Surviving the Financial Crisis

Michael Lissack, HARBOR STYLE's financial guru, gives his advice for keeping your finances in order this new year.

1. Credit will not be as easy to come by — or as easy to abuse — for the next decade as it was during the past decade.

The financial crisis is really more of a credit crisis. When banks and other financial institutions discovered that many of the assumptions they made about the future of housing prices and the ability of borrowers to repay loans were wrong, a massive retrenchment followed. Two years ago it was relatively easy to borrow 100 percent of the purchase price of a house without even proving that you had a job. Mortgage bankers called these “liars’ loans.” Credit card companies offered zero interest teaser rates just to get you to borrow more. Those days are over for years to come.

What happened to the financial institutions was the discovery that uncertainty about future payment streams (will those borrowers really repay the loan?) lowered the price that other banks would pay to own the loan. If I believe you really will pay me $10 next month, that’s worth about $9.50. But as my uncertainty grows, your promise to pay may go down in value to $6 or $3 or even $1. As those values dropped, the banks’ ability to make loans also dropped. Banks are usually allowed to lend about 10 times the value of the assets on their books. As asset values decline, so does their ability to make loans and extend credit. In such times, only those with the best credit can borrow new money.

If you have good credit, try your best to preserve it. If you ever had problems, work hard to get them resolved. In the present era, your credit scores matter. Being 30 days late on a bill triggers a negative mark on your credit. Thus, you need to be careful to get bills paid on time and without late fees. Always pay the mortgage first, then the utilities and as many credit cards as you can. It’s better to be on time with many little payments than late on many payments and on time with one big one (other than your mortgage). If a bank offers you a teaser rate, grab it, but use the money to pay off a higher interest loan. In an era of tight credit, splurging is a poor use of low interest cost money. When time comes for a big purchase — a house or a car — you’ll value having the higher credit score.

2. Cash is king.

If you have the ability to pay cash, you have something merchants want. Getting paid full in cash means not having to worry about future collections and not having to pay the cost of extending credit. So if you can pay cash, make the most of it. Ask for a lower price. You’re likely to get it. This is true even in a department store. Ask for the buyer or a manager. They have the authority to lower the price, and they’ll do so to get your cash business.

3. Interest costs matter.

A few years ago it was safe to merely ask how big your monthly payment was going to be. Interest rates were low, and they stayed that way. Now banks are using any excuse to change what you thought was a contract. Your 11 percent credit card suddenly becomes 29 percent.

Perhaps the most frustrating thing about opening a credit card bill is discovering that the bank has raised your interest rate without warning. From the bank’s perspective, the fine print buried somewhere on page 49 of a statement you never read is warning enough, but it’s that attitude that got banks in trouble in the first place.

Always read the interest rate section of your bill. If the interest rate seems ridiculously high, get on the phone and ask for it to be reduced. Often they will reduce it just because you asked. Then make sure you ask for the change to be applied retroactively. That one question could save you hundreds of dollars.

4. Ask for help.

The financial crisis has revealed that uncertainty and confusion apply all the way up to the top when it comes to money matters and the economy (and you thought it was just you). I’m not suggesting that there’s comfort in knowing the so-called experts don’t know what they’re doing, but it does mean a new proliferation of programs have been designed to get you better answers and asking better questions.

If you need help with your mortgage, call the bank. Ask for preloss mitigation. Insist that you be connected to this department and only this department. They’re there to help the bank by helping you. They can lower payments and offer counseling.

If your credit card bill is too high, call the bank. Ask for the loss mitigation department. They can adjust your interest rate and change your payment schedule. (Note: Pre-loss mitigation on a mortgage; loss mitigation on a credit card.)

If the price of an item seems high, ask for the manager. You can almost always get 5 to 10 percent off just by asking.

What you should not do is contract with a so-called credit counseling or loanmitigation firm. As the crisis unfolded, the number of these firms multiplied. Most cannot do what they promise. Unless they’re affiliated with a group you already belonged to, stay away! These firms claim to be one-stop shops, but they often just take your money and leave you with the work to do. Make the phone calls suggested above first. That will save you time and aggravation.

5. Make the most of what you have.

Before you spend on something new, can you make do with something old? The American economy as a whole will only recover when we all collectively start spending again, but that doesn’t mean you need to play an early role. Your wallet can last much longer if you put off making that purchase for a while. Food in the supermarket is much less expensive than going out to eat. The natural beauty and attractions of our area are much less expensive to enjoy than flying away for a vacation. You can probably live with one less handbag.

6. It’s only money.

The point of this article is not to put you in a funk just as a new year begins. Perhaps the most important resolution of them all is to remember that in the end, it is only money. Your health, your family and your willingness to carry on with life and find joy in the little things are all much more important.

If the bills or planning about how to cope with them get you down, take a walk on the beach, play with your pet or just stand outside and remember how nice it is that it’s warm out and you’re not buried under a foot of snow. We live in paradise. That’s priceless.

Michael Lissack was once cited by Worth magazine as one of “Wall Street’s 25 Smartest Players.” He was Smith Barney’s senior banker with overall responsibility for new product development, municipal derivatives and the technical work produced by the firm’s Public Finance Division. In the 90’s, he gained infamy as a whistle blower in the municipal bond industry. From his home in Naples, he sells real estate, writes, serves as director of a research institute and is a frequent lecturer on business ethics.