Victim's Fault Take Two

Back in October I wrote an entry on whether the victim of a theft was partially responsible for their predicament.

A friend of mine posted a bit from Fight Club on their facebook talking about auto recalls. The gist is if the number of vehicles times the probability of failure times the cost of settlement is lower than the cost to recall the manufacturer will let an issue slide.

No one is disputing whether Toyota has a defect in their cars. We all have seen the proof on nightly news where the cars accelerate out of control and override the brakes.

Therefore all runaway Toyota crashes are the manufacturers fault and they should be punished.

I'm not sure I'm ready to go there. Perhaps the driver has some culpability. There is a very simple solution to the car accelerating out of control. Shift the car into neutral. Anyone who drives a stick would know to do that. Anyone should be able to figure that out even if all they ever do is drive automatics.

There will be some who will claim drivers won't know that. The sad truth is, they are right. Drivers education in this country is abysmal. It would be interesting to note whether there is a crash disparity between the US and Europe on the same cars.

While Toyota has made some defective products I personally believe it is incumbent on the operator to know how to properly drive their car, even in emergencies. Therefore I can not personally lay all the blame on these tragedies on Toyota. It is time we collectively take responsibility for our driving.

Credit File No Hits

I was overhearing a couple young people talking about credit. Guy was upset he had no credit, applied for a card, got rejected, then supposedly had a worse score than he started with.

Ahh ignorance.

I resisted the urge to cure it in person as it was truly none of my business.

Let's take the first three facts as truth.

Guy had no credit. This means he is classified as a no hit. No Hits are treated as a special case and return codes rather than scores when a lender attempts to pull your score. These codes indicate that the individual does not have a credit record in any way shape or form. No hits typically fall into the following three categories. Young people just starting out (the vast majority), foreign nationals (most of the difference), synthetic fraud (very rare).

As a quick aside, credit agencies break fraud into two types. True Name Fraud is the classic someone stole your identity. Synthetic Fraud is a fabricated identity.

Back to our story. Second fact. No Hit Guy applied for credit. In this case the card issuer would have received the code that indicated he didn't have a file. The lender would then make a determination on whether to accept the risk. No Hit's tend to have higher risk profiles than the average person with a score.

Which leads to fact three. He got denied. Under today's tighter credit practices I am not surprised. Especially since being young he probably had little income and little income history to show as well. No hits usually have better luck establishing credit with secured cards or loans that have collateral attached to them. Banks face less risk in these situations so they are more likely to approve the line of credit.

Now about his conclusion, his score got worse because he was rejected. Au contrair mon frere.

He now has an inquiry on file. He is no longer a no hit. He is still unscoreable on the basis of a single inquiry. He just gets a different code. He is now classified as "Hit, but not scoreable". Again lenders will have to make decisions on other application factors besides his non existent credit score. Again, people in this classification tend to be higher risk than the average person with a credit file.

The good news is, when he does actually receive a credit card or loan he will start building his score. The extra inquiry will have little to no impact on his starting score.

The bad news is, a good portion of your score is determined by your credit history of which he will have none at the outset. So like everyone else, his starting score will be lower than he would like.

The cure is time and judicious use of credit without being late. For that matter, that's the answer to anyone's credit problem.

War Games taught me everything I need to know about Game Theory

Remember War Games? Great movie. Here's a quick synopsis for those of us with a few grey hairs. Kid hacks a military computer programmed to play out every possible variation of a global nuclear war. The hack sets the thing in motion, everyone thinks its real.

The computer at the end of the movie comes to the conclusion the only winning move is to not play the game. This conclusion is based on the fact that whatever action you take, will result in your competitor matching your behavior.

You sell me out, and I'll do the same.

This applies in business all the time. We all see the airline and gas station price wars. I saw it in auto insurance as well. It even exists in the credit scoring industry. In every case all the players are less profitable than they were before the game started.

As a manager who has a brilliant plan to alter the competitive landscape and scoop up gobs of market share, ask yourself one thing. Where will you be in 5 years when your competitor matches your move. You will be at the same share (assuming you can still afford to be in business) with lower margins.

Sure you want that on your resume?

Effective Federal Tax Rates

The tax man commeth. He is as inevitable as death.

Once again I owe more than I had withheld. While my wife and I don't like writing a check come April the truth is, we are giving ourselves and interest free loan rather than giving one to the government.

We also moved up in the marginal tax brackets this year. I expected that to happen when we refinanced our house and lowered our interest rate deductions. Though I won't say which one the number sounds awful to me and being self interested I wish it was lower.

However, the marginal tax rate is just that. Marginal. It is not what you actually pay.

What you pay is determined by the current laws, rates, allowable deductions, credits, and exemptions as much as how much you earn. In the past 12 years we have had 3 presidents, I have gotten married, bought two houses, sold one, and have had two kids.

Therefore you can't compare your tax burden on an apples to apples basis by looking at your marginal rate. The solution is to calculate your effective tax rate. I use tax liability divided by taxable income. You could sub out the denominator with your gross income if you want to see how your 401k and traditional IRA impact your rates if you want.

Your effective rates will vary, but as you can see they have remained fairly stable for twelve years. That still doesn't mean I would like to pay less. It just means I'm not going to be attending any tea parties this year believing federal taxes are excessive.

Innumeracy will get you fired at last

I realize I'm preaching to the choir but the simple fact is basic math skills are mandatory in today's corporate environment. Nice to see if applies to politics as well.

An attorney in an Atlanta local government miscalculated the number of days required for a referendum which lead to a lawsuit and his resignation. Presumably, if you can earn a law degree you have a modicum of intelligence.

I am reminded of the business analysis course I used to teach. We were reviewing for a quiz on deterministic modeling and one of my students asked how they could evaluate an inequality on the quiz without the benefit of Excel. Here's a secret, when professors state there is no such thing as a stupid question, they are lying. Needless to say this student selected the multiple choice answer that had -16 as a larger number than 12.

The rambling continues.

We can pass also the consumer finance protection laws in the universe but when supposedly intelligent people such as these examples can not handle the basics of math we will continue to have people getting into trouble. While we can't fix stupid, we can cure ignorance.

Perhaps it is time to elevate the issue of Innumeracy to the same level as Illiteracy?

Decision Theory: Credit where Credit is Due

Professor Keeney QA at Freakonomics.

This is one of the better layman's treatments of decision making I have read in a long time. It's not technical but addresses the fundamentals of making good choices. If you have 5 minutes you make make much worse decisions on how to spend them.

Time to check your financial health

It's the first Monday of the new year. That means it is time to check your financial health with 4 easy ratio's.

These four ratios will tell you everything you need to know at a glance to asses your financial health and they really aren't that hard to figure out.

Solvency Ratio:

This value simply states the percentage your assets can drop in value and you remain solvent. (IE worth more than you owe). All you need to calculate is the total value of all your assets. Your total debt. Subtract your debt from your assets to get Net Worth. The ratio is Net Worth Divided by Assets. The bigger the number the larger the cushion you have against the next market melt down. Should you have a negative net worth your ratio will also be negative and it is high time to trim debt and shore up your assets.

Liquidity Ratio:

This compares how your liquid assets stack up to your current debts. Simply tally up your liquid assets then total your current debts. Any loan that does not mature this year, multiply your monthly payment by 12. Include all credit card debt as current. Once again, the bigger the number the better health you are in. You can further manipulate this ratio by multiplying by 12 to see how many months cushion your current assets would last in the event of no future income.

Debt Ratio:

This measures how much of your gross income your debt obligations eat up. Get your total monthly loan payments. For credit card debt include minimum monthly payment multiplied by 12. Then get your total monthly gross income and simply divide the total loan payments by the gross income. You want a low number here. As this ratio passes 40% on its way up to over 100% you are clearly in the red zone and will need to focus on reducing debt and or increasing income.

Savings Rate:

This measures how much of your after tax income is going into savings. You will need to know your after tax income for the year, and a good estimate of your total expenses. Subtract your total expenses from your after tax income to get your cash surplus. Add in any dollar amount used to purchase securities then divide by your income after taxes. Most retirement gurus suggest you want this ratio to be at least 10%.

Don't get hung up on absolute numbers for these ratios. I assure you the process of calculating them will pop up any reg flags you may have. Lastly, if you haven't checked one of your credit reports lately now may be a good time as well.

Here's to hoping 2010 treats your finances well.