In addition to marriage and relationship skills educators and financial educators, there are other financial tools that provide couples with options for improving their relationship with their partner and their credit. These tools include electronic payroll transfers, alternative credit scores, envelope budgeting, credit counseling, bankruptcy as well as programs to use credit to build assets, such as Individual Development Accounts (IDAs) and Marriage Development Accounts (which were discussed in Brief 1). Resources that can help address financial consequences brought on by family issues include help with child support payments and divorce mediation.
Other practical steps can make good financial practices the “default option” for couples. For example, direct deposit of earnings has been shown to lead to higher rates of savings.16 However, this option may be less available for employees who have lower wages or work less than full time. Secured credit cards are another example that can provide a training experience with credit. Automating the process of ordering a free credit report annually, thereby making receiving the report the default option, might also be helpful to couples.
Electronic Direct Deposit or Electronic Payroll Cards
If employers offer direct deposit of paychecks into savings or checking accounts, most financial experts recommend doing this because, on average, people who use direct deposit services save more than if they received their paycheck in traditional hard-copy form. For couples who are attempting to stay on their family budget, this can be a simple yet effective solution to curbing spending.
Alternative Credit Scores
For low- and moderate-income couples with bad credit or a lack of credit, alternative credit scores can provide a solution. Many people with low incomes use cash, write checks, or use debit cards instead of using credit, and therefore do not develop credit histories. The Fair Isaac Corporation, creators of the FICO score, introduced the FICO Expansion score to aid individuals without established credit histories. This method of credit scoring involves using utility payments, such as water and electricity, as a way to measure an individual’s ability to pay their debts. An Anthem score is another nontraditional credit score. Designed to assess the risk of potential borrowers with little or no traditional credit history, it incorporates additional indicators like rental history and utility payments into its model. Making use of alterative credit scores can give couples with low incomes improved access to credit based on their past success in making payments.
Envelope budgeting is a method where cash is divided into different, categorized envelopes. These envelopes are labeled for categories of spending including required spending, like a mortgage, groceries, and medical bills, and discretionary spending, such as eating out, entertainment, and shopping. As cash is divided into envelopes, it is immediately visible to all family members what on-hand cash is available to pay bills, make purchases, and contribute to savings. This method is simple to set up and manage and allows each partner to be completely aware of their financial situation.
Families must carefully consider if it makes sense to work with such a credit counselor, as much of this work can be done by the individual. Selecting a reputable, responsible organization is critical since some disreputable organizations prey on struggling families. Check out credit counselors with the state Attorney General, local consumer protection agency, or the Better Business Bureau.
Managing debt and building good credit can be challenging and there are some very good, well-known nonprofit and community organizations that can help couples get back on track. One organization is the National Foundation for Credit Counseling (NFCC) (www.nfcc.org). Programs like NFCC ask borrowers to turn over all their credit cards and for a $10 monthly fee and a check, NFCC will pay the debtor’s bills. By doing this, the counselors are able to negotiate and secure a lower interest rate than the borrower; thereby reducing the total loan amount and time required for payback. However, if both members of a couple with joint accounts do not agree to be involved, there is little that credit counseling can do for joint debt. Another drawback to this service is that in most cases, for seven years a borrower’s credit report will contain a line stating that he or she paid through NFCC. However, some credit companies view this as a positive move toward taking control of debt. Some credit counseling operations are financed by lenders and using them may have other consequences. And couples should be cautious that if it seems too good to be true, it probably is. Figure 5 presents the basic steps in acquiring credit counseling assistance.
Credit Counseling: What are the Steps?
If couples in difficult financial positions contact a credit counseling service, valuable advice can be available on specific financial situations as well as referrals to money management and credit education services. While each credit counseling agency may have different procedures to connect families to counselors, there are general steps that each follows.
- Pick a Reputable Counseling Agency—Financial educators recommend contacting an agency that is a member of the National Foundation for Credit Counseling (NFCC) or The Association of Independent Consumer Credit Counseling Agencies (AICCCA). Another option is to obtain a direct referral to a reputable counselor through a community service provider who may already be assisting or a local social services department. A reputable credit counseling agency will send free information about itself and its services without requiring the consumer to provide any personal financial details. The Better Business Bureau and the state Attorney General’s office should also be consulted. The FTC provides tips on choosing a credit counselor and avoiding untrustworthy organizations at: http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre26.shtm
- Set up an Appointment—Many credit agencies are part of national networks so the first step is to set up a user profile in their system. This can be done over the phone or on the internet. After this step, families are put in touch with a credit counselor if one is immediately available, a phone appointment is set up, or an appointment at a local agency who is a member of the network is made. During times when consumer spending is high such as the holidays, there may be a delay in getting an appointment.
- Talk to the Certified Credit Counselor—In an hour-long appointment that is free of charge, credit counselors will talk to families about the details of their debts and living expenses. Contacting a credit counselor for a free appointment does not ruin clients’ credit report so it is best to encourage accurate disclosure of debt and living expenses. Sometimes counselors are available through internet chats and e-mails to address specific questions.
- Decide on Customized Plan—At the end of a counseling session, the credit counselor will explore specific options that are available through their organization. Recommendations are made based on what debt couples face. Not all credit counseling agencies offer help with the full range of debt relief and credit repair options, some just specialize in particular debt relief options such as credit card consolidation. In this case, these agencies make referrals to other agencies that help deal with collection agencies or mortgage delinquency. It is likely that credit counselors will discuss education options to encourage healthy financial spending and credit options in the future.
SOURCE: Personal Communication, Consumer Credit Counseling Services.
As a last resort, bankruptcy is sometimes the only answer to starting fresh and rebuilding credit and finances. Declaring bankruptcy has serious long term financial implications and therefore should not be undertaken lightly. When an individual files for bankruptcy, the court takes control over all assets and orders them to be liquidated and used to repay creditors. For 10 years, the declaration of bankruptcy will appear on credit reports, which will likely make insurance and payments more expensive. When considering bankruptcy, first look to see if it is possible to pay off debts within the next two years. If the answer is no, then filing for bankruptcy might be considered.
Family breakup is one of the top three reasons that families with children cite as the cause of bankruptcy.17 Experts advise families to wait until the crisis that resulted in financial disaster passes before filing for bankruptcy, so the risk of increased debts after filing is minimized. If there is nowhere else to turn, bankruptcy offers the opportunity to have a fresh start, but at a cost that is better avoided if possible.
Help With Child Support Payments
Research shows that child support is an important source of income for single parents, yet many low-income single parents, who are often mothers, receive inconsistent payments from non-custodial parents.18 There are several reasons for the irregular payments that include: constraints on non-custodial parents’ ability to pay such as spells of unemployment; non-custodial parent is incarcerated; tensions about the amount of the child support payment especially if they are several delinquent payments; non-custodial parents’ concerns about how the income is spent by the custodial parent.
There are currently programs in different states designed to help non-custodial parents who make a good faith effort to make more consistent payments. These programs assist with the following:
- Better align obligations with fathers’ ability to pay and make it easier to modify order if needed.
- Forgive arrears if non-custodial parents make good faith efforts to make payments.
- Reduce the amount of child support that non-custodial parent reimburses the government so that more income goes to low-income children.
- Through marriage and family strengthening programs, improve parents’ communications skills to help deflate conflicts over child support payments could lead to more consistent payments over time.
- Set up electronic payment systems that include direct deposits into savings account or debit cards.
Although child support payments are cash transfers that occur within families from one parent to another, they can also be used build by families to build future assets for children.
Divorce and Child Custody Mediation
Divorce has both emotional and financial consequences for parents and can be especially hard on children during child custody negotiations. Although divorce is difficult, encouraging a process to keep parents’ communication levels open and honest about their children and their financial situations is important for children’s well being during and after the divorce. Experts suggest that parents consider using collaborative forums for child custody negotiation such as mediation rather than litigation. Research has shown that for families who had been randomly assigned to mediate rather than litigate child custody disputes, nonresidential parents who were more involved in their children’s lives, had lower conflicts with the residential parent and had greater influence in co-parenting 12 years after their child custody dispute was resolved.