Dedicated to bringing you some of the best information to help you survive tough economic times
July 2010 - Posts
by Bill Hardekopf
According to a recent FICO study, over one-fourth (25.5%) of Americans have poor credit. Nearly 43.4 million people now have a credit score of 599 or below. When you go to the grocery store or a ballgame, look around. One in four people around you have serious financial problems. Expect that number to grow as households continue to struggle through unemployment, credit card debt and foreclosures.
How Did We Get Here?
People don't get into financial problems overnight. It took years of overspending, overlending, and poor regulating to create these problems. Lenders, and even the government, share some of the blame.
The government helped open the door for higher rates and fees in 1978. At that time, a majority of states had usury laws that capped interest rates on credit cards, usually at about 18%. That year, a ruling in Marquette National Bank vs. First of Omaha Service Corp held that national banks could charge credit card customers the highest interest rate allowed in the bank's home state, instead of the customer's home state. Taking advantage of this new ruling, many major banks moved to states such as South Dakota and Delaware since those states had no usury limits on interest rates and they could even export these rates to the other states.
In the early 1990's, credit card issuers advanced beyond one-rate-fits-all offers and used credit scores and financial data to develop pricing and credit strategies. They set rates and limits based on computer assessments of an individual's risk of default. The higher the risk, the higher the interest rate. This new data led to innovations, such as increased credit limits and decreased minimum payments.
These new, advanced risk assessments created new opportunities to lend to people who were a higher risk, including people who should not have had credit. The new loans and higher credit limits were profitable for banks, but made the problem worse for the borrowers.
In 1996, a Supreme Court ruling (Smiley vs. Citibank) ruled that fees should be included with the balance, and could determined by what the bank's home state would allow. This ruling allowed issuers to charge more for fees as well as create new fees, such as over-the-limit fees. This ruling also opened the door for punitive practices like the Universal Default clause.
The days of loose lending for mortgages and credit cards, high rates and fees, second mortgages and borrowing beyond more than you could repay couldn't last forever. The crash occurred in 2008 and caused tremendous losses for borrowers and lenders.
Banks and credit card issuers responded by slamming the brakes on lending. They cut credit lines and increased interest rates. Reduced credit limits hurt borrowers' credit scores, and higher interest rates made it harder for them to pay down their balance.
Credit card issuers reacted strongly and quickly to protect themselves, but 25% of Americans are practically banned from inexpensive credit at the time they need it. The tightened lending policies shut off these consumers from many financial options.
Actions Causing Lower Credit Scores
- Debt-to-payment ratio increases. This happens when you add to your outstanding balance, moving you closer to the credit limit; or when the issuer reduces your credit limit. A higher debt-to-credit ratio is considered a higher risk and can result in a drop of about 20 points.
- Late payment. Some credit experts believe a few late payments on a credit card or other loans can lower your score by as much as 100 points if you have a great score, or 80 points for someone with an average score. Making payments on time is a big step toward improving your credit score.
- Defaulting on a loan or a foreclosure may lower a score by as much as 200 points.
Here's the basic breakdown of how long different types of negative information will remain on your credit report:
- Late payments: seven years
- Bankruptcies: seven years (Chapter 13) or ten years (Chapter 7)
- Foreclosures: seven years
- Collections: Approximately seven years, depending on the age of the debt being collected
- Public Record: Generally seven years, although unpaid tax liens can remain indefinitely
The good news is that the older the negative item, the less impact it will have on your FICO score. A collection that is five years old will hurt much less than a collection that is five months old.
A subprime credit score is just a number. It doesn't tell the individual story or reasons that a person gets into financial trouble. It doesn't tell of the stress caused by higher loan rates or increased insurance premiums because your credit score says you are a high risk. But lenders, insurers and even employers will make judgments and decisions about you based on that number.
Car loans, mortgages, credit card loans cost more when you have a subprime credit score. This puts additional strain on a budget that is already breaking.
When consumers have made poor financial choices and have damaged their credit score, they are on their own to fix it. There is no federal bailout or TARP fund that will rescue them.
Ways to Raise Your Credit Score
It's important to note that raising your FICO credit score is a bit like losing weight: it takes time and there is no quick fix. Here are a few tips for raising your credit score:
- Get a copy of your credit report from all three credit agencies. U.S. residents are entitled to one free copy of their credit report from each credit reporting agency once every 12 months. This information is found by calling 1-877-322-8228 or at AnnualCreditReport.com. If any of the information on a report is incorrect, contact the agency to correct it. Incorrect information should be corrected or removed within ten to thirty days, and doing so may give your score a quick boost. Your credit score is usually not shown on the free annual credit report. There are paid options that will allow you to see your credit score.
- Pay your bills on time. This is the single most important factor in your credit score. Even if you only pay the minimum, pay your bills on time. Late and missed payments can quickly lower your credit score.
- Pay off your debt. High balances and high debt ratios drag down credit scores. Your debt balance should be less than 35% of your available credit. If you have a good payment history, contact your creditors and ask for lower interest rates. Then use what you saved in interest to pay down your balances.
- Build a long-term relationship with the accounts you have. A long history of good payments on a car loan, a mortgage, or a credit card increases your credit score. Keep older credit card accounts open, even if you are not using them, because you are rewarded for a long, positive credit history. If you review your credit report and discover that you have many accounts that you no longer use, close the newest ones first.
- Limit your credit applications. Too many new accounts can lower your credit score. Each time you apply for a loan, the application shows up on your credit report. A significant increase in inquiries signals that you are desperate for money and are a credit risk. The exception is shopping for a mortgage or a car loan, as multiple inquiries for the same purpose in a reasonable period are considered a single inquiry.
- Get a checking and a savings account.
- Do not co-sign for a loan for someone else. This shows up on your credit report, and a missed payment or a maxed out credit card by the other person will affect your credit score.
- If you can't pay your bills, contact your creditor or see a legitimate credit counselor. The National Foundation for Credit Counselors, a not-for-profit organization, can give counseling and help you put together a debt management plan.
New Legal Protections
Under the financial reform bill passed last week, there is now a law dictating that a lender is legally responsible for assessing a borrower's ability to pay. Lenders will have to verify borrower income to make a loan.
Additional consumer protections and regulations include: free credit scores for those denied credit or offered only higher rates because of negatives on their credit report; brokers can not receive incentives to steer homebuyers into pricier loans; institutions that lend irresponsibly will be penalized
Bill Hardekopf is CEO of LowCards.com, a site that simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories, such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card. The LowCards.com Complete Credit Card Index is the most objective and comprehensive resource on the Internet which allows consumers to compare rates for over 1000 credit cards offered in this country.
by Dave Boblenz, PharmD
- Review all the drugs you are taking with your doctor and pharmacist at least every six months. This will help eliminate any unnecessary costly drugs and will also lower your chances of a dangerous drug interaction.
- Ask for a generic. Check with your doctor if there is a generic to the drug that he or she is prescribing. Ask your pharmacist for advice also. There may not be a generic of that particular drug, but there may be a similar drug for a much lower price that he could ask your doctor to write a prescription for.
- Check for samples. If this is a one time prescription, it is more likely that your doctor will have samples on hand. Always ask.
- Contact your drug benefit plan if you have one. Before you go the pharmacy, place a call to the 800 number on the back of your card. They should be able to direct you to some cost savings as they are interested in saving money also.
- Join your retail pharmacy’s drug discount program. These programs can provide better savings for people who are not enrolled in Medicaid or Medicare.
- Ask if your pharmacy will price match. With so many pharmacies competing for your business, many will match any competitor’s lower price in your area just to keep you coming back in the door.
- Use over the counter (OTC) medications whenever possible. There are several prescription drugs that are available in over the counter (OTC) formulations. Prescription allergy medications are expensive, but many OTC antihistamines are just as effective at relieving runny nose, sneezing, and itchy eyes. You do not need a prescription for these, they will not cause drowsiness, and you will save money. Another example is prescription heartburn medications. OTC heart burn medications, such as Prilosec OTC, Prevacid and Zegerid OTC, contain the same active ingredients and are just as safe, strong and effective as the expensive prescription products.
- Consider filling your prescription via the Internet. Internet sites do not have the same overhead that retail stores have and can therefore offer bigger discounts. To avoid internet fraud, always use the National Association of Boards of Pharmacy to find an Internet pharmacy, as they carry a list of recommended Internet pharmacy sites that are legitimate.
- Check out the online programs available. One good program is CaregiversMarketplace.com. For a one time fee, they provide rebates on items that are typically not covered by insurance. Vitamins, pain relievers, skin care products, and other items fall into this category.
- Seek advice from your pharmacist or certified pharmacy technician. Our job is to make sure that you have safe, affordable medications. Never hesitate to ask us for help.
Dave Boblenz is a pharmacist with over 13 years of experience. In addition to his daily job as a pharmacist, he also runs a website devoted to helping pharmacy technicians become certified at PharmacyTechnicianCertification.com. He is a father of four, who enjoys finding deals and helping his customers save money.
by Jeff Yeager
Sure, we could afford to spend more, but why would we? It wouldn’t make us any happier.
Those are the words I’ve spent the last two and a half years traveling the country to hear. It’s a simple but rare statement, given that nearly half of all Americans say that they literally live paycheck-to-paycheck and have little if any savings. How can some people live not only within their means, but substantially below their means, even when their incomes are often less than the national average? And here’s the biggest question of all: How can some of those same people insist that they are happier, joyous really, because of their thrift and frugality?
I traveled thousands of miles (nearly 3,000 of them) by bicycle and surveyed more than 300 of my beloved “Miser Advisers” to find the answers. In my new book, The Cheapskate Next Door: The Surprising Secrets of Americans Living Happily below Their Means, I share what I discovered about people and families (many of them just like you) who not only know how to stretch their money, but who are more content and happier because of it. The book also includes hundreds of their practical, money saving tips, unique ideas that anyone can use every day.
Some of what I found may not surprise you. They despise debt and have found creative ways to eliminate it from their lives. They differentiate between “needs” and “wants” and between “affordability” and “borrow-ability." And, yes, most of them own and still wear at least one article of clothing dating back to the Carter administration (or earlier).
But other findings surprised even me, The Ultimate Cheapskate. Only about 10% have a written household budget. “We live our budget. It’s second nature. We don’t waste time writing about it,” one cheapskate said. While they have savings in the bank, less than 15% have a formal “emergency fund.” "An emergency fund is for people who don’t have their financial house in order otherwise,” another cheapskate said. And more than nine out of ten say that they think, worry, and stress-out about money less, not more, than their non-cheapskate peers. They are 100+ times more likely to have a dog or cat adopted from a shelter than one purchased from a pet store. They are also far more likely to own a slow cooker (or several) than an iPod or flat-screen TV, and they divorce at less than half the national average.
These aren’t your miserable, Scrooge-like cheapskates. These are folks who know what’s important in life, and they skip the rest. Here’s a glimpse inside the mind of the Cheapskates Next Door:
- Cheapskates Say “The Joneses Can Kiss Our Assets.” Cheapskates are highly self-confident and proud of their frugal lifestyles, caring very little about what others think of them and even less about things like buying designer brand names and keeping up appearances with the Joneses.
- Cheapskates Are Immune from Buyer’s Remorse. Most shoppers eventually regret nearly 80% of the discretionary items they buy; but cheapskates are “premeditated shoppers” and, because of it, are largely immune from buyer’s remorse. Nearly 90% of the cheapskates surveyed say they “never” or “rarely” regret a purchase. And they don’t shop for “recreation” or “therapy,” which is one reason they prefer shopping at thrift stores (with a more certain selection of merchandise) than wasting time shopping at yard sales.
- Cheapskates Appreciate Appreciation (and depreciation, too) Other than when buying a house, most people usually don’t think about whether something will increase or decrease in value after they buy it. Cheapskates are tuned into appreciation/depreciation, often preferring to buy antique furniture (like the Amish do) that will retain/increase in value, and buying everything from cars to computers to clothing used, rather than new, so that the first owner pays for most of the depreciation.
- Cheapskates Know That The Best Things in Life Aren’t Things. Social science has shown that “stuff” tends to disappoint us over time, but “experiences” (how we spend our time) is what adds true value and meaning to life. Cheapskates value their time, and the things they can do with it, more than money, and the things they can buy with it.
- Cheapskates Answer to a Higher Authority. For most of the cheapskates polled, it’s truly not about the money. Nine out of ten cheapskates say that their decision to live a more frugal life isn’t about trying to amass a big savings account; rather it’s primarily grounded in some higher ideals, such as religious beliefs or environmentalism. That’s why, of the cheapskates polled, they donate nearly twice as much to charity as the average American.
Jeff Yeager is the author of The Ultimate Cheapskate’s Road Map to True Riches and The Cheapskate Next Door. His website is UltimateCheapskate.com
by Nikola HartmannDo you have items in your basement or attic gathering dust? Or marketable skills others would barter for? Chances are that your dust laden trinkets are things someone else wants and is willing to trade for, and that special skill you possess is worth gold or at least an invitation to Sunday supper to many cash strapped folks.
Millions have found creative ways to “go green” while still acquiring stuff, and all without having to shell out their hard-to-come-by cash. Their secret is old fashioned bartering, but with an electronic twist! Truthfully, both on and offline swap and shop sites are seeing tremendous increases in activity as many folks have turned to bartering to help survive this economic crunch. This week, I learned my neighbor, Veronica, an out-of-work accountant, had been preparing tax returns for some folks in our neighborhood in exchange for basic services, such as lawn and child care.
The world of bartering is huge. New sites and shops are opening daily, and while navigation takes a bit of finesse, you’ll find a lot of great bargains there. Before venturing out on your own, get your sea legs in shape here, by taking a look at a few of these popular sites.
U Exchange - One of the larger sites that specializes in all types of trades. Their motto is “Trade Everything, Pay Nothing”. The bonus is that they offer international listings.
Trade Attic – A social networking site that allows you to post your unwanted treasures for free. Also good for posting items you want.
Swap At Home – Receive Swap Coupons for posting items you no longer need and then use your coupons to purchase the things you want.
Labor Trader – This is the place to make a local connection if you have a service to offer or are in need on one.
Favor Pals – Get anything you want, from child care to health care, simply buy giving something in exchange. Check out their “Favor Hints” if you’re not sure what favor to give in exchange for something you need.
Trashbank – This site allows you to sell, as well as barter, trade and swap.
Swap-It Now – Billed as the ”Internet’s Flea Market,” it’s a smaller site that allows you to trade items ranging from DVDs to automobiles.
Trading the skills you possess or the items you own for things you want or need is a great way to watch your household budget grow. Haven’t you heard? Bartering is the new black and green!
Nikola Hartmann is a thrifty gal who believes in “Living Well For Less." Please visit her blog Live Well For Less and follow her on Twitter
by Bill Hardekopf
If you have a checking account, you now have a choice to make about overdraft protection. New Federal Reserve rules require banks to receive permission from each checking account customer before the bank provides overdraft protection for ATM and debit card transactions.
The change started July 1 for new customers and takes effect on Aug. 13 for existing customers. The rules do not cover checks or automatic bill payments. Banks can still authorize and pay overdrafts for these transactions at their discretion and charge a fee.
An overdraft occurs when one does not have enough money in a checking account to pay for a transaction, but it is paid by the bank anyway. This service is a loan from the bank and it isn't free. Banks charge a non-sufficient funds paid item fee (NSF) that is typically $30-$40. A fee is charged for each transaction paid in this manner.
Before the new rules, most banks automatically added courtesy overdraft protection to checking accounts with details and fees in the fine print. Some customers didn't realize the high price of the fee until they incurred the charge.
Now that the rules are in effect, banks are aggressively encouraging their customers to opt-in and marketing the benefits of overdraft protection. This is revenue banks do not want to lose. In 2009, banks collected almost $38.5 billion in insufficient funds and overdraft fees, Moebs Services estimates.
Banks have made a lot of money by allowing customers to spend or withdraw money that was not in their account. An overdrawn account can happen quickly with multiple transactions, even if they are small amounts. Sometimes, overdrafts can be caused by a number of things that are not in the consumer's control: the timing of cash flow or payments, the delayed posting of a deposit, or the banks paying the biggest withdrawals first. A $5 purchase can trigger a $30-40 fee. Since the cashier doesn't tell you it's an overdraft, you don't know there is a problem until it is too late.
In response to the new regulations, Bank of America and Citi no longer allow debit card overdrafts. Bank of America customers can still sign up for a formal program to cover debit card overdrafts.
How to Opt Out of Overdraft Protection (or Opt In)
Many banks are currently sending out informational letters to customers that explain overdraft protection and how to enroll in the service. A consumer can mail in the enrollment form (the letter may include a postage-paid envelope), or sign up by phone, in person at your local branch or online. If you do not choose an option by August 13, you will automatically be opted out.
Opting out means that you do not want your bank to authorize and pay for debit card and ATM transactions when it appears there is not enough money in your account to cover the transaction. This may create a situation where your purchase is declined.
Opting in means that you do want your bank to cover debit card and ATM transactions when there may not be enough money in your account to cover the transaction. As a result, you will be charged an NSF paid item fee.
Read the Fine Print
Carefully read the notice that you receive from your bank. It should reveal the true costs and limits of overdraft protection.
- The cost of overdraft may not end with the NSF paid-item fee. If your account remains overdrawn, you can receive additional fees. For example, if your account is overdrawn and continues with a negative balance for ten consecutive days, BBVA Compass charges a $25 extended overdraft fee. If the ending daily balance remains negative for 20 calendar days, another $25 extended overdraft fee will be charged. The BBVA Compass limits NSF fees to six per calendar day. The total of the negative balances and all fees and charges is due immediately.
- Transactions aren't processed in the order they occur. Banks can charge the items to your account in any order. They admit in the fine print that this can cause the available balance to be insufficient to pay one of more other items that otherwise could have been paid. This means the order the charges are paid can affect the total amount of overdraft and non-sufficient funds fees.
- Even if you choose to opt-in, the payment of an item is discretionary. Banks will choose which transactions to cover. You can't count on having overdraft protection when you need it.
If you opt in, you can cancel at any time. If you do not opt in, you can do so later.
Alternatives to a Standard Overdraft
Most banks offer cheaper alternatives to standard overdraft protection. These include a link to your savings account, a credit card, or a line of credit that will cover overdrawn transactions. There is still a fee each time you overdraw your account and your bank performs a transfer but it is typically $5-$10, much less than the standard overdraft fee. You must contact your bank to set up this alternative service, since it is not part of the opt in selection.
This is a good time to assess how you monitor checking account. Set up a low balance alert that will notify you when your account is low. Online banking can help you avoid overdraft situations and help you keep up with your account in real time.
Bill Hardekopf is CEO of LowCards.com, a site that simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card.
by Maegan Fox
I like things to have a place they live around the house. Hate having to move things out of the way, struggle to locate where things have been put, or have boxes/stuff lying around everywhere. Quite normal right. Well, my husband is a hoarder, comes from a family of hoarders, and will be a hoarder until the day he dies. We have a system to get around this, I declutter stuff in the house (to his annoyance) and he clutters in his storeroom/garage (to my annoyance). Usually works well.
Well this week I have to bless his great heart for his pack rat mentality. See we live on a gravel road that needs grading, and we hit a pothole and a gravel chip the size of Lake Michigan got embedded in our SUV’s front tire, causing a very, very large unfixable hole. Now these tires cost hundreds, and we don't have hundreds. But, hubby kept the old tires we replaced, and one of them wasn't particularly worn, matched the existing tires, and will last for months. Saved by a packrat! Grrrr...
So this begs the question, who is more frugal? Is it the person who doesn't have to buy things twice as they know where they have put it, who doesn't waste time searching for things, who doesn't need more room to store more stuff? Or is it the person who can nip into the garage and find a whatsit that will perfectly fix the whatchamacallit instead of the proper part, which costs megabucks? Okay, he might win this time, but will he be able to find it?
Maegan Fox is a SAHM in New Zealand who has been interested in frugality from her early years. Currently working through a property disaster with over a million dollars of debt she has outlined her journey in her blog at overamillionorbust.blogspot.com.