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Originally published Saturday, October 12, 2013 at 8:04 PM

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Conventional wisdom not always on the money

Surprising results of several recent studies and surveys might have you asking some interesting questions about your own household finances.


Chicago Tribune

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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?

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 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.

Does loyalty pay? You might think that sticking with your auto insurer year after year breeds goodwill 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.

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,” wrote Federal Reserve Board authors Jane Dokko and Geng Li.

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 take-away isn’t necessarily to choose mates with high credit scores, but for young couples to discuss finances and credit use before marrying.



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