October 4, 2013
Sometimes conventional wisdom about money and spending can cost you, especially when it's sketchy or flat-out wrong.
Surprising results of several recent studies and surveys might have you asking some interesting questions about your own household finances.
For example, what if young people having credit cards wasn't such a bad thing? What if sticking with your auto insurer led to higher rates? What if expiration dates on food labels meant nothing. And what if your credit score predicted whether you'll get divorced?
Here are some recent findings that buck conventional wisdom and are sure to be controversial.
When credit is due. Conventional wisdom is that young people need to be shielded from the dangers of credit cards, such as debt, overspending, punitive finance charges and damage to their credit scores after defaulting on card payments.
On its face, it seems logical. And it's the notion behind 2009 federal regulations that no longer allow credit card marketing on college campuses and prohibit card companies from issuing credit to people younger than 21 without collecting written proof that they have an ability to pay.
But those "protections" might be based on false assumptions and might not end up being helpful, according to a previously unreleased working paper by researchers at the Federal Reserve Bank of Richmond and Andra Ghent, a professor at Arizona State University's W.P. Carey School of Business.
The study's findings? "Young borrowers don't seem to be defaulting any more than other people. In fact, they're defaulting less, in terms of serious defaults," Ghent said. Serious defaults are defined as being 90 days past due.
Getting credit cards at a younger age can be a good thing. "It seems that the type of people who get credit early are better borrowers — less likely to default," Ghent said.
Part of the reason young borrowers become better borrowers may be that they are once bitten, twice shy. "They have some minor delinquencies and they learn their lesson," Ghent said.
The takeaway? Don't necessarily discourage a young adult from getting a credit card.
"I just want to make clear," Ghent said, "credit cards can be dangerous for everybody. All we're saying is, they don't seem to be particularly dangerous for young people."
Does loyalty pay? You might think that sticking with your auto insurer year after year breeds good will and maybe even lower rates. But the opposite can be true, according to the Consumer Federation of America. It says some insurers are illegally jacking up car insurance rates on people who, faced with higher rates, are less likely to shop around for a better deal, a practice called price optimization. It's used by 45 percent of large insurers, and 29 percent more plan to use it in the near future, according to a recent study by insurance industry consulting firm Earnix, which did not identify which insurers used the technique and didn't respond to a request for comment.
Raising prices is generally part of a free market, but auto insurance is different because its purchase is not optional. States require drivers to buy it. That's why laws in every state require insurance companies to use actuarial standards in setting rates, not such practices as price optimization, the federation claims.
"There is considerable evidence that the practice of price optimization is widespread, actuarially unsound and unfairly discriminatory," federation Director of Insurance J. Robert Hunter wrote in a letter to state insurance commissioners. Consumers with identical risk profiles might pay different rates based on whether the insurer thinks the customer will balk at a higher rate and defect to another insurer.
The Insurance Information Institute, an industry group, didn't address the propriety of using price optimization directly but said the price of auto insurance is based "largely" on the likelihood that a policyholder will file a claim and the cost of that claim. It concedes price optimization is not an actuarial term.
"Auto insurers have not, and will not, abandon risk-based pricing because insurers are able to price risk in 2013 with greater accuracy, transparency and speed than ever before," said institute spokesman Michael Barry. "Consumers have benefited from these trends."
The issue will probably continue to develop, but the takeaway is tried-and-true advice regardless of price optimization: Regularly shop around your insurance coverages to make sure you're not overpaying.
Divorce and credit scores. It's easy to imagine how a finance-wrecking divorce can affect your credit scores, but a preliminary study suggests credit scores can be a crystal ball into the success of a marriage.
A couple's differences in credit scores "are highly predictive of subsequent financial distress and household dissolution," write Federal Reserve Board authors Jane Dokko and Geng Li. Dokko notes the paper wasn't really meant to be cited yet, and a more complete draft is likely to be ready this year.
Couples are more likely to break up if they have widely different scores or both have low scores. Meanwhile, couples who originally had good and similar scores are more likely to stay together, the study found.
The takeaway isn't necessarily to choose mates with high credit scores, but for young couples to discuss finances and credit use before marrying.
Dating game. Those "use by" and "sell by" dates on food items seem like helpful guides, but they actually don't mean much. That's because they are not standardized or regulated, says the study "The Dating Game," produced by the Harvard Food Law and Policy Clinic and the Natural Resources Defense Council.
The harm is that reasonable consumers take the dates seriously, fearing the food is unsafe. They trash it after the expiration date has passed, wasting perfectly fine food and wasting money on replacing it, according to the study.
The average household of four could be spending $275 to $450 per year on discarded good food, just because consumers misinterpret the label date, says Dana Gunders, a Natural Resources Defense Council staff scientist with the food and agriculture program.
"The U.S. food dating system is not a system at all. It's a mess," Gunders wrote in a blog post about the study.
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