September 2010 - Posts - Dollar Stretcher Guest Bloggers
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September 2010 - Posts

  • Tips on Rebuilding Your Credit

    by Bill Hardekopf

    Credit card debt is falling and fewer cardholders are defaulting on credit card loans. But those trends don't tell the whole story when it comes to personal finances. Many households are still struggling with a variety of loans and rising expenses. They wonder how they will pay for it all.

    According to the American Bankruptcy Institute, bankruptcy filings by individuals or households with consumer debt surged 15% to 781,150 for the first six months of 2010 when compared to year ago levels. The Bankruptcy Institute predicts there will be more than 1.6 million new bankruptcy filings by the end of 2010.

    Economists predict sluggish growth and a tepid recovery for the near future. These are not strong enough ropes to rescue the many Americans who are struggling to hang on until better times.

    So what do you do? Let go and give up? File for bankruptcy and start over? Keep charging on your credit card until you finally default? Here are a few options that could help you re-build your credit and some courses of action to avoid.

    Credit Counseling

    If your credit score is sub-prime or you are struggling to make minimum payments, a legitimate credit counselor may be able to help. A credit counselor can advise you about budgeting, teach money management skills, and suggest techniques that are based on your individual circumstance.

    Be very careful in selecting a credit counselor. Select a reputable one like the National Foundation for Credit Counseling. You can find a local affiliate by visiting NFCC.org. The Justice Department also provides a list of approved counseling agencies here. Read all agreements carefully before signing anything. All verbal promises must be in writing.

    Here are some questions to ask a credit counselor:

    • What are your fees? Are there set-up and/or monthly fees? Get a specific price quote in writing. What happens if I can't afford to pay?

    • Will you help me fix my current problems and develop a plan for avoiding problems in the future?

    • Are you licensed to offer your services in my state?

    • What are the qualifications of your counselors? Are they accredited or certified by an outside organization? How are they trained?

    • Do your employees make money if I pay a fee or make a contribution?

    Debt Management Plan (DMP)

    If your financial problems come from too much debt or your inability to repay your debts, a credit counseling agency may recommend that you enroll in a debt management plan (DMP). A DMP may not be for everyone. A credit counselor will thoroughly review your financial situation, then give you a customized budget and advice on managing your money.

    In a DMP, your credit counselor develops a payment schedule with you and your creditors. You deposit money each month with the credit counseling organization, which uses your deposits to pay your unsecured debts, like your credit card bills, student loans, and medical bills. Your credit counselor may work out agreements with creditors to lower your interest rates or waive certain fees, but double check with all your creditors to be sure they offer the concessions that a credit counseling organization describes to you. Before you send any payments to the credit counseling organization, make sure the creditor has accepted the proposed plan. Then, review statements from creditors to make sure they have received yourpayment.

    Your DMP may prohibit you from applying for or using any additional credit while participating in the plan. This helps you get serious about paying down the debt you have, but it is also unlikely that creditors will give you credit anyway.

    DMPs take time and discipline to be successful.  You must make regular, timely payments, and  the DMP could take 48 months or more to complete. Ask the credit counselor to estimate how long it will take for you to complete the plan.

    Look for an organization that offers a range of services, including budget counseling, and savings and debt management classes. Avoid organizations that push a debt management plan (DMP) as your only option before they spend a significant amount of time analyzing your financial situation.

    Make sure you understand how your DMP will work. Here are some questions to ask about DMPs:

    • How will you know that all creditors will be paid by the due date? How will you get statements and updates about your account?

    • How is the amount of my payment determined? What if the amount is more than I can afford? If you can't afford the monthly payment, don't sign up for a DMP.

    • What debts will not be included in the DMP?  You will still be responsible for paying these on your own.

    • How will enrolling in a DMP affect my credit?  Keep in mind that counselors cannot remove negative information from your credit report.

    • What happens after I complete the DMP? Will you help me when it is time to apply for a loan?

    Debt Consolidation

    Before the credit crash, consolidating debt into a home equity line of credit was a popular and easy way to lower the cost of debt. The requirements for these have tightened dramatically.  Even if you qualify, these loans may not be worth the risk because they require you to put up your home as collateral. You could lose your home if you can't make the payments or if your payments are late.

    Consolidation loans are also costly. In addition to interest on the loans, you may have to pay "points," with one point equal to one percent of the amount you borrow. However, these loans may provide certain tax advantages that are not available with other kinds of credit.

    Debt Negotiation Programs

    Debt negotiation is not the same as credit counseling and DMPs. It can be very risky. If you don't do it correctly, it will have a long-lasting impact on your credit report and hurt your ability to get credit. Many states now have laws regulating debt negotiation companies and the services they offer.

    A debt negotiation company may describe itself as a "nonprofit" organization, but there's no guarantee that the services they offer are legitimate. Your creditor may not even accept partial payment of a legitimate debt, and if you stop making payments on a credit card, late fees and interest usually are added to the debt each month. This can cause your original debt to double or triple and the fees add even more. Most debt negotiation companies charge a fee to establish the account with the debt negotiator, a monthly service fee, and a final fee of a percentage of the money you've supposedly saved.

    Creditors aren't obligated to negotiate a settlement, but they must provide accurate information to credit reporting agencies, including late payments and failure to pay monthly payments. This can hurt your credit report.  Be aware that the Internal Revenue Service may consider any amount of forgiven debt to be taxable income.

    You should also avoid credit repair clinics that claim to help clean up credit reports for a fee. You already have the right to have any inaccurate information removed from you credit report. No one holds a magic eraser to remove accurate information from your credit report. Only time and a conscientious effort to repay your debts will improve your credit report.

    In July, the FTC enacted new rules to protect consumers from predatory practices of debt settlement companies. Debt relief companies that sell products over the phone may not charge a fee before settling a debt for a consumer and they will be prohibited from making misrepresentations.

    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.

  • Consumer Tips for Automated Banking

    by Bill Hardekopf

    Banks have aggressively pushed their customers to online automated banking, even charging more for paper statements. Automated payments and online banking work well and are convenient, as long as banks can assure customers that their money is safe and their accounts are secure.

    However, if the system goes awry, it can cause significant problems for consumers. Last week, the Chase online banking system had a service outage and was down for three days, leaving 16 million customers without access to their account.

    An outage of this size is uncommon, but it is a good reminder for all of us to have a back-up plan, to keep a personal record of account information. A lost credit card or a stolen wallet can be just as damaging if you don't have a record of all bills you've set up for automatic payment.

    Many consumers use credit and debit cards for automatic bill payments. This is a system that typically runs smoothly and on schedule but also makes it easy to forget about the merchants and bills you are paying. If you must replace a card or an account number is changed, these bills aren't automatically transferred to the new account. It is up to you to immediately contact each merchant and vendor with the new card information to avoid interruption. Keep a record of the name and phone number for every person, business, bill or loan that is paid with an online payment.

    A late notice, accumulating fines, or terminated service may be your first notification that a bill was not paid. Missed payments can cost much more than a late fee. These problems can negatively affect your credit score. Making a record of accounts to pay is a small hassle, but there may be a time when you are glad you did. Scrambling to fix it after you are delinquent on the payment is too late.

    For Chase customers, several days without account access was an anxious time for those that had bills to pay. Even though Chase will refund any late fees incurred during the delay, the bank cannot repair the credit scores that may drop after the late payments.

    It is also possible that account information may have been corrupted. Chase customers should look carefully at their account for lost transactions, incorrect account balances, missed deposits, and missed payments.

    Bill Hardekopf is CEO of LowCards.com, a site dedicated to simplifying 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.

  • Downgrade Now and Upgrade to Financial Independence Later

    by Rick Kahler

    Recently I was explaining to one of my staff members that I had decided to drop one of my two fitness studio memberships and save about $40 a month. She said, "So you’ve chosen to downgrade your lifestyle to upgrade your future." It was a perfect phrase for the process of achieving financial independence.

    People who become financially independent successfully internalize the future financial benefits of living frugally now. They understand that building financial security means never living the maximum lifestyle you can afford. Most successful financial frugalists have learned to live on less than 75% of their take-home pay.

    Unfortunately, according to a survey published by Jean Chatzky, only 30% of Americans put anything toward building financial independence. In their senior years, the 70% who aren't saving will find themselves completely reliant on government welfare, families, or the charity of strangers for their survival.

    This fact quickly puts into perspective why so many Americans are embracing larger government and expanding government entitlements. Unfortunately, the retirement that government welfare will provide isn’t going exactly going to be golden.

    Spending less today and investing that savings to provide for your future makes perfect sense. Why, then, do only three out of every ten Americans do it?

    Psychologists tell us it’s because our brains are wired for instant gratification. There's an immediate emotional reward in planning a shopping excursion, finding the perfect pair of shoes on sale, walking out of the store with them, and rushing home to try them on in front of your own mirror. Making an online deposit to your IRA just doesn't get the dopamine flowing in the same way.

    One way to help you save is to trick your brain by learning to visualize today the reward you will receive tomorrow. What does financial independence mean to you? A paid-off house, travel, time to spend in your garden or with kids and grandkids? Take time to visualize clearly what your version of financial independence would be like. I have very successful clients who have actually clipped pictures representing their financial independence and taped them to their bathroom mirrors. Sound hokey? Not to one client who did this and went from having nothing to accumulating a net worth of $20 million.

    Beginning to invest in your future will almost certainly mean downgrading your current lifestyle, significantly increasing your income, or both. The goal is to invest enough money to build a nest egg that, at retirement, will provide you a desirable lifestyle for the rest of your life.

    To get started, you will first want to pay off all consumer debt and then never borrow again for consumer purchases. Set up savings accounts for future cars, vacations, repairs, medical expenses, and gifts. In addition, begin investing 10% to 50% of your take-home pay. The older you are, the higher percentage you will need. The best place to begin is a retirement account like an IRA, 401k, or 403b.

    This will mean reducing your current expenditures on housing, car payments, vacations, eating out, and similar expenses. When possible, reduce rather than eliminate. Pay attention to which parts of your current lifestyle really matter to you, and be creative in finding ways to keep them.

    Will this be challenging? Of course. Will it pay off? Done properly and consciously, absolutely.

    The more clearly you can imagine a financially independent future, the easier it will be to make conscious, frugal choices in the present. You won't be depriving yourself. You will be investing in yourself. Downgrading your present lifestyle to upgrade your future is the surest way to make your dreams come true.

    Rick Kahler, Certified Financial Planner(r), MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!

  • Bankers Remain Pessimistic about Credit Card Market

    by Bill Hardekopf

    According to a FICO survey of bank risk officers released today, the difficulties in the credit card market may continue in the short term.

    Nearly 85% of the bankers who manage credit cards expect delinquencies on credit cards to increase or remain the same, while approximately 15% see the delinquencies dropping.

    In addition, bankers predict that the reduced lending trends will continue through 2010. 46% of respondents expect approval criteria for credit to tighten while only 14% of those surveyed expect the criteria to be loosened.

    Demand remains strong for new credit cards, but cards are harder to get. According to the survey, the number of new credit cards accounts dropped by 17.7% during the 12 months ending in April 2010 from the previous 12 months.

    But the number of inquiries for new credit fell by just 3%. This seems to indicate that consumers could not get all the credit they wanted. During that time, the total amount of credit available on all U.S. consumer credit cards fell by 12.2%.

    These numbers show that the industry is still weak and many cardholders are still in financial trouble, but FICO says the figures are an improvement over last quarter. The percentage of all respondents expecting an increase in credit card delinquencies fell from 59% to 42%.

    Banks slashed credit card approvals to minimize their losses, especially to applicants with average or low credit scores. High unemployment and bankruptcies do not create an environment that encourages these loans.

    The FICO Survey of Consumer Credit Trends is a quarterly survey of bank risk professionals. It was conducted in July 2010 with 235 risk professionals in the United States participating. The complete results of the survey can be found at www.prmia.org/PRMIA-News/USConsumerCreditRisk3rdQtr.pdf.

    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.

  • How Much Is Enough?

    by Rick Kahler, Certified Financial Planner(r), MS, ChFC, CCIM

    How much money is enough? Some people might give this question a flippant answer like, "A lot more than I have!" Others might argue there is a finite income or asset level that "should" be enough. But, of course, there is no one-size-fits-all answer.

    Well-being is comprised of three factors: prosperity, happiness, and health. Without considering the components of happiness and health, we simply can’t answer the question of how much money is enough.

    True, research has verified that having enough money to comfortably meet our basic needs is related to happiness. Yet the accumulation of money in and of itself rarely brings happiness. Many of us know people who have set financial goals: "When I earn $50,000 a year or have a net worth of $500,000, I'll be happy." When they attain that goal, they decide they will actually be happy when they obtain more.

    Happiness is not entirely determined by the amount of money we have, but rather what we do with our money to support living an authentic life. An authentic life is one free from control by others in which our lifestyle is congruent with our deepest goals and desires.

    The first step to finding out how much is enough is to put away your calculator and determine what makes you happy. Finding out what brings happiness to your life may be a bit more daunting than you first think.

    The first things you may think of that make you happy are activities, such as having a good meal or glass of wine, shopping, a new car or home, a vacation, or a romantic rendezvous with that special person. These are all pleasures, activities that give us a short-term boost of endorphins but are not long-lasting. Psychologists tell us that sustainable happiness comes from gratifications, which are long-lasting activities that draw on and challenge our personal talents, strengths and abilities.

    The questions then become: What challenges you? What activities do you engage in that make time seem to stand still? That leave you energized and fulfilled?

    Answering these questions takes some focus and time, sometimes years. Most of us don't have the luxury to go meditate on a mountaintop until we figure out what will make us happy. While we're defining the goals and activities that will gratify us, we also need to be making a living.

    In fact, I would go even further and suggest that while you're exploring these essential questions, you also work on building some wealth. That way, when you eventually answer the question, "How much money is enough?" you'll be well on your way to having that amount.

    The challenge is to be sure that accumulating money doesn't become a goal in itself. Here are a few ways to help your life aspiration planning and your wealth-building support each other in a balanced way.

    • Learn the basics of investing and focus on the long term. Don't allow yourself to get pulled into attempts to make money in a hurry through high-risk speculation or trading individual stocks.

    • Develop the habit of living on less than you make, so you don't find yourself using up precious time and energy supporting a lifestyle you don't really want.

    • Don't invest a lot in an education until you're sure it supports your life aspirations.

    • Finally, think in terms of "financial planning," rather than "managing money." A true financial plan is far more than a budget. It is a blueprint for using all your resources—including money—to create and support the fulfilled, gratifying life you want.

    Rick Kahler, Certified Financial Planner(r), MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!

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