What do multiple credit card accounts, option arm home loans, and 30% interest rates have in common? Trouble. Not guaranteed financial collapse, but a high potential for financial trouble. They also push the edge: “Not credit worthy? Fine, we’ll jack up your interest rate.” “Don’t have enough money to buy the home you want? No problem…just pay the interest.”
The phrase that I have heard to describe these practices is the “democratization of credit.” I think the idea has a place in our society, but another way to describe it is “the Wild West of credit.” The Wild West has many new opportunities, and many ways for things to go horribly wrong.
Managing money is hard, and what I’ve noticed is that when financial institutions care, they come up with some pretty cool products. I especially like this one from Vanguard. Don’t know a lot about asset allocation over time for retirement? No worries, they handle it for you, automatically shifting your asset mix over time.
I’d like to see something similar for our bank accounts (not these choices from my bank). Recently graduated or building your credit and don’t know how to manage debt-to-income ratios? No worries, your bank/credit union will handle that for you. You give 100% of your business to one financial institution and in return you have confidence that you aren’t building your financial foundation out of sand. I also think it would be great if banks offered transparency into why a certain credit limit has been set, what a realistic allocation of your income should be, etc. The basic account could be very simple: checking, savings and a credit card based on income and credit history.
The customer would have to acknowledge limits (more credit doesn’t mean more money), but as long as they stayed within the plan they could also be confident that they were on the straight and narrow. The wild west can still be out there (I’m not recommending we limit choice), but those who want it can find a safe harbor with lower risk.
Full disclosure: I’m not now nor have I ever been a banker. While this kind of account may not be a match for most consumers, I think it could really help others who are seeking guidance and stability. Perhaps even more importantly, it would show that banks were interested in actually helping their customers as opposed to just maximizing revenue opportunity and minimizing risk.