Millennials Are Applying For Credit Cards But Not Qualifying For Them

New findings by consumer risk management firm ID Analytics found that 35% of new credit card applications are made by millennials. That’s 6 points higher than the applications submitted by Generation X, and 7 points higher than baby boomers. While the demand for credit cards among this age group appears to be higher than most, the approval rates are less than impressive. One in five people between the ages of 23 and 27 have been declined for credit multiple times within a single year . Once declined, an overwhelming majority does not re-apply for at least a year.

The biggest obstacle facing millennials in their struggle for new cards appears to be their credit scores. ID Analytics reports that 67% of consumers under the age of 30 have a subprime or non-prime credit score. Worse yet, around 33% of people in this age group do not have any score at all, due to a lack of credit history. Patrick Reemts, vice president of credit risk solutions at ID Analytics, claims that this is, in part, due to the fact that traditional credit scores aren’t tapping into more modern data sources, like cell phone bills. “Traditional credit scores may have served previous generations well,” he writes. “Their lack of visibility into critical modern credit responsibilities [has left] many millennials with incomplete or nonexistent histories at the major credit bureaus.”

Analysis of credit score data by the Federal Reserve Bank of New York found that 67% of those who are 30 or younger have a credit score below 680. A majority of that group has scores below 621, putting them in the subprime-lending region.

This wouldn’t be a problem if millennials were being declined credit for valid reasons. Credit scores are intended to predict an individual’s ability to repay their debt. This filtering mechanism prevents credit cards from falling into the hands of people who, with them, would dig themselves into a financial pit. However, the ID Analytics also found that many individuals in this age group have the ability to repay their obligations. Therefore, there is a clear mismatch between the risk modeling provided by traditional credit scores and the real financial standing of people under 30. This also prevents many millennials from building out a credit history and from ultimately getting travel rewards cards that many of their peers are using as a way to save money on lavish trips.

How Credit Scorers Are Stepping Up

FICO, the company that produces the most widely used credit scoring models in the United States, recognizes these problems. In recent years, they haven taken steps to help underscored groups, like millennials. In 2015, the company introduced FICO Score XD – a new model that draws on alternative data sources to produce scores for otherwise unscorable consumers. However, this doesn’t immediately solve the problem at hand.
Once better models exist, the issue then becomes whether or not lenders actually use them. Currently, FICO 8 is the standard model that most banks rely on when determining credit worthiness for new card accounts. According to Jim Wehmann, Executive Vice President of Scores at FICO, it took “5 years for FICO score 8 to reach usage in 50% of risk management decisions.”

Large institutions typically have many legacy systems in place that make it difficult to upgrade to new technologies. Big banks cannot simply jump on the newest and best credit scoring model, without significant effort. However, research by firms like ID Analytics suggests there is high demand for card accounts among populations that wouldn’t necessarily default on their loans. Perhaps this is enough of an incentive for banks to put resources towards pushing these models through at a faster rate.

A Gap Filled by Alternative Lenders

Some companies have decided to jump on the lending gap created by traditional scores. Affirm is one of the companies gaining the most traction in this space. To date, the company has raised $420M from investors, including $100M from Morgan Stanley just this month. Max Levchin, Affirm’s CEO and the cofounder of PayPal, told CNBC that the company is focused on “creating a purchase oriented, purchase built loan to help folks afford nicer things…especially millennials.” The startup operates by providing consumers loans when at the checkout of some online retailers, including Casper, Reverm and Pixel. Affirm uses some pretty alternative data sources to provide their loans to as many people as possible. According to the New York Times, the company uses things like social network profiles and online communications to assess their users.

The danger to alternative lenders popping up to fill the credit card gap, is that it leaves the door open for predatory practices. This is something that is currently plaguing the small business online loans space, where rates are high and terms are often difficult to sift through and understand. Fortunately, consumer lending in the United States is subject to much regulation that aims to minimize the risk of something like that affecting millennials seeking credit.

Raj Panjabi was one of the lucky ones, though it may not have felt like it at the time. He was born in Liberia in West Africa. And by the time he was nine, his country was being ripped apart by civil war. His family lost their home but managed to find space on a rescue plane, were taken to the US and built a new life in North Carolina.

From then on Panjabi made his own luck. He studied hard at UNC at Chapel Hill, one of the best universities in the US, became a doctor and then joined the faculty of Harvard Medical School. But Panjabi never forgot the people who didn’t make it out.

In 2005, Panjabi decided he could help. The civil war had left the country with just 50 doctors to serve a population of four million. Away from major towns, medical care was all but non-existent. “In remote villages, far from the nearest clinic, you could die anonymously of a preventable illness like malaria or diarrhea,” says Panjabi. “These are things people shouldn’t die from in the 21st century.”
Panjabi returned to advise Liberia’s Ministry of Health and work as a doctor in rural communities. In 2007 he joined forces with a small group of civil war survivors and other American health workers to form Tiyatien Health. With just $6,000, a wedding gift, they set up a rural HIV clinic.

Panjabi and his team then developed a radical but simple solution to the paucity of health care in remote areas. They suggested that locals in could be trained, equipped and paid to carry out basic health care: to screen for tuberculosis and provide anti-retroviral drugs for those with HIV; to hydrate those with diarrhoea; and to administer antibiotics and nutritional supplements for new-born babies.

In 2013 Tiyatien Health, a non-profit rebranded Last Mile Health outside of Liberia with Panjabi as CEO, was supporting 300 healthcare workers who were providing advice and care for more than 30,000 Liberians. In 2014 though Ebola broke out in West Africa and it hit Liberia hard.

Last Mile Health moved quickly to train and support a new frontline of health workers and locals across Liberia to help control the infection. It also worked with the Liberian government to establish and run the Ebola Operations Center.

That kind of response requires support. And it came quickly, from the UBS Optimus Foundation. “With their support we were able to fight back and mount a surge response, training over 1,300 rural Liberian responders, including CHWs, primary care nurses and midwives and community leaders,” says Panjabi.

“The UBS Optimus Foundation’s support helped to train people like Alice Johnson, a nurse who distributed digital thermometers, masks, gloves and gowns to clinics to ensure infection prevention and control measures were in place. And David Sumo, a 24-year-old lab technician who drove a motorbike more than six hours over mud tracks in the rainforest to collect blood samples from hundreds of people at risk. And Zarkpa Yeoh, a CHW who ensured no child with malaria in her village missed a day of treatment even as the health system was collapsing around her.”

Support for Last Mile Health came in other ways too. “I had the honor of speaking at the Global Philanthropy Forum that UBS hosted with its clients in December of 2014,” says Panjabi. “It was during the height of the Ebola crisis and was an important opportunity to inform and get feedback. We received great wisdom and ideas from the group, and had the chance to build new collaborative partnerships that continue to impact our work today.”

For Panjabi it was further proof of contemporary philanthropy’s power. “Philanthropy is becoming more entrepreneurial,” he says, adding that it’s “leveraging the skills of the private sector” to heighten its own impact.

Last Mile Health typifies the kind of partners Optimus supports; organizations that can be genuine game changers; that already have effective leadership but who need more support; that are already making an impact but can be scaled up; and that can effect policy changes at the highest level. Panjabi and his team are a perfect fit. And they have ambitious plans.

Panjabi believes he has a model that can be replicated across the developing world. The World Health Organisation estimates that 1 billion people have no physical access to health care. Panjabi believes that if his model of professionalised community health workers is scaled up, 3 million lives could be saved every year in sub-Saharan Africa alone. “Our primary responsibility is to build an everyday health system that works for the people and provides a health worker for everyone, everywhere, every day,” he says.

As of the end of last week, 78% of the companies that have reported earnings for the most recent quarter have beaten estimates.

That’s on about a third of S&P 500 companies that have reported thus far. Remember, FactSet says on average (the five-year average), 67% of companies in the S&P 500 beat their analyst expectations. And they beat by an average of 4%. So the numbers in this earnings season are running a little hotter, albeit on a lowered bar.

We’ve talked quite a bit in the past week about the run up to Apple earnings, which came in yesterday after the market close. The earnings number beat expectations. But it was by a slim margin.
The stock was lower on the day. Still, on the second quarter report this past July, Apple was a sub-$100 stock (trading at just above $96). Today it will close above $115. That’s 20% higher in the span of one quarter, and it was on a report that was very much in line with the report we heard yesterday. And the report included only a few weeks of the new iPhone7 release. And it doesn’t reflect the implosion of Apple’s competitor, Samsung.

As the media and analysts tend to do, especially when the macro news front is quiet and market volatility is quiet, they picked apart and speculated on the future of Apple today as a company that may have peaked.

Let’s just take a look at the stock, and not pretend to have better visibility on the future of the company than the people do inside–the same ones that put a transformational supercomputer in our pockets
Apple still trades at 13x earnings. The S&P 500 trades at 16x. Apple trades at 13x next year’s projected earnings. The S&P 500 trades at 16.5x. Clearly it’s undervalued compared to the broader market. What about Apple’s monster cash position? Apple has even more cash now–a record $237 billion. If we excluded the cash from the valuation, Apple trades at 8.6x earnings. Though not an apples to apples (pun), and just for a reference point, that valuation would group Apple with the likes of these S&P 500 components that trade 8x earnings: Dow Chemical, Prudential Financial, Bed Bath & Beyond, a Norwegian chemical company (LBY), and Hewlett Packard Enterprise. It’s safe to say no one is debating whether or not Hewlett Packard is at the pinnacle of its business. Yet, if we strip out the cash in Apple, AAPL shares are trading at an HPE valuation.

Apple still looks like a cheap stock.

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Earlier we looked at how to become a billionaire. It’s really not that hard if you can live long enough. Today we are going to look at how to accumulate $1 million in retirement accounts. More specifically, we are going to examine some common mistakes people make that derail their savings goals.
Let’s start with the assumption that one saves $1,000 a month in a 401k or IRA (subject to contribution limits, of course). If invested in an S&P 500 index fund, it will take about 22 years to become a millionaire. This assumes a 10% return on stocks (more on this assumption in a moment).

In contrast, if one were to stick the money under their mattress, it would take just over 83 years to achieve millionaire status. And after even modest inflation, one would never accumulate $1 million in today’s dollars.

With our baseline set, let’s look at some common mistakes investors make. What’s fascinating about these mistakes, as you’ll see, is that at first glance they look like sound decisions.

Mistake #1: Bonds are Safe

It’s a common belief that stocks are risky and bonds are safe. It’s important to understand what is meant by “risky” and “safe.” In the investment world, risky simply means volatile. Stocks are “riskier” than bonds because their prices fluctuate more widely. Stocks can go up or down by 30% or more in a given year. Bonds tend to stick to a tighter band of returns.
The problem with this definition of risk is that it doesn’t tell the whole story. According to Vanguard, a 100% bond portfolio returned 5.4% from 1928 through 2015. Using this return data, and saving $1,000 a month, it would take 32 years to become a millionaire. That’s an entire decade longer than the 100% stock portfolio we looked at earlier.
Halloween is just around the corner and we all enjoy giving a good scare, especially when playing a silly “trick” on our kids. Make sure your “scare-tactics” focus on goblins and ghosts and not on our often ghastly behavior around money. Unfortunately, I’ve seen my fair share of scary financial situations, which have really messed with our kids’ perception of money. What are some of those instances that will haunt the financial lives of your children? Let’s try to unravel some of these messes and messages to turn the, “Boo” into “Do.”

Scary Thing #1:  Making Money The Biggest Secret In Your Family

If you are like most families, money issues are the biggest secret within the household.  Your kids may ask what something costs, what you earn, or how much the bill was for dinner at the local restaurant last night.  Your knee-jerk reaction may be, “Don’t ask about money, it’s impolite.”

Hold on! Do you want your kids to have a healthy attitude toward money? Do you want them to understand what it can and can’t do?  You never want them to confuse “net worth” and “self-worth;” however, if you never discuss it, or hide behind “being polite,” they will ultimately learn about it from friends.  Those lessons may not reflect your values.

Buck up and make the money part of your life, the business part as well.  You want to teach your children to grow up to be financially responsible, so start talking.  Begin with the small things.  When they are about 10 years old, introduce them to some of the household bills and work with them to understand that there are costs involved with, for instance, electricity.  It just doesn’t come with the house.  You are not practicing recreational yelling when you pounce on them for having a conversation with the refrigerator door open; there is a real cost to that behavior.
Challenge your kids to reduce the electric bill by unplugging cell phone chargers, turning off the TV or computer when they leave the room, and, yes, only opening the fridge when they know what they are looking for. They can track the savings and you can decide whether or not to split the windfall with your kids each month.

When there are teens involved, you can discuss your real budget, unless you feel it will scare them. Your goal is to allow them to understand how the real world of money works.  Show them your pay stub, if you are comfortable.  Explain that you are entrusting them not to share this knowledge with anyone.  It could make their friends feel bad; this is information that should be kept within the family. Show your kids what is taken out for taxes, Social Security, and benefits like a 401(k).  Explain what you are saving for in the future.

Scary Thing #2: Fostering, “The I Want, I Want Syndrome”

You know how your kids can nag you for something they want?  Well, if you give in and just say, “Yes,” you are supporting the notion that they are entitled to get what they want if they whine enough.  It may work when they are little ones, but it probably will not be okay with you by the time they are teenagers, and hopefully not as they move into adulthood.

Nip this behavior in the bud when they are young.  Show them that the only way to get money is to earn it.  Set up my simple allowance system that shows them how to do chores (work) to get money (payment).  The caveat is that there are two types of chores within any household; Citizen of the Household Chores, where they do not get paid, and Work for Pay Chores, where they do get paid.

Mom and Dad, you are the CEOs of the household, so you decide on what chores go into which category.  In my home, my kids had to keep their own rooms free of breeding diseases, and they didn’t get paid for that.  They also had to learn respect for public places in the house and clean up their toys and stuff.  Work for Pay Chores taught them the life skills that they needed to run a home, such as dusting, recycling, loading and emptying the dishwasher, doing laundry, vacuuming, making a shopping list, etc.

Next, comes the pay.  I recommend that you pay kids their “age” per week; a 5-year-old receives 5 dollars and a 10-year-old receives 10 dollars. With their newly-earned income, should come the habit of budgeting.  Get four clear jars or envelopes and label them: Charity (10% goes into that jar); Quick Cash (30% goes into that jar to go for instant gratification spending); Medium Term Saving (30% goes into that jar for kids to push off instant gratification and save for something more expensive); Long Term Saving (30% goes into that jar to save for college).

Scary Thing #3: Fighting About Money In Front Of The Kids

Money problems bubble up within any family and they can cause a tremendous amount of stress.  We have to deal with financial issues every day of our lives.  These issues can also be attached to subconscious baggage that we carry with us from childhood. The Wall Street Journal noted; “That’s because when couples argue about how to spend money, they’re not just debating the issue at hand, such as how much they can put on the credit card each month, or whether they can really afford that big vacation.  They’re giving voice to subconscious anxieties that even they may not be aware of—bumping up against the unarticulated fears of their partners.”

The bottom line?  Your arguing causes your kids to become stressed out, and thus they will start to develop their own “scary” relationship to money.  So, “let it go” when you are in front of the kids; don’t frighten them.

The money part of your kids’ lives should be healthy and not scary.  Come clean with them about how money works.  Remember the words of Lloyd Douglas, the famous minister and author who said, “If a man harbors any sort of fear, it makes him landlord to a ghost.”
The latest episode of “The Bulletin with UBS” on Monocle 24 delves into the third edition of the UBS/PwC Billionaire Report, part of a continuing investigation into an historic era of wealth generation. The featured data covers about 1,400 billionaires over two decades; it includes 14 of the largest billionaire markets, accounting for about four fifths of billionaire wealth around the world.
China may be the world’s largest emerging economy, beating India in many economic and financial indicators. But India is beating China in an indicator that matters the most to emerging market investing: financial market development. This means that India is less prone to a financial crisis than China, and therefore, a better investment than China.

China’s economy outperforms India’s in many metrics, including World Forum’s Global Competitiveness – where China occupies the 28th and India the 39th position – and per capita GDP, where China beats India by more than three to one—see tables.

Apparently, China has been doing a lot of things right. That’s why it is suggested as a model for India.

But there’s an important metric, financial market development, where India beats China. India ranks 38, while China ranks 56.
 Source: World Competitiveness Index, World Economic Forum.

Financial development is the 8th pillar in The Global Competitiveness Index, and includes several sub-metrics that describe the soundness of a country’s financial sector. That includes such measures as domestic credit to private sector, financing of SMEs, corporate bond issuance, financing through equity markets, market capitalization of listed companies, soundness of banks, bank non-performing loans, and regulation of security exchanges.
Why is this metric so important? First, poor financial development leads to uncontrolled growth of credit, which fuels financial bubbles, which lead to economic crises.

That seems already to be the case in China. In a recent report the Bank for International Settlements (BIS), pointed to the rapid rise of China’s credit-to-GDP ratio, which now stands at 30.1, three times the threshold of 10 that indicates an impending financial crisis.

Second, the financial system is the Achilles heel of emerging market economies – the sector where economic crises arise, and the reason equity market rallies end and bear markets begin.

In fact, it was government’s heavy-handed intervention in financial markets that killed recent rallies in Chinese equities, which have been lagging behind Indian equities in the last five years. And things can turn worse, when China’s multiple bubbles burst.

That’s why I’d rather bet on Indian rather than Chinese equities at this point.
The Internal Revenue Service (IRS) has announced the annual inflation adjustments for a number of provisions for the year 2017, including tax rate schedules, tax tables, and cost-of-living adjustments for certain tax items.

These are the applicable numbers for the tax year 2017 - in other words, effective January 1, 2017. They are NOT the numbers and tax rates that you’ll use to prepare your 2016 tax returns in 2017 (you’ll find them here). Rather, these numbers and tax rates are those you’ll use to prepare your 2017 tax returns in 2018.

If you aren’t expecting any significant changes, you can use the updated tax tables to estimate your liability for the 2017 tax year. If, however, you are expecting to make more money, get married, buy a house, have a baby or other life change, you’ll want to consider adjusting your withholding or tweaking your estimated tax payments.
If you are filing as an individual taxpayer, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your federal income tax return. Take a look at line 76 of your form 1040: if it is at least $1,000, you should likely be making estimated tax payments.

estimated tax threshold

Similarly, if you owed federal income tax last year and expect to owe again this year, you may also have to pay estimated taxes for the current year. Some exceptions and special rules apply, so check out federal form 1040-ES (downloads as a pdf) for more information.

To make estimated payments, you’ll figure your estimated tax; you can use the worksheet on the federal form 1040-ES to figure your estimated tax. For estimated tax purposes, the year is divided into four payment periods, about once every quarter. Each period has a specific payment due date as determined by IRS (usually April 15, June 15, September 15 and January 15). Watch the dates carefully: if you don’t pay on time, you may be subject to a penalty.

If you don’t make enough in estimated payments for 2011, you may owe a penalty if the total of your withholding and timely estimated tax payments did not equal at least the smaller of:

90% of your 2011 tax, or
100% of your 2010 tax. This amount is considered the “safe harbor” amount. A good rule of thumb if your income doesn’t change from year to year is to pay at least as much as you owed in tax for the prior year. There is one quick exception: if your adjusted gross income (AGI) for 2010 was more than $150,000 ($75,000 if your 2011 filing status is married filing separately), you must pay at least 110% of your 2010 tax for the safe harbor amount.
If you are subject to a penalty for not making enough estimated tax payments throughout the year, you can figure the penalty by using federal form 2210 (downloads as a pdf). The penalty amount is entered on your return at line 77; add the penalty to your total tax due and enter that amount on line 76.

estimated tax

A good example of when a form 2210 comes in handy is when your income varied during the year and your penalty is reduced or eliminated when figured using the annualized income installment method. Taxpayers use this method when income is uneven throughout the year; for example, instead of receiving a regular paycheck every other week, the bulk of your income comes in summer due to seasonal employment. When this happens, your estimated tax payment is figured at the end of each period based on a reasonable estimate of your income, deductions, and other items from the beginning of the tax year through the end of the period. While this method can save you from unwanted penalties, it can also be tricky.

You will not file form 2210 with your return unless the instructions on the form indicate that you must. Typical situations that would require the filing of form 2210 would include a request for waiver of part or the entire penalty. There is an exception to this rule for weather-related issues. Last year, floods, hurricanes, tornadoes and fires created havoc across the country and interfered with making estimated payments. If you lived in a federally declared disaster area and were granted a break on making estimated payments, you do not have to do anything special and you do not need to file form 2210. The IRS will automatically identifies taxpayers located in a covered disaster area and will apply the appropriate penalty relief. If you still owe a penalty after the automatic waiver is applied, the IRS will send you a bill.

If the math is too much for you, you can use tax prep software to figure the amount due. You can also choose to leave line 77 blank and the IRS will figure your penalty and send you a bill unless you use the annualized income installment method (this is where that tax pro comes in handy). The IRS won’t charge interest on the penalty amount if you pay by the due date on the bill.

It’s important to try to file and pay your estimated payments by the applicable deadlines but if you miss one, don’t assume all is lost and just ignore it. Ignoring a missed payment won’t make it go away (anymore than ignoring a bill will make it go away). If you miss a payment, simply file and pay as soon as you can. Remember that penalties are imposed on each underpayment for the number of days it remains unpaid so it’s to your advantage to pay as soon as you can.

Of course, if you miss a payment, there’s no need to panic either. The penalty is worth, roughly, the unpaid interest on the estimated payment. It’s not huge but it’s not worth racking up.


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