WalletPop

Mortgage Confidential: When and when NOT to pay down debt

David Reed — 2008-05-06T15:30:00+00:00

Filed under: Debt, Mortgage Confidential

Mortgage expert David Reed invites Walletpop readers to ask him questions about real estate financing. leave your questions in the comment section of this post.

Okay, I admit. There are those who will vehemently disagree with the premise of not paying down debt, I'm among them, but there are times when not paying down debt makes perfect sense when considering buying real estate and obtaining a mortgage. On the other side of that very same coin, it also makes sense to pay down debt for the very same reason: to help qualify for a home loan. What's up with that?

When debt-to-income ratios are too high for a particular loan program, then getting rid of some of that debt to help qualify is in order. But which debt? Revolving balances on credit cards do very little unless you substantially pay down a credit card balance, from say $10,000 to $5,000, but simply paying $1,000 or so will do very little to reduce the minimum monthly payment on that revolving account. That means the debt to income ratio will barely be affected.

Not the case with installment loans, and in particular an automobile loan. An interesting underwriting guideline asks that if an automobile loan has less than 10 months remaining then the lender won't count the car loan against the borrower's debt even if the borrower is still making payments on the car. For instance, if a borrower's monthly car payment is $450 and has 12 months left, the borrower need only pay the note down to nine payments. That's $1,350 to pay down the auto loan instead of paying off the auto loan completely, somewhere around $5,500. (this trick doesn't work on a leased vehicle, the underwriter will assume that when the lease is over the borrower will have to buy/lease another automobile, keeping a similar debt load.)

A quirk regarding not paying off debt addresses credit scores. One of the biggest factors when calculating credit scores is the loan balance compared to available credit. The magic percentage seems to be somewhere around 33%, meaning a better credit score will be calculated with $3,333 in loan balances with a $10,000 credit limit compared to a $10,000 credit limit with zero balances. I know it sounds counter-intuitive, but having a zero balance on a credit card can actually lower a credit score compared to a loan balance of about a third of the credit line.

Real estate finance expert David Reed is president of CD REED Mortgage Bankers in Austin, TX and author of Mortgage Confidential: What You Need to Know That Your Lender Won't Tell You and Mortgages 101: Quick Answers to over 250 Critical Questions About Your Home Loan.

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Banks target smart homeowners with stupid products

Zac Bissonnette — 2008-05-05T11:00:00+00:00

Filed under: Banks, Debt

The unchecked use of homes as ATM machines has left many home owners in the uncomfortable position of being former home owners.

Now that they're out equity and have little left to be milked for fees and interest, the big banks have turned to another group: people who have been responsible, paid off their mortgages, and preserved their equity. The New York Times reports that the big banks would "love to serve" these people.

Will isn't that just dandy. Having spent the past decade reporting huge profits (and then huge writedowns) helping financially unstable people get themselves into bigger trouble, the industry is now looking to move on to the more responsible borrowers.

To be sure: some retired people who own their homes outright do need to tap into the equity to provide for living expenses. But as I wrote back in March, retirees need to proceed with caution, especially when it comes to reverse mortgages.:

There's a reason salespeople love these products -- and therein lies the problem. One elderly lady quoted in the New York Times piece paid an up-front fee of 8% -- $17,100 -- out of the initial proceeds of the loan. And the independent counsel that people are federally-required to receive before closing on a reverse mortgage appears to be a total joke --oftentimes it's paid for by the lender making it, by definition, not independent.

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Mortgage customers don't know what they're doing

Zac Bissonnette — 2008-05-03T16:30:00+00:00

Filed under: Debt, Real Estate

Back in October, The Federal Reserve released a startling -- and widely ignored -- study showing that a large chunk of recent home buyers know almost nothing about their mortgages. Here are some findings from the Fed's survey:

25% could not identify the APR on their mortgages.
25% didn't know how much they spent on settlement charges.
50% didn't even know much the loan was for.
Two-thirds were unaware of any prepayment penalties.
75% did not recognize that the loans included charges for optional credit insurance.

Major, major props to Forbes' Josh Zumbrun for digging this up. Zumbrun adds that "It's a point you don't hear much about. Yes, lenders maliciously tricked borrowers, and yes, frenzied speculators bought houses they knew they could not afford. But it's just as true that a lot of well-intentioned people simply signed mortgages they did not understand."It's easy to understand why this happens: home buyers are asked to sign a slew of documents -- some lawyers explain them in detail, some don't -- and then sign their names to indicate understanding.

This is the equivalent of assessing a second grader's competence in math by handing him a sheet of math problems with answers and asking him to sign that he understands. If he signs, he gets an A+!

One possible solution: to get a mortgage, borrowers should be handed a "quiz" with questions like "What is the APR on the loan?" and "Describe any pre-payment penalties." Then the borrower would have to rifle through documents -- and ask the lawyer -- to find the answers to those questions. If we did that, every home buyer would understand her mortgage.

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Recession watch: Selling your gold at home parties

Kyran Pittman — 2008-05-03T09:00:00+00:00

Filed under: Debt, Entrepreneurship

This post is part of a series about real-life signs we're in a recession.

Move over Pampered Chef and Mary Kay. The latest in-home sales "party" concept has reversed the usual guest-to-rep cash flow. Instead of pixie-sized portions of a demonstration omelet, or a makeover that makes your dog bark at you when you get home, the new guest takeaway is cash.

So claim the many "gold party" services cropping up (curiously, overwhelmingly headquartered in Detroit). Companies like My Gold Party and Gold Party by ADI offer to help convert your friends' gold to cash, either by supplying you (for a fee) with the equipment and training for do-it-yourself appraisals or by sending a representative to your home who will set up shop in your kitchen.

Trading your bling-bling for cash is nothing new, of course. Many folks have turned to the jewelry chest when times are hard. Traditionally, you don a scarf and dark glasses and do it quietly in a back room across town. What's new is the idea that parting with Mom's locket or Dad's pocket watch is a rollicking good way to spend a Friday night, accompanied by spinach dip and boxed wine.

As has been reported by WalletPop previously, would-be gold brokers should proceed with caution, particularly if they are required to make an investment upfront. And there are compelling arguments for keeping the lid on your jewelry box for now.

Kyran Pittman blogs at Notes to Self.

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Tricks credit card companies play: Seven to watch out for

Ken and Daria Dolan — 2008-05-02T16:00:00+00:00

Filed under: Borrowing, Cards, Debt, Saving, The Dolans

Folks, we might have a new winner in the contest for the most hated consumer industry. For years, the hands-down winner was car dealers.

But we think that credit card companies are giving them a serious run for their money!

Most credit card companies are downright ingenious when it comes to cooking up sneaky new credit card fees and dirty tricks that take more money out of your pocket. If you've had enough, keep reading because today we are going to reveal seven of the industry's dirtiest tricks. We hope this list will help you protect yourself, slash your costs and be credit card smart.

Dirty Trick #1: Say "Bye-Bye" to Your Grace Period

No grace period means that you'll start accruing interest the moment you charge something. That can cost you a bundle of "extra" interest.

Most credit card issuers have already reduced their grace period from 25 days to 20 days. Many others have eliminated the grace period altogether. Now they are coming up with more and more reasons to take away your grace period. Miss a payment? Stop carrying a balance? Bye-bye grace period!

Dirty Trick #2: Punishing you when you are credit smart.

If you want to see my beautiful wife throw a complete fit, just mention any of these scandalous fees in her presence! These fees are the lowest of the low because they penalize you for being a responsible credit card user.

Some of the biggest offenders include charging you a fee for:

Closing your account
Failing to use a card for a period of time (such as six months or a year)
Not carrying a balance (how DARE you!)
Every transaction each and every time that you use your card

If your card charges you any of these fees, it's time to look for a new card! Click here for our tips on how to find the best card for you.

Dirty Trick #3: Doing you the "favor" of sending you "convenience" checks.

Credit cards often send you "convenience" checks so that you can write checks against your credit card account. Isn't that nice of them? Please!

DON'T do us any "favors"!

What they bury in the fine print is that these checks usually carry very high interest and fees -- even higher than regular credit card charges. Some cards also give you no grace period on convenience checks, so you start paying interest from the day you write the check! Shred these little "gifts" whenever they arrive.

Dirty Trick #4: Psst... Hey, buddy, want to skip a payment?

In their infinite generosity (ha!), some cards will "invite" you to skip making a payment. This "helpful" offer, which sounds great at first blush, often comes after the holidays when your balance is big and your wallet is feeling stretched. DON'T DO IT!

Skipping that payment can lead to a host of trouble -- from a higher interest rate to possibly having to make extra payments in the future.

Are you starting to notice a pattern? You should be skeptical whenever your credit card company does something "nice" for you without you asking for it.

Dirty Trick #5: Lowering your minimum payment due.

Another way some cards try to jack up their profits and lure you deeper into debt is by lowering the minimum payment due on your balance. It used to be cards required a minimum monthly payment of about 4% of your balance, but many now require as little at 2%. Don't fall for it!

Going from a $40 payment to a $25 payment on a $2,500 balance means it will take you an extra 19 months to pay off the debt.

Dirty Trick #6: It's 5 o'clock... Do you know where your payment is?

We all know that our payment is due on a certain date or it's late, right? But a new twist being thrown into the mix is having your payment due by a certain time on the due date. If your payment is due at noon and gets processed at 12:01, you get socked with a late fee AND likely a higher interest rate.

Gimme a break! Carefully check your statement so you avoid this trap.

Dirty Trick #7: "Over the limit" fees

Credit cards charge you a hefty fee for going over your credit limit. Look, we don't have a problem with penalties for that. But now these fees have gotten excessive -- almost $40! Plus, credit card issuers don't exactly discourage you from going over your limit when they approve charges and balance transfers that put you over your max.

Dolan Smart Credit Moves

So there you have it: Seven tricks and traps you now know how to avoid. But credit card companies will keep dreaming up new ones. So here's the bottom line on how to protect yourself:

Don't sign on with a card until you have a list in writing of all fees that the company charges. You can find these in the small-print section of your credit card application. Or, if you apply online, you will have to agree to all of the terms and conditions as part of your sign up process. You can always call the company, too. Whether in print, online or on the phone, read carefully before you agree!

Also be sure to actually read any notices your credit card company sends you about changes to your card agreement. That's your chance to catch any changes before they come back to bite you.

For more tips on being credit smart and successfully managing your debt, visit Dolans.com.

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Tell George Bush I have his economic stimulation package... right here

Gary E. Sattler — 2008-05-01T17:30:00+00:00

Filed under: Borrowing, Debt, Shopping, Tax

If George W. Bush wants to do something to stimulate the economy and cement a positive legacy for himself, I have his magic solution right here. If he could get this done, he'd salvage his entire presidency. I'll warn you right up front though, Democrats won't like this idea. So, if you are of the progressive socialist ilk, you may want to move to the next blog post right now. Here's my plan.

If even only temporarily, we need to make the interest charged on consumer debt tax deductible. If I'm not mistaken, didn't they do away with that consumer perk sometime in the mid seventies? If I'm right, and that was part of the old tax code, we should reinstate it immediately. If it's a new and original idea of my own, please leave a dollar in the hat on your way out.

By making consumer credit interest charges tax deductible (again), we'd get an economic triple play. First, consumers would get excited knowing they could finance stuff again, Second, they'd get those interest charges back as tax credits. Third, banks could get a helping hand because consumers might step up their borrowing activity again. The government would just have to bite the bullet and tighten it's belt.

There are only two facets to this plan which would require some serious attention in order to make it work. First, we have a majority of society which needs to be schooled in responsible credit usage. That means we have to teach them how to understand budgeting and what it means to over extend yourself. Second, we need a complete overhaul of the tax code from top to bottom. In fact, the enactment of a "Fair Tax" system might render this entire blog post moot.

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Health care too expensive? Fly to Singapore!

Bruce Watson — 2008-05-01T14:00:00+00:00

Filed under: Budgets, Debt, Health, Travel

As I've mentioned before, I used to teach college. Although I still gripe from time to time about the downsides of teaching -- the poor pay, the administration, the poor pay, the push for political correctness, the poor pay -- I have to admit that there were a few bright aspects. I loved working with students, I enjoyed having a big office, and I really, really appreciated the health care.

Working for a state-supported university in Virginia, my health care was very cheap. In return for a premium of less than $100 a month, my wife, daughter, and I all received medical and dental benefits that, in retrospect, were pretty outstanding. To give you an idea, my daughter's birth cost my wife and I less than $300; taking into account all the prenatal visits and whatnot, I think it still came out to under $500.

Recently, I've been having some dental work done. Now that I am no longer employed by the state, I have come to realize just how great my deal was. As a further lesson, my sister has been in and out of the hospital for the past few months with a chronic liver problem that she has had since she was a baby. As an artist, she makes very little money, but, luckily, Pennsylvania's Medicaid is outstanding, as are the programs at the Geisinger Clinic, the hospital that is treating her. Otherwise, she would probably be in debt for the rest of her life.

When I first heard about "Medical Tourism," I thought that it was a cute idea. However, now that I'm seeing some of the harsh realities of the U.S. healthcare system, I'm realizing that it's a magnificent solution to one of the biggest problems currently facing America.

For a while now, many people have been traveling abroad to have elective surgery, dental work, fertility treatments, and other operations done. Given that the savings on these procedures can be 80% or more, it seems logical that uninsured individuals would choose to pursue this option.

To add to the high cost of health care, even people who are insured may find themselves being denied treatment for a variety of questionable reasons. For example, some patients have recently been denied places on the liver transplant list because they used medically-prescribed marijuana. According to the medical establishment, marijuana (unlike alcohol) has no direct effect on the liver; moreover, these patients were using marijuana under a doctor's supervision. However, in an increasingly overburdened health-care situation, many insurers, medical boards, and even hospitals are latching on to any excuse to drop patients.

Some people reject the idea of medical tourism because they worry about the quality of the hospitals or the training of the doctors in other countries. Ironically, however, very few of my sister's doctors were native-born Americans. Her primary surgeon was Indian, as was one of her endoscopic surgeons. Her interventional radiologist was from Germany, and another of her endoscopic surgeons was from England. Actually, of all her doctors, my sister's only native-born one was her gastroenterologist, and he spent his winter vacation with his wife's family in Germany! Moreover, while I can't speak to the cleanliness of India and Singapore's hospitals, many of the reviews that I've read have been complimentary. While we're on the topic, I've been to some pretty filthy hospitals in the U.S. In fact, my wife and I elected to have my daughter born at a hospital located an hour from our home because the one in my town was infested with flies.

One interesting development in the Medical Tourism front is Hannaford's recent adoption of overseas surgery. A supermarket chain, Hannaford Brothers has begun offering employees the option of having hip replacements performed at a hospital in Singapore. This particular operation runs between $40,000 and $60,000 in the U.S., but costs about 75% less in Singapore, even accounting for the cost of airfare for two, hotel charges, and room and board for a traveling companion. Looking at the savings, it's hardly surprising that 150,000 Americans elected to have medical procedures performed in other countries last year, nor is it shocking that Hannaford has started outsourcing some of its medical care. I wonder how long it will be before other companies follow suit.

Bruce Watson is a freelance writer, blogger, and all-around cheapskate. He's thinking about going to Indonesia to have some Komodo dragon venom injected into the wrinkles on his forehead.

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Ask the Dolans: Should we take out a home equity loan to pay off debt?

Ken and Daria Dolan — 2008-05-01T10:00:00+00:00

Filed under: Banks, Budgets, Cards, Debt, Home, The Dolans

Ken and Daria Dolan, America's First Family of Personal Finance, answer your money questions every Friday.

Dear Ken and Daria,

My husband and I have $7,000 in credit card debt. Should we take out a home equity loan?

Lyndajoy

Ken and Daria Dolan offer advice on all of your debt concerns at their Credit Resource Center.

Click here to ask Ken and Daria your question.

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Recession watch: Repo Men are reaping benefits

Geoff Williams — 2008-05-01T09:00:00+00:00

Filed under: Debt, Home, Recession

This post is part of a series about real-life signs we're in a recession.

I've had a couple close calls over the years, but happily, I've never had the experience of having anything repossessed. But if anyone reading this has had something hauled away, if it makes you feel any better, you're obviously not alone.

In this almost-but-not-quite recession, repo men have some enviable careers. Newspapers around the country have been publishing stories about local repo men raking in the bucks, taking away mostly vehicles, from cars to campers, and motorcycles to motor boats. According to KHOU, a Houston TV news station, 1.5 million vehicles were repossessed last year, a 15-percent increase from 2006. 2008 is expected to jump 10 percent from 2007.

But you can't really blame the repo men. They didn't create the current economic conditions, and they are just doing their job, and while I'm sure they're glad to be making extra money (who wouldn't want that?), I doubt these guys are getting their kicks off another person's misery. Besides, somebody's gotta do it.But what is a little creepy is what Cesar Dias, a California real estate agent, is doing, no offense meant to the guy. Obviously, he's a capitalist, and that's great, but it's not like his money-making venture was something the world was clamoring for. In any case... every Saturday, from 11:30 a.m. to 1:30 p.m., he takes three sold-out full-sized buses of interested buyers on a tour of all the repossessed homes in and around Stockton, California.

Meanwhile, Dias has been consulting other real estate agents at $5,000 a pop, so they can make an informed decision whether they should rent or buy a bus and get listed on his Web site, RepoHomeTour.com.

But it seems like it would have to be one of the saddest bus rides and money-making ventures going, if you really consider it. Owning a home is supposed to be the American dream. The people on the bus will be easier able to fulfill their American dreams because a lot of others failed to make their own come true.

Geoff Williams is a business journalist and the author of C.C. Pyle's Amazing Foot Race: The True Story of the 1928 Coast-to-Coast Run Across America (Rodale).

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Payday Lending, Part III: Will loan caps bring the return of the neighborhood loan shark?

Geoff Williams — 2008-04-30T12:00:00+00:00

Filed under: Borrowing, Debt

Some time ago, a woman wrote a letter to The New York Times, explaining how her life had been pretty much ruined by a loan shark.

She had borrowed $50 when her daughter was sick and had to pay three consecutive monthly payments of $22. It began a cycle where she wound up broke and then foolishly went to another loan shark. She eventually lost her job (the loan shark went to her boss when she couldn't make a payment), and finally began working at a new place of employment for a very small salary and naturally couldn't pay the loan sharks she owed money to. She ended her letter by noting that "the blood-suckers are hounding me to death."

She signed her letter, "Helpless."

The year was 1908. One hundred years ago.

Today, that same letter could easily be written, only with the words "payday lending store" in place of "loan shark." That said, a payday lending company may telephone a home relentlessly, trying to get their money back and then some. They may sue a person in court. They may help make life miserable for some people, decimate their credit score, send them into bankruptcy and financially ruin them for years to come, but at least they can't legally send someone to appear in your doorway and threaten your health, or stalk your boss.

Borrowing money with interest rates you can't afford is still a poor idea -- pun intended -- but at least predatory lending offers a safer option out there than loan sharks.

Payday lending stores started to swell in the early 1980s when many banks, angling for better profits, moved out of poorer neighborhoods. That's when the industry truly started to come into its own. It also didn't help when, in 1979, laws were loosened governing interest rates on loans. Before 1979, every state loan capped how high an interest rate could go.

Arguably, the predatory loan industry can evolve even more beyond not breaking people's legs -- much, much more. On the other hand, with 13 states having banned or virtually eliminated the payday loan practice, and many others looking like it may, one has to wonder if this path is just going to take us back where we started. Sure, plenty of people abuse the system, but I half wonder if this will just encourage anxious, occasionally-cash-strapped citizens who feel helpless to someday do something they never dreamed of doing -- like meeting a loan shark in a dark alley.

Geoff Williams is a business journalist and the author of C.C. Pyle's Amazing Foot Race: The True Story of the 1928 Coast-to-Coast Run Across America (Rodale).

Payday Lending Part II: the state of the industry today

Geoff Williams — 2008-04-30T10:00:00+00:00

Filed under: Borrowing, Debt

In the last year, there has been a lot of movement afoot in state governments to either quash payday lending establishments or at least force them to bring down their interest rates. Here's a quick snapshot of how things are going -- or not going.

California: Earlier this month, just as legislators were going to vote on a bill that would have forced payday loan stores to cap their annual interest at 36%, they pulled back. That would have effectively meant that for every $100 a consumer borrowed, he would only have to pay back that $100 plus $1.60 within a two week period.

Oregon: Last July, a 36% annual cap was put on the payday lending industry, and 80% of the stores closed up and went out of business.

Illinois: In 2005, the state put forth many regulations for payday loans under 120 days. So lenders stopped issuing short-term loans and went for loans longer than 120, meaning their customers wind up paying more and going into more debt.

Ohio: They're currently trying to pass House Bill 333, which would do what California was trying to do.

Georgia: Since 2004, payday lending has been a felony. North Carolina has also banned the practice. All in all, there are 13 states in America that have banned or virtually wiped out the industry in their own states: Oregon, Arkansas, Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Vermont and West Virginia. They're also illegal in the Virgin Islands and Puerto Rico.

And our neighbors to the north? Just as the payday loan stores are popping up everywhere in Canada, partially due to the influx of Americans going north to get cash, many provinces like Ontario are looking into legislation to regulate the industry.

Geoff Williams is a business journalist and the author of C.C. Pyle's Amazing Foot Race: The True Story of the 1928 Coast-to-Coast Run Across America (Rodale).

Recession watch: We've lost some competitors... and it hurts

Gary E. Sattler — 2008-04-29T15:00:00+00:00

Filed under: Debt, Entrepreneurship, Tax, Career, Wealth, Recession, Bankruptcy

This post is part of a series about real-life signs we're in a recession.

Normally, the loss of competitors in your field of business could possibly be considered a good thing, giving a boost of orders and income to your own business or employer. In today's economic climate however, the loss of competitors gives me cause for concern. Even as we struggle to accommodate growth in our facility, I'm worried by the downfall of some of our wood products compatriots. I know I've written that it doesn't pay to cry over lost manufacturing jobs, but that doesn't mean we should be without compassion either.

The National Federation of Independent Businesses (NFIB) reports for March that its Small Business Optimism Index is at its lowest point since the second quarter of 1980. Businesses are complaining that increased selling prices are not keeping up with overhead inflationary pressures. Nearly one-quarter of the NFIB survey respondents indicated that they raised employee compensation by a margin which is outstripping profitability increases. I believe that therein lies the downfall of my company's fallen competitors.

One of the biggest concerns I have with these job losses is that they tend not to be felt outside their own regions. We as a country lose a hundred good jobs here or there every day, in a hundred unnamed places. But it doesn't make the headlines because it doesn't sell advertising space. Government statistics never paint the whole picture either. The government bean counters expect that we're too dull to understand that the loss of a well-paid machinist is not mitigated by the addition of yet another undocumented food service worker. They only give you the bottom line numbers, painted with a broad and blurry stroke of the brush.

So, my employer's loss of competitors has a core which tastes quite bitter. As I work my long hours I sometimes pause to think; Was that competitor we lost as much a buyer of my goods as it was a rival? Could my employer be the next to go under, or my neighbor's, or yours? Please say a quiet prayer for the unemployed among us, then get back to work. That is, if you still have it.

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Recession watch: Cutting back on concerts and sports

Josh Smith — 2008-04-27T15:00:00+00:00

Filed under: Debt

This post is part of a series about real-life signs we're in a recession.

My wife and I usually take in a few concerts or comedians during the year as well as catching the occasional hockey and baseball game. This year, however, has proven different on both fronts. We missed the entire season of our favorite minor league hockey team, the Ft. Wayne Komets, and passed on seeing the hilarious Jeff Dunham in Michigan last month. We will also be passing on several concerts in the coming months.

These changes in our entertainment habits were spurred by the rising gas prices and tightening our belt due to the current economic slowdown. Spending $100 plus dinner on a concert when unemployment is rising, seems rather frivolous. Listening to a the latest album in surround sound or catching an HD concert on cable allows us to work on paying down debt and prepare for any consequences of the current economic downturn.

Even though we have cut back, we will still plan to catch some minor league baseball, while we root on the Mudhens! Thankfully the tickets are an incredibly good value, and by going with friends we can keep the gas cost down. We are saving more money by going to the alumni day our alma mater is putting on at the stadium. Group price tickets and a cheap diner nearby make for a fun and frugal night.

While the recession is keeping us from seeing our favorites up close an personal, we don't plan to sit at home and become spinsters. We will still try to take in concerts, comedians and sporting events closer to home and in the company of friends to keep costs down.

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Will your tax rebate check be 'found money' to you?

Tracy Coenen — 2008-04-26T11:00:00+00:00

Filed under: Budgets, Debt, Saving

Even those with the smallest amount of money management smarts know that there is a way to be responsible with their "tax rebate" check, and a way to be irresponsible. Our government is hoping you're irresponsible with yours. The whole point of the checks is for everyone to run out and spend it on things they might not otherwise buy, giving a little boost to our economy.

But as prices are rising (and there is no shortage of people complaining about it) and people more are in debt than ever before, the most responsible thing to do with a tax rebate check for most consumers is to save it or use it to strategically pay off some debt. That's what Terri Cullen of the Wall Street Journal is hoping her family does with their checks.

But she knows they probably won't. Why not? Because she says they (and many other consumers) look at these checks as "found money." It's an unexpected windfall that's not likely to happen again, so they feel as if they have somewhat of an obligation to run out and spend this free money.
I understand the mindset, especially if you've been living under a very tight budget for a while. But imagine what good could come out of being a little more thrifty and saving the money for a rainy day. For one, you could generate some interest on that money. (Maybe not a lot, but it's still something!) And I guarantee that a few months down the road when your car breaks down unexpectedly or you have some other surprise expense, you'll be happy you set that money aside.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

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Checking your credit for free

Tracy Coenen — 2008-04-25T19:00:00+00:00

Filed under: Debt

Finance experts will tell you that it's important to keep a close eye on your credit record, for a number of reasons. First of all, a good credit history is the key that opens many doors for you. Not only does it mean you'll have a better chance of buying a house and getting a good rate on a loan, it also has other implications.

Your credit history determines whether you're eligible for a credit card, what your interest rate will be, and whether you qualify for any special promotions. Some employers will do a credit check before hiring you, so that's another place a good credit record comes in handy.

Insurance companies check your credit and factor that in when determining your rates. Better credit means better insurance rates. It's also important to keep an eye on your credit record to make sure no one has stolen your identity and that no credit card company has made a mistake in reporting your activity to the credit reporting agencies.

You can keep up with your credit for free! The first and easiest way to do this is through the free annual credit report program required by law. Each of the three credit reporting agencies must give you one copy of your credit report for free each year if you as for it. All you have to do is visit annualcreditreport.com to start the process. I recommend that you space out your requests throughout the year to make the most of these free reports. Get one at the beginning of the year, another one in the beginning of summer, and the last one in fall. The next year, start the process over again.

There are other ways to get access to your credit information too. If you are denied credit by any credit card company or bank, you have a right to get a copy of your credit report for free. This is required by law, and you should take advantage of it. You will get a notice from the company you applied for credit with, and they will tell you which credit reporting agency they used. Follow the instructions to get your report from that agency at no charge.

There are other services out there to help you check and monitor your credit that say they're "free." Read carefully and follow all instructions so you don't end up paying for something you didn't want. The credit reporting agencies are trying to make money by selling you credit scores and monitoring services that aren't often all that they're cracked up to be.

This week I took advantage of a "free" offer to see my credit score and some other information in my credit file. I did it because I was curious about my score, and the free annual credit report required by law doesn't include the credit score. I signed up for a service that let me see the score and then immediately called to cancel it. I was within my one week "free trial" period, so I will not be charged anything for the service. But many consumers forget to call and cancel or they call too late. That's what the companies are counting on to get your money. The services they're selling usually aren't worth the money, so sign up with caution.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.

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Debt Smarts: Credit scores and their myths

Lita Epstein — 2008-04-25T16:30:00+00:00

Filed under: Borrowing, Cards, Debt

Lita Epstein is WalletPop's resident credit score expert. Write to her in the comments box below.

Many of the questions I receive relate to credit scores and how to improve them. There are many myths out there which I debunk below, but first let's take a look at what a credit is and who creates it. Actually there isn't just one type of credit score. The primary driving force behind most of them though is the Fair Isaac Corporation, known by most as FICO.

Each of the three credit reporting agencies has a score developed by FICO. Equifax's is called BEACON, TransUnion's is called FICO Risk Score and Experian's is called FICO II. Each one is tweaked slightly differently, so you'll find your credit score is not exactly the same at each agency, but scores are usually within 20 points of each other. If you find a greater difference, one or more of the credit agencies probably have inaccurate information in your credit file.

In addition to these three types of scores, there are new scores from Fair Isaac called NextGen. The names given to these new scores are Pinnacle (Equifax), FICO Risk Score (Experian) and Risk Score Next Gen (TransUnion).

That's not all. In addition to these scores there is scoring done for insurance companies and others designed for different types of businesses that set up a different set of parameters they want monitored. Insurance companies believe that people with a low credit score tend to file more claims, so in many states your insurance premiums can be higher if you have a low credit score.

So what goes into these scores? Generally your payment history has the greatest impact. For the three key credit reporting agencies, payment history accounts for 35% of your score. The next largest piece of the credit score pie is the amount that you owe, which accounts for 30% of your score. Next in line is credit history, which makes up 15% of your final score. Applications for new credit and types of credit in your record each account for 10% of your score. So 65% of your final score is impacted by whether or not you pay your bills on time and how much you owe.

Here are some of the common myths that need debunking:

Myth 1: Lowering your credit limits can help your score

Myth 2: Close cards to improve your score

Myth 3: You must pay in full to get a good score

Myth 4: Shopping for the best rates can hurt your score

Myth 5: Checking your credit score can hurt your score

Myth 6 : Credit counseling hurts more than bankruptcy

Myth 7: Putting a statement in your credit file can help your score

The most important thing you can do to improve your credit score is to be sure your credit report accurately reflects your credit history. If you don't know, get a free copy of your credit report from each of the credit reporting agencies. If you see any errors take the time to correct them.

Lita Epstein is the author of more than 20 books including the "Complete idiot's Guide to improving Your Credit Score."

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Ask the Dolans: Should I close old credit card accounts?

Ken and Daria Dolan — 2008-04-25T15:30:00+00:00

Filed under: Banks, Budgets, Cards, Debt, Saving, The Dolans

Ken and Daria Dolan, America's First Family of Personal Finance, answer your money questions every Friday.

Dear Ken and Daria,

There is a lot of controversy over closing credit card accounts after the balance is paid. What should I do?

Alethea

Ken and Daria Dolan offer advice on all of your credit questions and concerns at Dolans.com.

Click here to ask Ken and Daria your question.

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Wanna take a $3 trillion shopping spree?

Anne Gelhaus — 2008-04-25T08:00:00+00:00

Filed under: Debt, Extracurriculars, Tax

Since co-authoring The Three Trillion Dollar War with Linda Bilmes, Nobel Prize-winning economist Joseph Stiglitz has tried to help American taxpayers wrap their heads around just how much our government is spending on the conflicts and subsequent occupations of Iraq and Afghanistan by doing some comparison shopping.

"Try filling your shopping cart with what the cost of the Iraq War could buy: health care for every American? A new home for every subprime borrower now facing foreclosure? An Ivy League degree or two? You haven't even gotten started," Stiglitz said.

To illustrate Stiglitz's assertion, the folks at True Majority and Brave New Films launched the Three Trillion Dollar Shopping Spree, where consumers can fill their carts with $3 trillion worth of virtual items that could save the world or just make their own lives easier.

I barely broke the $1 trillion mark on my shopping spree, even with a cart full of goodies like fighting AIDS in developing nations ($15 billion), worldwide compliance with the Kyoto Protocol ($400 billion), worldwide no-kill animal shelters ($7 billion), achieving universal literacy ($5 billion) and a vacation in space for $20 million (hey, altruism has its limits).

Apparently, it's a lot easier to spend the big bucks on armed conflict. According to Stiglitz and Bilmes, this is how $3 trillion is being spent by the Bush administration in its war efforts:

$526 billion - borrowed money poured into Iraq so far
$615 billion - total interest costs for taxpayers
$280 billion - to rebuild our military
$590 billion - disability benefits and health care for Iraq veterans
$1.5 trillion - estimated costs through 2017

So while it's fun to fill your virtual shopping cart with items like universal health care for all Americans (about $6,000 per person), It's hard not be infuriated when you see where this money is actually going. The Three Trillion Dollar Shopping Spree gives people a clearer picture of how their tax dollars could be better spent.

Economic ripples hit both the rich and the poor

Bruce Watson — 2008-04-22T15:00:00+00:00

Filed under: Budgets, Debt, Extracurriculars, Wealth, Relationships, Recession

A couple of weeks ago, I was reading a backlog of newspapers and happened across two articles that addressed the rippling effects of the country's current economic woes. Although these two stories had almost nothing to do with each other, it seemed to me that, between them, they very eloquently showed how economic problems have a way of affecting everybody.

The first article dealt with food banks in the Bronx. The area's food banks, food pantries, and soup kitchens provide food to unemployed and lower-income individuals, often on a short-term, emergency basis. These organizations, in turn, receive their food stocks from a combination of personal and corporate gifts. Unfortunately, higher food costs and smaller amounts of disposable income have translated to massive drops in donations. Added to this, the unemployed population is steadily increasing, which means that a smaller and smaller pie is getting divided into more and more pieces.

This problem is, apparently, very widespread. For example, a food bank in Idaho has reported that the number of jobless people that it helps has increased by 10% every month this year. Moreover, these new food bank clients often come from the ranks of the middle and even the upper middle classes; for example, CNN recently reported the story of Patricia Guerrero, who went from having a $70,000 a year job in February to using a food bank in March. While Ms. Guerrero might have had fewer money in savings than most people in her economic position, hers is still a very eloquent cautionary tale.

At the other end of the spectrum, The New York Post recently reported ways in which the current economic downturn is affecting even the wealthiest segment of the population. A March article, Execs 'Bear-ly' Surviving, dealt with the economic woes suffered by Darren Henault, a high-end interior designer. Apparently, some of Henault's clients are employed by Bear Stearns, which has caused major problems for his business, as he's had to stop work on one redecoration and scrap plans for a second. In the first case, the redecoration was about $50,000 away from completion; in the second, this was to be a $300,000 contract.

Henault was optimistic about his loss of revenue, noting that he has numerous wealthy clients and will be able to weather this economic downturn. However, he is not the only one to feel the pinch since Bear Stearns' fortunes started tumbling. In the same article, Tom Martignetti, a bar and nightclub owner, noted that his sales had dropped about 25% since last year. Given that most of his revenue comes from workers in the financial district, Martignetti theorized that fears over potential firings had dampened the spirits of his regular patrons.

As the New York Times noted, one of the first things that many Bear Stearns employees did when their financial fortunes soured was to put their summer cottages on the market. Given that several of Bear Stearns; top-echelon executives count on yearly bonuses to provide most of their income and are heavily invested in Bear Stearns stock, the plummeting fortunes of the company hit them particularly hard. For example, James E. Cayne, Bear Stearns' Chairman, holds stock that was worth over $1 billion a year ago, but plummeted to $28 million in March.

Apparently, like Ms. Guerrero, many Bear Stearns executives weren't all that careful with their savings.

Even in the darkest times, however, there are businesses that know how to make lemons out of lemonade, and this is certainly true in the case of BF Designs, a firm that "stages" houses in the Hamptons. Basically, the company will repaint, refinish, and generally spruce up properties that are for sale or rent. According to one source, BF Designs has offered a discount staging fee to anyone who has worked for Bear Stearns and wishes to sell his or her weekend house in the Hamptons.

While these two stories couldn't be further apart, they tell about a similar progression: as economic woes increase and budgets get stretched tighter and tighter, we're likely to see ripples working their way through every segment of the population. I don't know about you, but I'm mighty pleased to see that, at least at BF Designs, the recession is inspiring unprecedented levels of charity!

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How to solve the credit card regulation mess

Zac Bissonnette — 2008-04-22T13:30:00+00:00

Filed under: Cards, Debt

BusinessWeek recently asked two experts -- a college professor and a senior fellow at the Competitive Enterprise Institute -- about whether laws should be passed to protect consumers from sudden increases in the interest rates on their credit cards. The pro/con piece is a good introduction to this topic, and definitely worth a read.

Karen Gross of Southern Vermont College describes the current policy of disclosure as a "flawed paradigm," writing that that "We erroneously assume consumers read, understand, and act on the explanation of credit card terms they receive. Many consumers, even those who read what they receive, do not fully understand the disclosures, which are often in small print or legalese."Eli Lehrer counters that increased regulation that goes beyond disclosure laws will result in higher interest rates for everyone.

I think they're both basically right. The problem is that the current disclosure laws are grossly inadequate: too many consumers don't read them and oftentimes they're almost impossible to understand -- even if you are financially literate!

Here's my idea for how to fix this mess: a quiz! Before they receive their line of credit, consumers should have to answer 10 multiple choice questions about the specific terms of the credit card. This way, consumers would have to understand the terms. Under the current system, they sign a line saying they understand the terms but don't have to do anything to demonstrate that they really do. That's the equivalent of handing an elementary school student a page with hundreds of math problems on it and saying "Sign there if you understand it", and then giving them an A based on that. Except instead of giving out grades, they're giving out credit. Applicants should have to demonstrate that they understand what they're signing.

And yes: I know that will never happen. But I still think it's the most logical solution to the credit card mess.

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