Life's not fair, and neither is the world of personal finance. But there's unfair and then there's really, truly messed up. That $5 monthly fee on your prepaid card might seem unfair, for example, but the $495 annual fee that the Visa Black Card charges clearly takes things to a whole other level.
There are numerous examples of these next-level policies throughout the economy, despite post-recession regulation improving things in many regards. And, if we want to continue making progress, we must acknowledge the pervasive existence of truly unbelievable policies and practices, and we must encourage regulators to address them. So, without further ado, here are a few of the most screwed up aspects of personal finance facing consumers today.
1. Biased Auto Underwriters: More than five million vehicles are totaled in the U.S. each year. When that happens, do you know who is responsible for determining how much the car was worth and, therefore, how much the insurance company should compensate its policyholder? Well, as many of us know, it's the very same insurance company who is facing a costly claim payment.
Now, do you think this is a fair, impartial dynamic? Of course not, and that's why it has to change. The fix is quick too; all we need to do is create an impartial organization of insurance appraisers. This group will add an unbiased third-person perspective to auto insurance disputes and dramatically improve the equitability of the industry.
2. Consumers Must Pay to Self-Monitor for Credit Bureau Errors: Let's get this straight. Credit bureaus collect information pertaining to our financial lives, they proprietarily manipulate and make mistakes with this data, and then they require us to pay to review it for errors, aside from the single free report from each bureau that we're entitled to each year? That's right, despite the fact that credit bureaus are so incompetent that 1 in 5 people has an error in one of their credit reports, we consumers are the ones tasked with keeping things accurate.
This can and should change. President Obama recently announced the participation of a number of financial institutions in offering free credit scores as part of a program to improve consumer privacy. If he were to simply place his support behind an initiative that replaced credit scores with credit reports and added on some complimentary credit monitoring, the environment would be far healthier.
3. Consumers Must Submit to Arbitration Clauses: Consumers are routinely forced to sign away their rights, such as when we agree to the terms of a credit card account including a clause stipulating that any disputes (other than matters of collection) will be handled in arbitration rather than in the courts. Why is this a big deal? Well, consider that the credit card companies are the ones who pay the arbitrators and that 94 percent of cases are found in the credit card company's favor. What's more, these arbitration clauses often contain language forbidding participation in class action lawsuits - often the only way consumers can afford to take on a financial institution. Oh, and the reason issuers exclude collections from arbitration is because they want to make sure nothing stops them from being able to sue you.
What can we do about this? Prohibiting mandatory arbitration is the obvious move. It is nevertheless unlikely to happen.
4. Personal Finance Is Not a Required Course in Public High Schools: We are not properly preparing our children for financial adulthood, and we haven't been doing so for years. We saw this with the dot-com bubble in the early 2000s, and the Great Recession simply hammered home the issue. Ultimately, it's really no surprise that 41 percent of American adults give their knowledge of personal finance a grade of "C" or below or that American parents are more pessimistic about their kids' grasp of money management basics than any other country but Bosnia. Why? Because financial literacy is just an issue our schools have not focused on in recent years.
The solution, an idea that has recently gained steam, is to make personal finance a mandatory class in public schools across the country. Experts have differing opinions about the efficacy and structure of such a program, but it's clear that something has to change.
5. Our Loser-Pays Legal System: Small business is personal finance. Credit card companies have told us that for years, asking for our Social Security numbers on business credit card applications and holding us personally liable for business card debt. That just goes to show that problems facing the small business community are issues rooted in personal finance, issues which could wind up harming a sector of the economy that is responsible for 47 percent of private payrolls in this country as well as 60 percent of the new jobs added in the past two decades.
One systemic issue facing many small businesses these days, especially high-growth companies in competitive fields, is strategic litigiousness. Entrenched companies with deep pockets use the court system to their advantage, bringing suits against smaller, financially challenged rivals in a form of corporate bullying. They have little to lose, after all, considering that such suits likely involve what amounts to chump change for them and they probably won't be responsible for the other sides' legal fees. So, even if they have to drop their suit or a judge rules against them, the larger party probably won't incur any significant losses.
We could change this dynamic by adopting the loser-pays system used in Europe. By requiring the defeated party to foot the legal bills, Europe has decreased frivolous lawsuits and potentially saved a number of nascent companies from a premature demise along the way.