently manage your finances with cash and don’t rely on credit, you may find that you do not have a credit score.

What are the Elements of a Credit Score?

Let’s talk about what is actually included in the credit score and in Part 2 we’ll discuss tips on how to improve that score. There are five elements in the calculation of a credit score and they have different weights of importance.

  1. Payment History (35% of the total score) – This element measures whether you have paid your past accounts on time (e.g credit cards, retail store cards, car loans, mortgage loans, student loans)
  2. Amounts Owed/Credit Utilization (30% of the total score) – This element measures the total amount of debt owed on all of your accounts. It looks at different types of debt like installment accounts with a fixed payment schedule (e.g. car, mortgage) as well as revolving accounts (i.e. credit cards). For installment accounts, it looks at the remaining balance versus the total amount borrowed, so if you have a $10,000 balance on your car loan and you originally borrowed $20,000, it would show that you still owe 50% of the balance of the loan. For revolving accounts, a credit utilization ratio is used to determine the percentage of your overall credit limit is being used. For example, if you have three credit cards with a total credit limit of $10,000 and you owe a total of $2,000, your credit utilization ratio would be 20%.
  3. Length of Credit History (15% of the total score) – This element measures the time since your credit accounts have been established. The longer the credit history, the better. It will consider an average length of your credit accounts.
    Tip: This is why you should reconsider before closing or canceling your oldest credit card accounts, even if you no longer use them.
  4. New Credit (10% of the total score) – This element measures the number of recent credit inquiries in the prior 12 months. The idea is if you are signing up for several credit cards in a short span of time, it increases the risk to lenders. In other words, people who open up several accounts in a short span of time typically plan to use them and use them heavily.
  5. Credit Mix (10% of the total score) – This element simply measures the different types of credit accounts you have. This is biased toward having credit cards, but also includes installment loans like car loans or mortgages as well as retail card accounts.

Where Do I Find My Credit Score?

Finally, let’s talk about where to get both our credit scores and reports. For the official FICO scores and credit reports, you can purchase them from FICO for a one-time purchase of $60 or different monthly plans. A better option, in our view, is to use FREE sites like Mint, Credit Karma, or Credit Sesame that are not the ‘official’ FICO score but do a decent job getting a close approximation. You can use one or all three and it will not affect your credit score. They can also provide you with the details of your credit report which you can view and check for erroneous information.
So we have demystified the credit score, discussed why it’s important and the elements considered and not considered. Again, your credit score is not a measure of personal value or personal success much like a GPA is not a measure of intelligence, but rather the combination of course grades. Also much like a GPA, your credit score is much easier to bring down than it is to pull up, so we have to be diligent about our finances. The purpose isn’t to have an 850 score, but to monitor your score and know how you can improve it to save money if you borrow in the future.