June 2011 - Posts - Dollar Stretcher Guest Bloggers
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June 2011 - Posts

  • New Study Reveals Many Americans Manage Money Poorly

    by Bill Hardekopf

    A long recession, the collapse of the housing market, and loose lending by banks have been blamed for dragging down household finances. However, a new study, Americans' Financial Capability by the National Bureau of Economic Research, says that many Americans lack the skills and knowledge to make good financial decisions for themselves and this is also part of the problem.

    The survey of nearly 1,500 Americans in the summer of 2009 shows that many households don't plan for predictable events like retirement or for unpredictable events like emergencies. They poorly manage debt and are stung by higher interest payments and fees. Some don't even know the interest rate they pay on their credit cards or mortgage. Poor planning and financial mistakes make a family even more vulnerable to the shocks of a turbulent economy.

    According to the study, many Americans take financial actions and make mistakes that lead to higher interest rates. They overdraw on checking accounts, make a late payment on credit cards, or exceed their credit limit.

    Almost half of Americans have trouble paying monthly expenses and bills. 35 percent said it is somewhat difficult to keep up, and 14 percent admitted it is very difficult. One-third of respondents said they had a large and unexpected drop in income during the last year. Only 49 percent had an emergency fund that would cover expenses for three months.

    About 15 percent do not have a checking account and 28 percent do not have a savings account, a money market account, or Certificate of Deposit. Considering these two variables together, the proportion of the unbanked is 12 percent of the population. The unbanked are also disproportionately African American and Hispanic; as many as 28 percent of African Americans and 30 percent of Hispanics are unbanked.

    Bad Debt Management Leads to Higher Payments

    More than 68 percent of respondents had a credit card. Of those, about 27 percent had at least four credit cards. The study found that borrowing habits of 41 percent of credit card users resulted in either substantial interest payments, fees or both. Nearly 33 percent paid the minimum payment, paid a late fee, paid an over-the-limit fee or used the card for cash advances at least twice. 54% always pay their credit card bill in full. Of the 46 percent of credit card holders who don't make their credit card payment in full, 12 percent don't know the interest rate on their credit card with the largest balance.

    More than one in five Americans have turned to alternative lenders like payday loans, pawn shops, or advances on payday loans during the past five years.

    Tips for Managing Debt

    • Learn about the debt you have. Look at the monthly statement for each of your loans, then write down your balance, interest rate, credit limit, and payment due date. The first step in getting out of debt is to understand what you owe and what you are paying.

    • The biggest factor in your credit card debt is the APR, the annual percentage rate. Most issuers offer a tier of interest rates. The rate you receive is based on your credit score, but you will not know what your rate is until after you apply. The higher your interest rate, the more you will pay the issuer for the privilege of borrowing money, while less of your money will be used to pay down your balance. A high interest rate can add thousands of dollars in interest penalties and years of payments.

    • Your credit card balance consists of all the charges you have made with your credit card. Fees are also rolled into the balance so you do pay interest on all fees such as late payment fees.

    • The due date obviously means that you must pay the minimum payment by that date. This is not a soft date for banks and credit card issuers, and there are many consequences for a late payment. The late payment fee can be as high as $35. The late fee is not the steepest consequence of a late payment. Your issuer can increase your interest rate to the default rate, which can be as high as 30%. Before activating the penalty rate, they must give you a 45-day notice. If you have a late payment, quickly catch back up because your issuer should restore your original rate if you make all of your minimum payments on time during the next six months.

    • The minimum payment is set by the issuer. Look at the minimum payment box on your credit card bill. You may be shocked to see the number of years it takes to pay off your balance if you make only the minimum payment each month and how much interest you will pay. To pay off your debt in a financially prudent way, you have to pay more than the minimum payment. You pay more money toward your debt, and save money on your interest payments. With any incremental money you receive or save, use it to immediately pay down your credit card debt. Make micropayments to help pay off as much of your debt as soon as possible.

    Credit Scores

    The study showed that many individuals don't know their credit score or information in their credit report; only 36 percent checked their credit score. The majority of people who check their credit score (52 percent) had a score higher than 720.

    Credit scores and credit reports determine much more than interest rates and they are too important to be ignored or overlooked. They are used to make judgments and decisions about you, including jobs, insurance, loans and apartment rentals.

    Your credit report is a history of how you have handled credit and is a gauge to a bank on the likelihood that you will pay off your debts. FICO is the most widely used score model and a score above 720 will get you a low interest rate. The credit score includes information on where you live, how you pay your bills, and whether you've been sued or arrested, or have filed for bankruptcy. If you have never looked at your credit report, do so at annualcreditreport.com. Once every 12 months, you can request a free credit report from each of the nationwide consumer credit reporting companies: Equifax, Experian, and TransUnion. Check for accurate information and correct any errors.

    If your credit score is low today, now is the time to start raising it. Here are ways to improve your credit score.

    • Pay your bills on time. A late payment can cause a significant drop in your credit score.

    • Pay down your credit cards and keep your debt-equity ratio under 30%. Balances close to the credit limit indicate a risk of default and this is a red flag for issuers.

    • Build a long-term relationship with your credit card. Older accounts with good payment history add points to credit scores. If you are just getting started, don't open several new accounts all at once; this looks risky if you don't have an established history.

    • Well-managed credit improves credit scores. Managing a variety of loans like a mortgage or car loan helps build your score. Get into the habit of paying all bills before the due date.

    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.

  • Father Knows Best or Does He?

    courtesy of The National Foundation for Credit Counseling

    Washington, DC 

    As Father's Day approaches, many dads  begin reflecting on the life skills they're teaching their children. Nice manners,  discipline and a good work ethic top many lists. Not to be overlooked, however, are financial skills, because regardless of whether they are taught formally or by example, parents pass along their financial habits to their children.

    This concept is confirmed by the National Foundation for Credit Counseling's (NFCC) 2011 Financial Literacy Survey in which the majority of respondents, 42 percent, indicated that they learned the most about personal finance from their parents. At first glance, this appears to be a good thing, as the home should be the ideal place for children to learn skills and habits.

    However, the same survey also revealed that 41 percent of adults gave themselves a grade of C, D or F regarding their knowledge of personal finance. This is a disturbing decline in financial literacy, as one short year ago, only 34 percent of Americans gave themselves a low grade. Further, five percent of U.S. adults, or about 11.5 million people, indicated that the failing grade of F best represented them, marking a sharp increase from previous years when less than three percent of adults self-identified at this level. Taken together, these results suggest that many parents are ill-prepared to teach their children sound financial principles.

    "The good news is that Americans recognize and are willing to admit their financial deficiencies," said Gail Cunningham, spokesperson for the NFCC. "Now it is up to them to do something about it, particularly if they have children who will invariably model their parent's financial behavior."

    There are many resources available to consumers desiring to improve their level of proficiency in personal finance, including self-help books, the media, the Internet or financial professionals. Interestingly, the survey showed that while Caucasian and Hispanic adults are more likely to identify the home as the primary learning ground for personal finance, African-Americans are more than twice as likely as Caucasians to garner such information from self-help books, the media or friends.

    Looking at gender, men were more than four times as likely as women to give themselves failing grades for their knowledge of personal finance, eight percent versus two percent, respectively.

    ''During these painful economic times, it can be a argued that keen personal finance skills are more important than ever," continued Cunningham. "The NFCC calls on parents to stop the cycle of financial illiteracy by improving their own level of financial expertise, thus enhancing the likelihood that their children will some day be able to give themselves a grade of A in this important life skills category."

    If you want to improve your level of personal financial skills, reach out to an NFCC Member Agency where you can meet with a counselor one-on-one, or participate in group workshops on a variety of financial topics. The services are free or low-cost and are open to the public. To be automatically connected to the NFCC Member Agency closest to you, dial (800) 388-2227 or go online to Debt Advice.org. For assistance in Spanish, dial (800) 682-9832.

    The National Foundation for Credit Counseling (NFCC), founded in 1951, is the nation's largest and longest serving national nonprofit credit counseling organization. The NFCC's mission is to promote the national agenda for financially responsible behavior and build capacity for its Members to deliver the highest quality financial education and counseling services. NFCC Members annually help over three million consumers through close to 800 community-based offices nationwide. For free and affordable confidential advice through a reputable NFCC Member, call (800) 388-2227, (en Espanol (800) 682-9832) or visit NFCC.org. Visit us on Facebook, on Twitter, on YouTube and our blog at financialeducation.nfcc.org.

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