Fine print, Living with credit, Protecting yourself

Beware, financial optimists: Smile and the world takes your money

Fred Williams

It’s hard to take a stand against optimism. Without it, plus a cup of coffee, many of us wouldn’t have the will to rise in the morning. Football coaches would stand silently in the locker room at halftime. At commencement, new graduates would toss their caps down on the ground.

A positive outlook helps you get through the day, but too much of it can really land you in trouble when it comes to your finances. In fact, a skeptic would say that lenders, some of them anyway, have built profitable business models on our excess optimism.

Take the example of deferred interest cards for big purchases. “0 percent interest!” the ads blare. What a seemingly great way to afford a big screen TV or, for Donald Grimes, an Apple laptop. Grimes signed up for an 18-month deferred interest deal on a machine that cost over $3,000, with the extras and taxes.

“If you are careful about paying, these turn out to be a great deal,” Grimes says.Smile and the world takes your money

I remember in high school they would teach you all about government, they didn’t teach you anything about finance … So people make all sorts of horrific financial decisions.

Donald Grimes
University of Michigan

That’s a big “if.” Consider that Grimes is an economist at the University of Michigan, and he has the cash on hand to simply pay for the laptop if he wanted. He set up an automatic deduction from his checking account that will pay off the deferred-interest card a full month early, and he won’t be tempted to use it  for any other purchases. “I have enough credit cards,” he says, adding, “I have no idea how many people aren’t able to pay these off.”
Grimes isn’t basing his early payoff hopes on an optimistic view of his financial future. If you are, your results may vary.

It’s pretty well established that the world of dollars and cents doesn’t
always obey the classical model of Adam Smith, where individuals act out of rational self-interest. Psychologists and pollsters have
demonstrated how irrationality creeps into our decisions, with a bias toward overconfidence being one of Americans’ common quirks. In finance as in poker, overconfidence is dangerous.

A consumer named Chelle from Hilo, Hawaii, told Consumers Union about her experience with a deferred interest deal on a $4,800 TV.  Although she was able to make the payments, she miscalculated the date for the final payoff, thinking she had until the end of the last month. Less than $100 was still due at the deadline, but that balance triggered more than $2,000 in built-up interest.

“Even when consumers have the best of intentions to pay off the debt before the deferral period ends, the unexpected — a job loss, large car repair bill or other financial shock — can keep them from paying off the balance in time,” the consumer organization said in a filing with the Consumer Financial Protection Bureau.

In other words, a little pessimism about the future could save you a lot of money.

“Not me!” you may be thinking right now. “I’m different and smart and responsible — I can handle it!” Sure you are. But know that those are the same financially overconfident feelings that keep payday lenders in business, a recent analysis by the Consumer Financial Protection Bureau suggests. The industry says payday loans are meant for emergencies, for bridging an unexpected gap in your cash flow.  At effective annual interest rates of 339 percent, on average, they’re not meant for long-term use. Who would keep paying those rates?

Nearly half of payday loan customers, that’s who. Forty-eight percent of borrowers take out a loan 11 or more times a year, the bureau found. The typical user took out 10 two-week loans in a year and paid $458 in fees. I doubt that even 1 percent of customers signed up for that first loan thinking they would end up paying that kind of money. Like you, they thought they would pay off that first loan and never need to take out another. And another.

“I remember in high school they would teach you all about government, they didn’t teach you anything about finance,” Grimes says. “So people make all sorts of horrific financial decisions.”

Maybe “decision” is too strong a word, when the behaviorists say we’re governed largely by intuition and wishful thinking. Take a lesson from the card table and play the hand you’re dealt when it comes to financial products. Being realistic about the odds against you will keep you from drawing to an inside straight.

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  • roberta

    can a creditor garnish your wages?