Everybody knows that the economic crisis came about, in large part, because loans were given that could not be paid back. Since then, both the government and individual lending agencies have developed stricter lending policies in order to prevent the same thing from happening again.

In theory, this is a good thing.  Stricter lending laws seem to lead directly to the giving out of fewer bad loans, which in turn will not be sold as investments and will not tank the economy when they’re not paid back.

The downside of stricter lending, though, is that having fewer bad loans means having fewer loans in general, and that means less consumer spending and fewer new jobs in important sectors such as the construction industry.

While many of these stricter lending policies have to do with loans given out to individuals and families hoping to purchase a new home, some of them also target construction companies.  These companies are often being asked to put down double the down payment they had before the financial crisis, plus a deposit equal to a year’s worth of interest on the loan.  With this kind of up-front investment, it’s no wonder construction still only proceeds slowly.

Since the construction industry is one of the prime places where new jobs will pop up, holding it back means holding back the entire economy. Some economists say that this is worth it to deter another crisis, but others aren’t so sure.

And the stricter lending policies are hitting individuals, too. Take the new FHA lending rules, for instance.  Not only are they making loans harder to get, but they’re hurting condo prices across the country. It’s now harder than ever for a condo complex to qualify for FHA buyers, and that means the pool of potential purchasers for these condos is lower. With demand down, condo owners have to sell for less or hold out and hope things get better.

With every positive move, it seems, there are also negative repercussions.

Have you been hit by the new lending rules? How has it hurt (or helped) your situation?

Image courtesy of SliceofNYC.

Unless you’re a mechanic, you probably dread the day you have to take your car into the shop. Whether it’s making an unusual noise or it’s just time to change the oil, you often end up spending more than you’d hoped. However it doesn’t have to be this way. With just a little bit of education, you can save hundreds or even thousands of dollars every year.

Start With a Reputable Brand

Consumer reports and auto magazines publish the latest reliability and durability studies on automobile brands.  Don't buy a car for it's looks or fad, but factor in functionality and maintenance cost.

Read Your Manual

Your car’s manual won’t tell you how to repair your car, but it will tell you how often maintenance needs to be done. You might be surprised to find out that you don’t have to change your oil every 3,000 miles - in fact, some cars only need it every 7,500 miles, or even every 10,000.

In addition, reading your manual will tell you when your timing belt, your transmission fluid, and other commonly serviced parts of your car need to be looked it. That way, you won’t end up falling victim to an upsell from a mechanic.

Avoid Repairs by Learning to DIY

Most cars, if taken care of and maintained properly, can last a long time without needing major repairs.  Learn to perform the basic maintenance yourself (or recruit the man if your life).  You'd be surprised how simple changing your oil, renewing spark plugs, updating your windshield wipers or topping off your liquids actually is.  Simple maintenance tasks done in a timely manner will keep you away from the mechanic's operation table.

Track Your Repairs

It’s good to get into the habit of writing down the mileage and date of each repair you have done. That not only makes it easy to see at a glance if you need to get routine maintenance done, but it will also help you spot any problems. If, for instance, you had the brakes replaced several months ago and they’re already wearing down again, it’s time to look for another problem.

Get to Know Your Mechanic

While you don’t need to be buddy-buddy with the guys who fix your car, having some sort of relationship with them will help make sure that you get good service. If they come to know your car, too, they might be able to spot some trouble before it becomes something major. At the very least, having a relationship with your mechanic will often meant that they send you coupons in the mail, which you can use to lower your routine bills.

Know When To Part With Your Clunker

Let's face it, cars won't last you forever.  If your car has high mileage count, or keeps needing frequent stops by the mechanic, you may be better off getting rid of the clunker and getting into a new ride.  Do the numbers: add up all the repairs in the last 6-9 months and average it out for an approximate monthly maintenance bill.   Also look for potential residual value you can use to get yourself in a new car.

Have you found a good way to save money on car repairs? Share your tips with fellow readers in the comments.

Image courtesy of Teo Romera.

Since August of 2008, just before the bottom dropped out of the housing market and the current financial crisis got its start, credit card debt in America has dropped or stayed at the same levels.  Consumers have practiced an uncharacteristic frugality, spending less and paying off their bills in full when they do use cards. They have controlled their buying habits, because they saw the trouble that spending had gotten them into.

Until now.

In a report released by the Federal Reserve last month, credit card spending seems to be climbing back up once again.  At the end of December, it was up $2.3 billion from only a month previous, which is an annualized rate of 3.5% growth.

And that may only be the tip of the iceberg.  Banks will charge-off credit card debt that consumers cannot pay, and this isn’t collected in the Fed’s statistics. If this amount was $5 billion in December, which is a reasonable approximation, then debt could have grown by as much as 20% more than what was reported.

All of this leads us to ask, “Why?” Haven’t Americans learned anything in the last two years? What makes people think that they can add debt now, when six months ago they weren’t comfortable doing that? Has something changed?

Here are some reasons why consumers are feeling more comfortable adding debt again:

1) New Credit Card Rules
With new rules regarding credit cards, including caps on interest rates and statements that are easier to read and interpret, it’s likely that most consumers feel safer using their cards than they used to.  Even if they don’t know or understand the details of the new laws, the fact that these exist and have been reported on extensively by the media lure people into a sense of security.

However, this security might be false. Interest rates were not capped at a level most experts would consider “low.” In fact, they can still be much, much higher than the rates that come with borrowing via traditional loans. Consumers still need to take care that they don’t use credit cards to run up bills they cannot pay off, or they’ll find themselves in the same kind of trouble they were in before.

2) Economic Improvements
To most Americans, the economy seems to be doing better. Though unemployment rates are still relatively high, layoffs have, for the most part, stopped. In addition, the DOW Jones and the S&P are rising steadily, and people associate overall economic health with the health of those indexes.

While the economy is recovering slowly, that doesn’t necessarily mean that it’s a good idea to move back into the “spend today, pay tomorrow” mindset. After all, that mindset is a big part of what caused these problems in the first place. If everyone moves back to functioning that way, the economy could teeter on the edge faster than most people might think.

3) Jobs are More Stable
Though most companies aren’t hiring a lot of new positions, those who have retained their jobs are less likely to lose them than they were even a few months back. Unemployment numbers have looked better the last 3 months, plunging nearly 1 percentage point.  This means that people know how much they’re making, and feel confident in having a steady income over the foreseeable future. Thus, they’re more comfortable spending because they know that they won’t get stuck without the money to pay anything off.

There’s truth and falsehood here, though. While it’s true that having a steady income makes it easier to pay off credit card debt, running up bills so high that you struggle to make minimum payments is never a good idea. A solid income gives a little more freedom for spending, but consumers should still make sure that paying off their debt is within the capacity of their income.  Debt-to-income ratio is an important indication of a person's credit health: the lower it is, the better.

4) Times are Tough
While many Americans are doing better, the effects of the economic crash and the credit crunch still linger in many families. With credit cards slowly becoming easier to obtain, like they were before, some of these cash-strapped folks may be covering their basic needs in the only way they know how: with credit.

It’s usually better to pay your bills than to default on them or to pay them late. However, when you pay one bill by racking up another, it’s hard to know if you’re making a good choice or not. When there’s no other option, credit cards are better than nothing. That bill will come due before you know it, though, and you’re not in a much better situation if you can’t pay it off.

5) Old Habits Die Hard
Before the markets crashed in the fall of 2008, the United States had experienced a season of market growth. In times like that, people always spend more and use credit more freely. Over time, spending money like that becomes a habit. While relative poverty can enforce frugality for a time, a society like ours, that touts material possessions and excess, will almost always go back to spending when things even out.  Perhaps, after a few months of counting every penny that comes in and goes out, Americans are feeling frugal fatigue.

Right now, Americans are tired of looking at things that they can’t have. They’re tired of feeling poor, and they feel like they’ve reined themselves in long enough. Spending less for two whole years took a lot of energy, and now that there are hints the overall situation is improving, consumers have their credit cards out and ready to go.

Let's hope the trend is just a cyclical result of the holidays and a bit of optimism, but if Americans are spending more without the means to pay for it, we are headed to yet another set of financial troubles.

Are you using credit more or less than you used to? Tell us why in the comments.

@RobGarciaSJ

PS. A hat tip to Daily Finance, WalletPop, and the The LA Times for the statistics quoted in this article and some of the insights that prompted it.

Plato once offered an answer to what drives innovation: "Necessity, who is the mother of invention".   This can't be more true today in the banking and financial services industry.  So how have customer needs changed in the last few years, and what does it tell us about the future of money?  I try to answer these question after listening and interacting with visionaries in the financial and start up worlds who were present at the top financial innovation event in the country: The Future of Money and Technology Summit.

Overall, I found myself immersed in a sea of positivism and excitement about the future of financial services.  Yes, there was  dose of realists at the conference, and to certain extend retrograde thinking.  Mikki Langston, one of the attendees at the conference, summarized the vibe in the crowd in her tweet: "There are 2 groups present: those who want to expand their financial empire, and those who want to change finance completely." Yet overall, you could feel the almost unanimous agreement that the future of money is bright and innovative for banking, payments, transactions and money management.   Here is what the future holds:

It Will Be Very, Very Different
The last 3 years have provided the perfect opportunity for start ups and big banks alike to innovate.  In an environment of credit crisis and financial instability, banks are trying to figure out how to make up for loss of revenue, while start ups are finding endless opportunities to fill the big disillusionment hole left by the traditional financial institutions. “What it means to be a bank is up in the air,” said Schwark Satyavolu of BillShrink. “There’s an opportunity to fill huge gaps in what has been a static industry for hundreds of years.”

Customer needs have changed significantly.  After the credit crisis we suffered through, trust in the financial system is at an all time low, making people more aware of their money.  Now more than ever, consumers want to know 3 things:

1. Where their money is:  obviously trust in the institution matters, but also how the money is being used (invested) also matters more than ever.   Is my bank using my money to indirectly finance industries that I am morally opposed to?  is my bank investing in esoteric mortgage-backed securities? How can I influence how my money is used? As Don Shaffer from RSF Bank put it: "Consumers have no control of what their money funds at big national banks."
2. What my return is: whether my return is measured as an interest rate, a social impact, or as services and features, more people are now aware of how hard their money is (or should) be working.  Why should I take a measly 0.05% on my checking account? when the bank is turning it around and lending it to people at 5%, 10% and even 20% (as in credit cards)? 
3. What my fees are: free checking and high-yield accounts are now a thing of the past.  Banks are trying to figure out how to make money, and consumers are painfullyaware of this situation as they experience increases in credit card rates, account fees, and other ways banks are lining up to collect more dough.

"It's expensive to be poor with the disappearance of free accounts and other services at your bank." said Ryan Gilbert from BillFloat.  Some consumers are finding out the hard way, realizing they are better off moving their banking to other cheaper online options such as SmartyPig.com, or local banks  and credit unions.   At Lending Club, we have also experienced an influx of funds from investors who prefer to move their "idle money" into investments in consumer credit (personal loans) and obtain a higher, steady return instead.

Other consumer trends that will impact how we bank? Definitely! Everyone seemed to agree that in an age of hyper connectivity, social networking, and real time lifestyles, banking and financial services are changing for the better, and it will be very, very different in the future.  It already has evolved significantly, if you count how mobile, online banking, and the evolution of personal finance management, credit score management (i.e. CreditKarma.com) and investing tools.  Al these innovations have changed the way we manage and invest our money.

So one thing is for sure: change is happening in the banking industry, and there is no turning back.

Money Will Be Mobile, Virtual
Paul Blythe of Microplace jokingly said "Who uses cash? Primarily, criminals!".  The same way we have seen a move from cash to credit, debit and gift cards, we will see an even more rapid adoption of "mobile money".   Take the example of gift cards becoming obsolete: according to PlasticJungle's Bruce Bower , "most people are motivated to redeem cards within a week, but remaining balances are often forgotten.  Mobile will increase redemption".

In this next year, we should also start seeing more trials of technology that allows account holders to "swipe" their mobile phones at points-of-sale.  Bank of America seems to want to jump in on the technology first with this interesting mobile payment technology test.

Other interesting experiments in this area are the Starbucks Mobile Payment card and mobile credit card payment gadget Square.

Digital money will be even more pervasive in the global economy, as citizens of third world countries are starting to adopt mobile as the de facto standard of carrying and transacting money.  This is a tangible and real way the unbanked and underbanked are gaining access to financial services: with a phone.   Carol Realini of Obopay cited the example of Kenya as the world's most developed mobile payment market, where mobile payments  equal 20% of all commerce, at a whopping $33 average transaction.

Personally, I certainly hope mobile becomes a more prevalent form of payment, perhaps kill the debit card altogether in the distant future.  One thing did seem funny to me: I still had to use cash to pay for lunch and later get a drink at the cocktail reception after the event.  Ironic, isn't it?

Projects and Financial Products Will Be Crowdfunded
Long are the days when people had to knock on doors or send mail to get a project funded.  Collecting money, be it for a non-for-profit organization, starting a business, or other more selfish endeavors, has seen a dramatic change in the last three years with the help of social networking, online based microfinance, crowdfunding, and peer lending.  Even venture capital is currently being raised online.  Lending Club was mentioned in several panels as an example of a new kind of trust building financial institution that uses transparency and simplicity as core to its model.   Try that at your favorite bank.

For example, to get a personal loan, consumers had only 2 options until recently: knock at their bank's door, or ask friends and family.  Now, companies like Lending Club have made a financial product such as a personal loan available at lower rates by allowing other individuals to fund those loans.  In the UK, this concept has had so much success with Zopa pioneering the space, followed by a handful of other companies (ratesetter.com, yes-secure.com, quackle.com) that the media hails it a true challenge to tight-fisted banks.

Danae at IndieGoGo spoke about the establishment of online money-collection as the most efficient way to raise capital, while Jessica Jackley of ProFounder talked about how entrepreneurs will soon have more options to fund their businesses.  AppBackr debuted their model to get mobile apps funded and distributed leveraging the VC funding wisdom of the crowd.  Even the "future of angel investing is all in the cloud", said David Rose of New York Angels.  Crowdfunding eliminates the middle man, creating efficiencies and benefiting both sides of the transaction.  As crowdfunding models mature, we'll see more institutional money and even banks jumping in to invest some of the cash they have sitting around.

Financial Decisions Will Be Information Driven, Made with Social Input
Yes, I did say it during my panel: "The last taboo topic on Facebook is money.  People still feel more comfortable sharing about their sex life than their checkbook on social media".  It is true, how many of your friends have you shrugged your shoulders on thinking: "Did you really have to share that?, where is the dislike button?" But I bet you have never said: "Hmmm, let me help my friend X with her CD  or financial question".  This is not about to change, folks.  Money is a difficult topic to discuss in public.  You don't share your money decisions with your close friends over dinner, why would you go on Facebook to do so?  However, social networking and social media serve as message augmentation and sharing of good news.  Since many of the new financial products are smartly integrating social media as part of their communication strategies, they have the potential of faster adoption and "sharing" among friends, family and even strangers.

Another clear trend is aggregation and visualization of financial data: aggregate data from social networks and money transactions will play a central role in financial decision.  This is already happening to certain extend in places like Mint.com, CreditSesame.com and ReadyForZero.com, where better data visualization of your money and credit situation helps consumers make smarter decisions.   User Experience will become an integral part of managing one's finances, as real time engagement banking will be more expected by consumers.  BankSimple, ING Direct and CBW Bank are examples of new financial organizations that get this concept better than the big banks.

Will we see Facebook become a bank? I don't think so, but social media will most definitely play an important role in the evolution of banking and financial services.

Back End Will Still Be Dominated by the Banks

Antonio Benjamin, Global CTO at Citi Group, painfully reminded the crowd during his conference closing remarks that most innovation in the last few years still depends of the core banking infrastructure.   He instilled some hope when he stated that his "personal aspiration is for Citi to provide entrepreneurs access to the banking infrastructure, including global payment network".  Still to be seen if a major bank would do something that bold.  During a couple of sessions, people got really excited about progress made in the last year to make the banking infrastructure more open and distributed, but the fact of the matter is that regulation and central governance seems to impede significant progress in this area.  It's still to be seen how much advancements in technologies will help the core banking infrastructure advance its centuries old core.  Open source currency? distributed virtual economies? alternative payment systems? I'll give all that a big TBD.

What do you think the future holds for banking?

Drop us a comment below and tell us what you think: how will you see the banking and financial industry evolving? What features or products are you more willing to adopt?  What emerging changes in consumer behavior or attitude will shape up how we use and manage our money?

@RobGarciaSJ

A New Year is supposed to be about a fresh beginning. You set goals and renew your efforts to improve yourself. Inevitably, this list of goals includes those have to do with finances. Unfortunately, as we list out goal after goal, it starts to become overwhelming. This is especially true as we begin to think of all the things we’d like to do with our finances.

For 2011, though, you might be able to simplify things significantly if you set one financial goal to work on. Goals like pay down debt, build an emergency fund and learn to invest are all great, but they can be overwhelming – and vague. Instead of trying to do everything all at once, you can determine what your most important financial goal should be for the coming year, and focus on that.

This doesn’t mean that you neglect other aspects of your personal finances; you should still manage your money prudently. If you have been putting money into a retirement account each month, you should keep doing that. There are many reasons to be optimistic about money matters in 2011, so I simply suggest that you find a way to work on a specific “big” financial goal in 2011, improving your situation.

Breaking it Down

When you choose one financial goal to work on in the new year, you can break it down into something more manageable. Evaluate your finances (be brutally honest about where you stand – and what could be different) and base your goal on something that is achievable in your financial situation. This can be paying down $10,000 worth of debt, or beefing up your emergency fund to hold six months of expenses.

No matter your goal, it is important to create a plan that can help you achieve it. Identify the steps you need to take to reach your goal over the next 12 months, and then create an action plan to make it happen. By focusing on one major financial overhaul this year, you are more likely to meet your goals, improving your finances in the process.

If you had to pick one goal for 2011 to get your finances in better shape, what would it be?

Photography courtesy of iUnique Fx ©