Category Archives: Debt

How To Opt Out of Credit Card Offers

stopDoes your mail box fill up with offers from credit card companies? Sometimes they will mail you checks and pre-approved credit cards. It is annoying, and its also a waste of time to go through them. You must also shred them to be sure no one steals your identity.

Those of you with an ecology or stewardship mindset would no doubt consider it a tremendous waste of our natural resources to make the paper, as well as a waste of energy to print and ship the offers. And 99% of the offers end up in the trash–the right place for them anyway.

Stopping those annoying credit card offers also helps remove the temptation to accept them. Today I went to the Federal Trade Commission website to see their most current instructions, and I cut and pasted the following for you to easily start the process:

  • To opt out for five years: Call toll-free 1-888-5-OPT-OUT (1-888-567-8688) or visit OptOutPrescreen.com. The phone number and website are operated by the major consumer reporting companies.
  • To opt out permanently: You may begin the permanent Opt-Out process online at OptOutPrescreen.com. To complete your request, you must return the signed Permanent Opt-Out Election form, which will be provided after you initiate your online request.

When you call or visit the website, you’ll be asked to provide certain personal information, including your home telephone number, name, Social Security number, and date of birth. The information you provide is confidential and will be used only to process your request to opt out.

Don’t Go In Debt for Christmas

Emotions are a very powerful force. Don’t ever underestimate their pressure to go against your good senses. Christmas, maybe more than any other time of year, tugs on your emotions to be a good friend, spouse, parent, and child and demonstrate it through generosity–generosity so great that you spend more than you have and charge the purchases on your credit card. Now that Christmas is less than two weeks away, you will feel more pressure now as time starts to run out.

Don’t do it. You will regret it later. Many Americans wake up in the cold months of January facing the stark reality of balances on their credit cards they can’t pay, and they are stuck with paying the minimum. This is exactly what the credit industry wants you to do. Not only do they make a percentage of every purchase, but they also get to charge you interest. Every month that you don’t pay off the balance they assess interest that ranges from 9% to 30%.

These immorally high interest rates are designed to keep you in debt and make you a slave to the lender. This makes the credit card issuers rich and you poor. The more debt you have, and the more difficulty you have making payments, the higher the interest rises. The more it rises, the higher their profits, and the more likely you will stay poor. That is their game, and they usually win because they know your emotions and will advertise like crazy to tug on them.

The great before-Christmas deals may tempt you to go into debt, too. You might think that this is a once in a lifetime to buy at that price, but recent research indicates retailers increase prices in the Fall, so now isn’t always the best time to buy.

Coffee with Jesus used with permission. Check out Coffee with Jesus on Radio Free Babylon on Facebook, and like it to follow these daily challenging messages.

 

Are the Educated Smarter With Finances?

A new study shows that prior to the current economic crisis, it was the highly educated people that were more inclined to have unmanageable levels of debt. The percentage of Americans with more than 40% of their income going to debt payments increased from under 15% in 1991 to 27% in 2008.

You would think college-educated people would be less likely than those without a college degree to make this mistake, but the study showed more of them exceeded 40 percent. The study provided some clue as to why this happened–optimism. College educated people with large amounts of debt were more optimistic about future economic conditions. Did they think they were immune to economic problems because they had advanced degrees, so they had less fear when they borrowed? That is the conclusion Sherman Hanna, co-author of the research and professor of consumer sciences at The Ohio State University, reached.

It wasn’t that those with advanced degrees didn’t understand debt as well as those with less education, but perhaps they thought economic conditions would always get better for them.

What caused the economic crisis? There is no one group to blame, but you could probably categorize them two ways: institutions and people. Institutions are guilty, especially those in the sub-prime industry (including the lenders), mortgage security issuers (investment bankers), and rating agencies. Some people place blame on the government’s excessive borrowing, and for not watching the institutions closely enough. At the end of chain are the consumers. We were borrowing too much and not saving enough. Can we blame one group of people more than the others? Some have opined that it was the lower-income and less-educated people that borrowed for mortgages too much.

However, the study found that the debt crisis wasn’t caused by homeowners who took out mortgages, since 35% of renters had heavy debt compared to the debt that 21% of the homeowners had in 2007. They concluded that we can’t blame the uneducated, the homeowners, or the educated.

The study appeared in Consumer Interests Annual and the International Journal of Consumer Studies.

How can I use the information, I ask myself. It provides more information when recession conversations come up. More personally, it forces me to examine my own thoughts about my financial plan. What do you think–comment below, or tweet or Facebook others if you found this interesting.

Debt Collector Fraud in the News

Over the last 4 years we have seen an epidemic of late monthly debt repayments. Many of the borrowers have never been late on payments before. However, during the recession people often have to deal with multiple problems. It used to be common that someone just had to work through unemployment and get hired within a short period of time. Now unemployment usually lasts longer, savings runs out sooner, and money invested in stocks drops in value, as in March of 2009 when the market plunged more than 40%. Unemployed people are especially vulnerable to financial setbacks, since often they can’t obtain or afford health insurance, they face inflating prices on gas and food, and many stressed-out couples go through money-stripping divorces.

The debt collection industry, either organized with massive call centers or as law firms, often buys the outstanding debt from the original lenders. The lender’s collection department or the collection companies have to follow strict guidelines and regulations outlined by the Federal Trade Commission, but they often break the law in their efforts to collect.

The Columbus (OH) Dispatch ran an article last May investigating the problems with the credit rating agencies, and this month it is extending the Credit Scars series about collections firms. The Dispatch is running what I have found to be one of the best series of articles on this subject in the entire country:

Credit and Gift Card Positives, Negatives and Innovation

The banking industry has never been known as innovators or centers of creativity. That’s why an article in the Wall Street Journal caught my attention today: Ice-Cream Bank’s Rocky Road. I’ll get to the article in a moment, but my gripe with credit cards and gift cards is that although they provide a definite convenience, their negatives outweigh their positives for many Americans.

Credit cards and debit cards are definitely handy. No one wants to carry thousands of dollars around when making large purchases. and the cards are necessary for making flight, hotel and car rental arrangements. Cards also provide reward points (maybe a small percentage of the purchase) that can be used for gifts, cash, and travel.

Then there are the negatives: retailers are charged 1.5% – 3% on purchases, automatically resulting in inflating the cost of goods we buy. The credit card industry makes a lot of money on these fees. They also like it when people don’t pay off their balances each month, because they charge up to 30% interest on unpaid balances. The credit card issuers are really nice when they offer you a card, tempting you with points and no interest for the first year, and maybe an offer to waive the annual fee. However, if you run into hard times and miss a payment, many of them increase your interest rate to their highest rate (nearly 30%), making it even harder for you to catch up.

Research shows that people that use plastic instead of cash to buy goods feel less pain psychologically and spend more per purchase.

In summary, you use credit cards for convenience.The retailers charge more for the goods to cover the cost. You spend more money, and you may end up paying high interest rates. In return, all you get is convenience and points. Now some people have awesome discipline and don’t spend more, so they really profit from the points. I wouldn’t recommend this to most people, but if you are really disciplined, the points can cover your vacation costs every year, potentially saving a few thousand dollars from your budget.

Gift cards, on the other hand, are a nice way to buy gifts for people. Some people buy them at grocery stores and get reduced gasoline costs; Kroger and Giant Eagle are common grocery and gas bundlers in our area. Some people do this when making large purchases at other retailers. The negative side of gift cards is that they can sometimes get lost in the mail, we may forget or lose them once we receive them, or they may lose value if not used within a specific time.

Now back to the story about an Ice-Cream Bank. Seems there’s this boutique ice-cream parlor in Pittsburg that pays 5.5% interest per month on its cards. The interest can be redeemed for items they sell, such as ice-cream and coffee. The banking regulators are in turmoil trying to shut down this parlor offering bank-like products, but so far they haven’t figured out how to shut down the niche the proprietor found in banking and securities regulations.

I like innovation, and I admire Ethan Clay (the owner) for his creativity and courage to come out with an interesting idea to attract and reward customers. This got me thinking: Why don’t the credit card and banking industries, as well as major retailers, come up with ideas not only to add convenience and points, but also to encourage saving money on purchases and perhaps provide discounts on purchases if you use their cards? Wouldn’t it be cool if a credit card company rewarded people who finally paid off their balances, by depositing money into a special savings account (redeemable only in the future) for each month that the balance is reduced? Maybe they could even increase that amount for every month that this is maintained and the balance is finally repaid. They probably cook up ideas like this all the time, but they are not approved when they get to the executive team for fear of lost revenue, since they make more money on interest and fees. But like Ethan Clay’s small Whale Bone Cafe, small companies can try new ideas. Maybe a smaller credit card issuer will read this story in today’s Wall Street Journal and provide a card that has positive innovations to help people more.

 

Home Mortgage News, for Those Struggling with Payments

I’ve talked to several people who have been having difficulty staying current on their mortgage, some just over the past year, and others that have been struggling for several years that have qualified for help recently, and they are able to stay in their homes.  Some have even been turned down for loan modifications and short-sales in the past, and things looked very dark. It seems as if some lenders are trying to help borrowers more than ever now. The help includes:

  • Loan modification temporarily lowering of monthly payment
  • Second mortgage forgiveness
  • Interest rate reduction to 1% for veterans
  • Refinancing with their current lender even though they might not normally qualify
  • Settlement to compensate people for unfair treatment due to bad foreclosure processing, but the deadline to apply is 9/30.

I encourage you to call a qualified HUD counselor and contact your lender talking to their mortgage hardship department. Lastly pray for a financial miracle, I’ve seen plenty.

Wrongful Foreclosure Compensation Deadline Approaching

If you’re one of the millions of people who’ve faced losing your home through a wrongful foreclosure, you might get help, but you must act quickly. Homes that were foreclosed on in 2009 and 2010 should find out about the free Independent Foreclosure Review (IFR) process. The IFR process is by the Office of the Comptroller of the Currency and the Federal Reserve, will award financial assistance to borrowers who were foreclosed on because of inaccuracies and oversights.

According to the Independent Foreclosure Review website, borrowers are eligible for independent foreclosure review if: (1) the property securing the loan was the borrower’s primary residence; (2) the mortgage was in the foreclosure process at any time between January 1, 2009 and December 31, 2010; and (3) the mortgage was serviced by one of 27 IFR approved servicers. These servicers include: America’s Servicing Co.; Aurora Loan Services; BAC Home Loans Servicing; Bank of America; Beneficial; Chase; Citibank; CitiFinancial; CitiMortgage; Countrywide; EMC; EverBank/EverHome Mortgage Company; Financial Freedom; GMAC Mortgage; HFC; HSBC; IndyMac Mortgage Services; MetLife Bank; National City Mortgage; PNC Mortgage; Sovereign Bank; SunTrust Mortgage; U.S. Bank; Wachovia Mortgage; Washington Mutual (WaMu); Wells Fargo Bank, N.A.; and Wilshire Credit Corporation.

A small fraction of people have applied for this, and with the application deadline extended to September 30, 2012, it is important that potential claimants look into receiving compensation or other support, as soon as possible. This may apply to people who were foreclosed on – even when they were abiding by the terms of their mortgage or their modification agreement, or were protected by bankruptcy.

The Independent Foreclosure Review process may provide compensation in the form of a lump sum payment, a loan modification, a suspended foreclosure, or even a corrected credit report.

To find out more about the Independent Foreclosure Review process, visit the website https://independentforeclosurereview.com/.

Is Loaning to Friends a Good Idea?

Often I am asked what I think about loans between friends or family. There are usually two reasons where I see this happening, either to help bail someone out of a difficult financial situation or as way for the lender to earn interest, while helping a friend reduce their debt.

If the motive is purely to help someone, top-selling financial author and speaker Dave Ramsey recommends the generous friend consider it a gift and not a loan, and no expectation for re-payment. This is probably good policy, because it helps to maintain the friendship dynamics as much as possible. People should be very careful doing this, in fact before doing so, I recommend reading the book When Helping Hurts for guidance about the best way to go about helping others without hurting them.

Loans between friends for the purpose of debt acceleration and investment purposes goes something like this. Lets say Bob is carrying about $20,000 in credit card debt and the interest rate is 18.99%. Bob is barely able to make the minimum payment, or perhaps is only able to pay a little extra. It may take years for him to get out of debt. Bob’s friend Jim is doing pretty well financially. Jim has more than adequate savings and investments, and his job is secure. Jim would like to help Bob out by loaning Jim $20,000 for debt repayment for 5% for 5 years.

If Bob were paying $400 per month on this credit card, it would take him over 30 years to pay this card off, and Bob would have paid $59,137 in interest. Many credit cards have much higher rates, so this number is fairly conservative.

Jim on the other hand has $20,000 in a 5-year CD at his local bank paying him 1.5%. At the end of 5 years Jim’s CD would appreciate to $21,559. Jim hates this rate of return, and he knows Bob’s predicament, so he approaches him with an idea. If Jim loaned Bob $20,000 and charged him 5% interest, in 56 payments Jim will be re-paid his full $20,000 and earned $2,500 in interest. It was a win for Jim because he earned $1,000 more interest, and a win for Bob because he got out of debt 25 years sooner, and saved over $50,000 in interest.

This sounds like a great idea, but I’m not a big fan of doing so because it can strain the relationship, since the dynamics are never the same, this is the reason Dave Ramsey has the same viewpoint. The other concerns are that if Bob looses his job, or racks up credit cards again, then isn’t able to keep up payments to his friend, then that could strain things. In these types of situations, I recommend that Bob and Jim both speak to trusted advisors that know them both before making this arrangement,. Also, if they decide to go down that path I would insist that Bob attend a Dave Ramsey Financial Peace University class in his area.

There is a third alternative, and that is for Bob to increase his income and reduce expenses so that he has more money to accelerate his debt repayment. Last January I wrote the article 15 Ways to Increase Income; so there may be ways for Bob to come up with extra money to re-pay his credit card quickly. For example if he increased his monthly payment to $600 per month, or $200 additional, it will be repaid it about 46 months. Yes he will pay about $7,600 in interest, but doing it this way will provide character building qualities and give him a sense of accomplishment. If his credit rating is good, he might be able to switch to a lower or no interest rate credit card periodically and reduce the term and interest even more.

Capital One Credit Card Woes

The credit card industry, within the last few years, has come under closer oversight and regulation. Dave Ramsey in his Financial Peace University class lessons of Dumping Debt and Credit Sharks in Suits has been particularly critical of the bad behavior and sometimes illegal practices of credit card companies.

Just last week Capital One Financial Corporation agree to pay $210 million to settle allegations that they allowed its call-center contractors to pressure customers to purchase add-on products that they didn’t understand, need, want or would qualify for. Credit One will begin refunding customers who purchased the products after August 2010. The have stopped selling them. Other banks are expected to face similar scrutiny.

This was one of the first actions by the newly formed Consumer Financial Protection Bureau (CFPB) of the Obama administration, headed by former Ohio Attorney General Richard Codray. The CFPB reports that Capital One is one of the biggest source of credit card company consumer complaints.

The credit card industry probably feels that they are over-regulated, but they have had much free rein for decades, abusing and taking advantage of consumers, to their [billion dollar] profit. I welcome the CFPB’s aggressive stance towards credit card companies, as well as the Credit Card Reform Act of 2009- they are both a great start to combating abuses of that industry that have gone on for far too long.

Lender Reduced Interest Rate to 1% for Veteran

I just spoke to a good friend and veteran in Columbus Ohio that has a mortgage with JP Morgan Chase for 30 years at just over 6%. Chase lowered their interest rate to 1% for 3 years, which made their monthly payment drop by about $400. They were told that this was a special program for people who had been in the military, and had applied for a loan modification in the past. The letter they received was a godsend, allowing them a little extra in their budget to save and re-pay other debt. The letter said the payment reduction amount is taxable, which indicates to that this amounts to forgiven interest, but they should consult their tax preparer to be sure.

The benefit this couple received is probably part of the settlement reached with the Federal government and 49 state Attorneys General, Bank of America, J.P. Morgan Chase, Ally, Citi, or Wells Fargo in February to provide relief to servicemembers and veterans. From the Whitehouse’s website, the lenders will

  • conduct a review of every servicemember foreclosed upon since 2006 and provide any who were wrongly foreclosed upon with compensation equal to a minimum of lost equity, plus interest and $116,785;
  • refund to servicemembers money lost because they were wrongfully denied the opportunity to reduce their mortgage payments through lower interest rates;
  • provide relief for servicemembers who are forced to sell their homes for less than the amount they owe on their mortgage due to a Permanent Change in Station;
  • pay $10 million dollars into the Veterans Affairs fund that guarantees loans on favorable terms for veterans; and
  • extend certain foreclosure protections afforded under the Servicemember Civil Relief Act to servicemembers serving in harm’s way.

Reducing Fees for FHA Borrowers Seeking to Refinance: FHA will cut its fees for refinancing loans already insured by the FHA. An estimated 2-3 million borrowers could be eligible for this savings, providing the typical FHA borrower with the opportunity to save about a thousand dollars a year through refinancing than they could have under today’s fee structure.

This is very brief information, servicemembers and their dependents who have or have had a mortgage with Bank of America, J.P. Morgan Chase, Ally, Citi, or Wells Fargo and want to read about all of the benefits (this is just a summary of some of them), should look into this further:

  • Call the Justice Department at 800-896-7743, they have information to determine if you are victims and the settlement requires those individuals to be contacted
  • Military legal assistance office locator at http://legalassistance.law.af.mil and click on the Legal Services Locator
  • Justice Department’s enforcement of the SCRA and the other laws protecting servicemembers is available at www.servicemembers.gov
  • Whitehouse fact sheet

When to Pay off Your Mortgage

There is quite a bit of miss-information when it comes to whether someone should pay-off their mortgage. On one hand it is wise to have as a goal to someday have a mortgage free home, especially as one enters the retirement years, and minimizing of cash flow and simplification are goals. Many people wonder if it makes financial sense to payoff one’s mortgage instead of using those dollars to invest.

Dave Ramsey and other financial experts advise people to payoff the mortgage after one has: 1) repaid all other debt 2) fully funded emergency savings with 6 months of expenses (or 12 – 18 months if self-employed) and 3) putting enough money into accounts for retirement and college education. This is great advise for the masses, these experts are trying to convey with a simple message that people can strive for. Debt elimination is always good, as it is always nice to not be under the burden that we feel when we are shackled with debt. Simple messages are good for public communicators, because people are often looking for loopholes for their ‘special’ circumstances, and then lose sight of goals and lessen their chances of overall success.

That said, does it ever make sense to direct money that would be going into savings and/or investments instead of house mortgage repayment?  If someone is not investing (bad idea) and just putting the money into a savings account that today is earning less than 1%, they would be better off to pay off the house. This is because even with today’s low mortgage rates of less than 4%, their savings would still be earning less interest than they would be paying. If someone is investing, and earning a rate of return that exceeds the mortgage on their home, then it is a maybe. Maybe because it would depend upon how they are investing, and the interest rate of their mortgage net of tax-deductions, since most people are able to deduct the interest on their mortgage. The interest rate calculation may require careful analysis with the help of one’s tax preparer. Lastly, the invest or pay-off question depends upon how much money someone has to invest, either as a lump sum or a monthly amount. Meaning the analysis would be easier if someone had $100,000 in investments, and the mortgage was $100,000, but the calculation would be more difficult if someone didn’t have that lump sum, but merely an additional monthly amount to apply to principle. In this case there is no rule of thumb and careful analysis would reveal the most appropriate solution.

When to Use Credit Counseling Agencies

US households debt service ratio is now down to 11.5 percent from a high of 14.0 percent, in the third quarter of 2007. People are making great strides to reduce or eliminate debt altogether. This is good news, however many people are still concerned about their debt.  The conventional ways of debt reduction entail some type of snowball method and lowering of expenses.  Snowballing is a simple way to more quickly eliminate debt by committing to a total fixed dollar amount each month towards a debt reduction schedule. When one debt is totally repaid, then the next one (typically the one with the highest interest rate or lowest balance) receives a larger amount of the fixed payment.  People ask me what they should do if they can only make the minimum payments, and nothing more, snowballing will help but they may be decades away from being debt free. Down sizing and second jobs is the answer for many, while others can refinance homes in this day of very low mortgage rates to get a little room in their budgets.

If people can’t make minimum payments, no matter how much they tighten their budgets, often they consider bankruptcy (either Chapter 7 forgiveness or Chapter 13 repayment), or credit negotiation companies. Dave Ramsey advocates a pro-rata approach instead of those options, and that might work for some people if creditors comply, but IRS and student debt or debts long in collections may not cooperate.  

What can people do who are barely making minimum payments, or are doing further in debt in each month, and are not yet to the point of needing to consider these options, should they ever consider credit counseling agencies?  The answer is maybe. I think people should at least talk to a couple of really good ones, and get proposals. To read more about them, Mary Hunt has written an excellent piece below. Mary is founder and publisher of Debt-Proof Living, a highly regarded organization consisting of interactive website, monthly newsletter, personal finance tools and almost 20 books.

Is Credit Counseling For You?

If there’s one thing that makes many people go hmmmm, it’s the topic of credit counseling. Many people still confuse credit counseling—paying back all of what a borrower owes—with debt settlement and negotiating payoffs of 50 percent or less of what the borrower owes. Others assume incorrectly that credit counseling is the same as debt consolidation.

Credit counseling is educating consumers on how to avoid incurring debts that cannot be repaid, and creating an effective debt management plan and budget. Credit counselors are often able to negotiate lower interest rates and a more favorable payback schedule.

Here’s when a credit counselor’s debt-management program may help you:

1. Your unsecured debt is mostly on credit cards. Debt-management plans typically can’t deal directly with overwhelming medical bills, student loans or other similar debts.

2. You are ready to get on a strict budget. A debt-management plan requires you to turn over a certain dollar amount each month to the credit counselor, who distributes the money to your creditors.

3. You are determined to avoid bankruptcy. Credit counseling is designed to help you avoid bankruptcy or debt settlement.

4. You’re not already in too deep. Unfortunately, people wait too long to seek aid. If you have enough income to pay the minimums on your bills and a little bit extra, you’ll have the best shot at success with credit counseling.

For most of credit counseling’s history, the industry has been dominated by the National Foundation for Credit Counseling, whose nonprofit affiliates known mostly as Consumer Credit Counseling Services offer lower interest rates and payment plans for people who have fallen behind.

NFCC, offering credit counseling and financial rehabilitation since 1951, has become the gold standard in credit counseling.

Recently, I spoke with Gail Cunningham of NFCC and asked her about NFCC’s success rate. “In 2011, of the 2.5 million people NFCC counseled, one-third required only a number of counseling sessions to get them back on track,” says Gail. “Another one-third of that group required professional intervention by means of our debt-management program.” The final one-third were found to be better served by someone else.

About 53 percent of those who come to NFCC seeking help go on to a successful completion, which means unsecured debt is 100 percent paid off and they’re back on their feet financially.

What happens to your credit during counseling largely depends on how your lenders report your account to the credit bureaus. Some creditors report customers as delinquent on their bills until they make three consecutive payments of the negotiated new minimums. Being reported as late or delinquent can certainly hurt your credit scores, but a simple notation about credit counseling probably won’t.

To be connected with a credit counselor that is certified by NFCC, go to www.NFCC.org and look for “Click Here to Begin.” Or call 800-388-2227 to be connected to the counselor closest to you.
©Copyright 2012 by Mary Hunt

In conclusion, be careful before committing to one of the approaches, be sure to talk to several wise financial counselors and pray for direction.

Important Credit Score Information

This is a follow-up to an earlier article about an excellent series from The Columbus Dispatch about significant errors of credit agencies combining the credit history of other people, usually family members or others with similar names, that have bad credit. Some of the stories really blew my mind- click to read the full articles:

Bad credit and other bad information on the reports prevents people from obtaining all sorts of loans, such as for cars or from their home equity. Bad credit rating can also effect employment, and cause auto and homeowner’s insurance rates to raise dramatically.

Credit reporting agencies are responsible for tracking our payment history on obligations like utility bills, mortgages, credit cards, and other debt, as well as using this information to compile a credit ratings for consumers. The reports also contain information about felony criminal records and addresses.

Normal problems are easy to corrected, such as small errors about late payments, or debt that has long since been repaid, by writing letters to the main credit reporting agencies. Often consumers have to make follow-up phone calls and send additional letters, but I understand that things usually get cleared up. It is just a pain to do so.

Everyone should check their credit history, usually for free through annualcreditreport.com and NOT freecreditreport.com. There you can get reports from Equifax, Trans Union, and Experian. If you find that your information is incorrect, quickly find out what you need to do to fix it, and then constantly followup until done so. This may turn into a part-time job for some, but is important. To know your rights and procedure you should follow, there are many excellent articles at www.ftc.gov:, start with Credit and your consumer rights.

Credit Score News

The Columbus Dispatch reported significant errors of credit agencies combining the credit history of other people, usually family members or others with similar names, that have bad credit. Bad credit and other bad information on the reports prevents people from obtaining all sorts of loans, such as for cars or from their home equity. Bad credit rating can also effect employment, and cause auto and homeowner’s insurance rates to raise dramatically.

Credit reporting agencies are responsible for tracking our payment history on obligations like utility bills, mortgages, credit cards, and other debt, as well as using this information to compile a credit ratings for consumers. The reports also contain information about felony criminal records and addresses.

Normal problems are easy to corrected, such as small errors about late payments, or debt that has long since been repaid, by writing letters to the main credit reporting agencies. Often consumers have to make follow-up phone calls and send additional letters, but I understand that things usually get cleared up. It is just a pain to do so.

Everyone should check their credit history, usually for free through www.annualcreditreport.com NOT freecreditreport.com. There you can get reports from Equifax, Trans Union, and Experian. If you find that your information is incorrect, quickly find out what you need to do to fix it, and then constantly followup until done so. This may turn into a part-time job for some, but is important. To know your rights and procedure you should follow, there are many excellent articles at www.ftc.gov:, start with Credit and your consumer rights.

How to Break the Pay-Day Loan Trap

A lot of people are stuck in a cycle of using Pay-Day and Checking Cashing stores, and they don’t know how to get out of them. First let’s understand how they work to both help people then trap them in an ever ending cycle of debt and pain.

  • Loan is given, equal to one or two paychecks, and is automatically deposited into checking account
  • Borrower uses those funds for things like food, utilities, rent and gasoline and there is no money left in checking account
  • Paycheck is deposited from the employer automatically into the employees/borrower’s checking account
  • A few days later the pay-day advance company is repaid back for a portion of the loan amount, through an automatic checking account draft, the amount re-paid sometimes equals the paycheck, plus a fee (very large fee when you compute it as interest) so the person is often left with no money for the next round of bills they owe
  •  The cycle repeats itself, the borrower is going to be short again, so they receive the loan, sometimes automatically, then repeat the above

Question:    I need the money to pay my bills, how can I stop the cycle?

Answer:       The keys are for your expenses to be less than your  income each month, and for you to have around $500 extra as a cushion for things that fluctuate a little bit like for food and gasoline, so that you are not bouncing any checks or tempted to go to the pay-day-loan store for an advance on your paycheck. Then you want to have at the minimum $1,000 emergency savings in your savings account that is only used for dire emergencies. Make sure that you look at your expenses and cut everything or substantially reduce all unnecessary expenses until your income exceeds your expenses. After you have your savings established, use all disposable income to ‘snow-ball’ debt until all non-mortgage debt is eliminated.

Once you don’t need the pay-day advance cancel it, and all automatic checking account deposits and drafts so that no more money flows to or from the check advance place.

 

Question:    I don’t make enough money, how can I break the cycle?

Answer:      Get second jobs, sell things- do whatever you can to pay the loans off.

 

Question:    I’ve done all of that and I can’t get ahead, what should I do?

Answer:      Cancel the automatic checking account draft, so that they can’t pull the money from your checking account. Sometimes they are uncooperative, and you have to get tough. Sometimes you need to give them a 10 day or so lag time.  If all else fails contact your bank and discuss with them cancelling the draft on the banks end before it hits.  Some people cancel the bank account, but you might be faced with bounced check and other service fees. Make sure you contact the lender to arrange a monthly payment plan that you can afford, until it is repaid

Bank of America New Plan for Foreclosing Homes

The Wall Street Journal reported that BofA is initially offering in New York, Arizona and Nevada homeowners who are having difficulty making mortgage payments, to lease their home back to them, at market rates, in exchange for transferring the deed to the bank using a ‘deed-in-lieu of foreclosure.’

This could be a win for the banks, who usually receive no payments during the foreclosure process which can take from 6 to 18 months for the legal process to complete. Often this period of time is even longer when you consider homeowners apply and re-apply for loan modifications, and the homes don’t even go into this long foreclosure process until all modification options have been exhausted. There are even instances of the banks being slow to start the foreclosure process and homeowners are able to live rent-free for many years, before the process ends in a sheriff sale when the homeowner has to find a new place to live. Banks choosing to offer this program at least get cash flow, and a homeowner that will probably maintain the property better than when it goes vacant for many months. Unoccupied homes lose value through vacancy entropy; leaks don’t get noticed for example, copper plumbing, air conditioners and appliances are often stolen.

This is a win for the homeowner too, who wants to stay in a house or condo instead of renting an apartment, pay rent that is affordable, don’t want to move out of their children’s school district until they graduate to the next level.

What to do with your Tax Refund

When we find out we are going to receive what might be thousands of dollars in tax refunds from the Federal or State Governments, we have two competing impulses:  wants versus needs. Those that are struggling may want to give this issue serious consideration, because any windfall like tax refunds or bonuses can really help us get out of financial crisis, or at the least set us on the path to doing so. Those doing okay, can really use these funds to plan smarter. Research indicates that most people who get windfalls and raises seldom see any change to their day-to-day cash flow management, since life just seems to happen and soak up any extra money that flows our way. These demanding recessionary and inflationary (i.e., health care, gasoline and food) times require diligence.

Needs: Basic items that are necessary to sustain basic living. In Dave Ramsey’s Financial Peace University class he advises that people should cover these things first, because sometimes people will pay for wants or debt and then not have money for important things like food and rent. Good for some to be reminded when they have money forthcoming.

  • Housing: rent or mortgage, utilities (basic phone only), real estate taxes and insurance
  • Groceries: food and personal care items
  • Transportation: car payment, gasoline and car insurance
  • Health: prescriptions and doctor provided care
  • Clothing
  • Childcare if working fulltime
  • Tithe: this is essential, and could be in either this or the next category. Special counsel is advised to those in very difficult financial situation

Tier 2 Needs: Items that are not always necessary for day-to-day living, but help people with things such as health and not fall into pay-check to pay-check lifestyle. Again good for some to be reminded when they have money forthcoming.

  • Emergency savings for things like car repairs and health insurance deductibles
  • Health insurance and fitness
  • Pet expenses for those that already own one
  • Internet

Tier 3 Needs: Things people must do to get debt free, since when debt is eliminated extra money will be there for building up larger savings and investments. With no debt and savings, people will usually be a very good financial situation. If someone gets a tax refund or a bonus, these are the items to use it for:

  • Debt repayment, using the snowball method until all non-mortgage debt is repaid
  • Emergency savings fund for health insurance deductibles, car repairs and the like

Wants:  These are the things that people may be considering with their tax refund, but should refrain considering until they are out of debt and have funded 3 – 6 months of income in savings. Extra courage is needed, especially when we have done without for a long time:

  • New TV, car, furniture and appliances
  • Robust cable TV
  • Vacation
  • Smart phone or fully equipped phone with data and all the bells and whistles
  • Down payment on a new loan for anything

Federal Student Loan Repayment Options

Week #4 of Dave Ramsey’s Financial Peace University: Dumping Debt was a great motivating lesson. Since that class I have received numerous questions about Federal student loans. Therefore I put together the following brief about Federal Student Loans various repayment options to foster your additional research and consulting with your advisors. Please keep in mind, this subject is complicated and further investigation about someone’s particular situation is recommended.

When you are out of school (graduate, leave school, or drop below half-time enrollment), monthly repayment installments are required. The rate of interest that is charged depends upon when the loan was disbursed, type of loan and whether graduate or undergraduate degree. There are various options for making, consolidating and stopping payments, and some of them are as follows:

Loan Payments Stopping

  • Grace period of 6 – 9 months  from the date school ends, depending upon the type of federal loan
  • Total forgiveness for death, total and permanent disability, and other severe hardship
  • Deferment of loan payments for specific situations or hardship, depending upon the type of loan you may not have to pay interest during deferment, or you might have to pay it or have it added (capitalized) to the loan
  • Military deferment for active or post-active service
  • Forbearance with interest accruing
  • Partial forgiveness after 10 years if employed by a “Qualifying Public Service Organization,” remaining balances of loans granted under the William D. Ford Federal Direct Loan (Direct Loan) Program are forgiven after making 10 years of Qualifying Repayments (Income-Based Repayment (IBRP) Plan or the Income-Contingent Repayment (ICR) Plan, or the 10-year Standard Repayment Plan or repayment plan where the monthly payment amount equals or exceeds the 10-year Standard Repayment Plan
  • Partial forgiveness after 25 years for Income Based Repayment eligible borrowers but not employed by Qualifying Public Service Organizations, this is new

Loan Repayment options (example used $100,000 at 5%)

  • Standard level for 10 years $1,060.66 for a total of $127,279
  • Standard graduated repayment plan, for 10 years, the first payment is $706.10, and total payments would be $132,496
  • Extended months for 25 years of $584.59 for a total of $175,377
  • Extended graduated repayment plan, for 25 years, the first payment is $416.67, and total payments would be $191,558

Income Based Repayment

  • Income based repayment programs, base the repayment on various factors, including family size, household income, and spouses student loans. Repayment will change as someone’s situation changes, including income. Using the online calculator for a family of four, earning $60,00 the payment is only $330 per month.

New Student Loan Consolidation

  • In October President Obama announced a new loan consolidation plan, it seems to have a few benefits: slight reduction in fees, interest rates and complexity

Lastly, someone asked me even if there are financial benefits to doing IBRP and forgiveness, are there any behavioral, ethical or financial disadvantages?  Negotiating payments or bankruptcy I think gets into the ethics and behavior issues more than federal forgiveness programs, however some may argue this point, because forgiven payments will have to be paid by tax payers ultimately. From a financial perspective it is possible that someone could end up paying more with a IBRP than a standard 10 year repayment plan, with longer term payment plans especially if their income increased quite a bit over time.  To estimate this one would have to run 20 different reports.

International Banking Roots

If you are following the European debt crisis, you may be interested to know more about how the international banking system got its start, in a culture dominated by those whose leader’s believed it to be wrong: check out a piece aired on NPR 1/31/12 “In Italy, Art As A Window Into Modern Banking.” Interestingly Florentine merchants financed the Renaissance by going around the Catholic Church’s ban on money-lending. Up until the 14th century both the Catholic Church and Judaism followed the Bible condemnation of usury.  Merchants invented the financial instruments of international trade, which also helped to fuel the expansion of art.

News about lenders: Post Bankruptcy Collections, Auto Loans, and Pay-Day Lenders

If you have had some difficulty with making debt payments recently, this article may be for you.

It is has been reported in several places including the Wall Street Journal, that even though people declared bankruptcy, some lenders still tried to collect on the old debt. This is an illegal practice, where the lenders or collectors are fishing, hoping some people would pay, even though they have been legally released of the liability. If this happens to you, ignore the requests. If you have paid, you may have grounds for a lawsuit.

A few lenders are now loaning mony to people wanting to buy cars, even though they may have been late on mortgage payments. This is good for the auto industry, and those for who this borrowing makes sense. The best thing is to buy good used cars cheap, drive them a long time, learn personal financial management, don’t borrow to buy deprecating assets like cars, pay off debt, save and pay cash for things that are needed, such as your next used car.

Lastly, with the controversial appointment of Richard Codray to lead U.S. Consumer Financial Protection Bureau, Richard has announced that they are going after pay-day lenders. Look for regulations to severely restrict these institutions ability to continue to shackle and take advantage of the poor.