Archive for the ‘personal finance’ Category

Wednesday, November 25th, 2009

WiseBread has a story about Jeff Ledford, a fellow who overdrew his Bank of America checking account by $10 and was hit with $175 in overdraft fees. As WiseBread points out, that amounts to a 1,750 percent penalty.

In order to extract as much money out of Ledford and other loyal customers, banks manipulate the time order of withdrawals — processing the largest transaction first — to get customers' accounts into the red as quickly as possible so they can issue more overdraft fees.

When a CBS News affiliate asked Rod Brown, a representative of the California Bankers Association, about this sneaky trick, Brown gave a lame excuse: "Consumer research indicates that those larger transactions are of greater importance to the consumer." That makes no sense, of course. The real reason they do it is because it's not against the law for them to rip off customers that way.

Incidentally, after reading this story, I went out and collected my mail from the mailbox. One letter was junk mail from Bank of America that said, "Bank of America: Your Lender for Life." Was that a promise, or a threat?

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.

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Wednesday, November 25th, 2009

Ramit Sethi of the terrific blog I Will Teach You to Be Rich has a semi-regular feature called The Money Diaries in which he posts a diary written by an anonymous person who has personal finance problems. They are an intimate glimpse at individuals' relationships with money.
His readers offer tips on how the diarist can make changes to improve his or her financial situation.

The most recent Money Diary was written by a 25-year-woman from Honolulu who is a single parent of a special needs child. Her diary is fascinating and sad. She writes checks that she know will bounce, and is hooked on cigarettes, candy, and Coke. She goes to bars and talks guys into buying her drinks and hot dogs. She knows these are bad habits, but her life is out of control, and it seems like she is "self medicating" with sugar, caffeine, and nicotine.

So far, 110 people have offered advice to the anonymous woman. Comment #20 from a woman named Susan Su was the most insightful:

She doesn’t feel like – or act like – an agent in her own life. As a result, things 'happen to' her; but she does not play an active role in making them happen… In psychological terms, this woman has high external locus of control and low self-efficacy. She is stressed, possibly depressed, and does not believe that her actions (earning more, saving more, exercising control over spending) have the power to REALLY change her situation.

Ken H. in Comment #41 offered the best advice:

[F]ind discipline in yourself to give yourself the initial boost in self-esteem. There are certain things that cost nothing but always helped me when I was down about my situation — go to bed at the same time every night, make tomorrow’s lunch at the same time, wake-up at the time every morning. ALWAYS be punctual for all appointments! These things are free and go a long way to feeling better about ourselves.

I agree. The woman's "bad habits" really aren't the problem, as they don't cost that much compared to her other expenses. Making a schedule and sticking to it would give her self-esteem a boost and put some much needed order in her life. The fact that she was able to maintain a diary for a week shows that she can muster up the discipline needed to take steps to gain more control over her life. I wish this woman well in her steps towards gaining the confidence she needs to manage her money and her life in a more responsible way.

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.

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Wednesday, November 25th, 2009

Pop quiz: Which of these industries is more closely regulated: 1) airline pilots; 2) air traffic controllers; 3) credit repair agencies; 4) big tobacco; 5) school bus drivers? You'd be surprised to learn that, other than big tobacco, the credit repair industry is the most closely regulated, both by federal and state agencies, in fact.

First, let's dispel a persistent and absolutely false myth: credit repair is illegal. No, that's not true. Credit repair is perfectly legal in every state except Georgia, where there are still a variety of ways to run a credit repair organization legally. Having said that, many in the credit industry would love to convince you that credit repair organizations are unethical, immoral, and deceitful.

As long as a company follows the rules set forth by the Credit Repair Organizations Act (or CROA), operating a credit repair organization is perfectly legal. Having said that, CROA has teeth. The law is so overly burdensome that at least one of the credit bureaus has settled a class action lawsuit for alleged violations of CROA. When the law exposes a credit bureau to penalties as a credit repair organization…well, you can see how comical that is.

For the consumer, CROA helps and CROA hurts. It helps to somewhat protect consumers from the rogue credit repair organization, who is in the business simply to rip them off. But, it also prevents legitimate companies from entering the marketplace fearing that much of their revenue would go to pay attorneys. Plus, the credit bureaus have done a masterful job convincing the world that all credit repair is bad, despite partnering with them to provide data. Point being, they don't want YOU to do business with them, but they're perfectly willing to do so themselves.

CROA mandates the following for a credit repair organization to operate legally:

• They must disclose to you that you can challenge incorrect information yourself at no cost.
• They cannot charge you until their services have been completely rendered.
• They cannot guarantee the removal of any of your credit data.

Violating any of these provisions, and there are more, will subject the credit repair company to lawsuits and possibly the wrath of the FTC, who closed down over 30 credit repair organizations in 2008 in what they referred to as "Operation Clean Sweep."

So, if you choose to use a credit repair organization, fair enough. Just be aware that you can do what they do for the cost of a stamp and a few minutes of your time. And, that your air traffic controller isn't under nearly as much scrutiny.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

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Wednesday, November 25th, 2009

I got a call from a couple who was interested in refinancing their home. It was a slam-dunk deal that would be approved anywhere. So we chatted about rates and I told them what the rate and fees were for the best deal I knew about.

They said that they had talked with their current lender who had offered a better deal. That was a bit of a surprise because I had always been able to beat that company's deals. So I said, "Let’s look at their website and see." Sure enough, at the same rate the fee at that lender was about $3,000 higher than what I had told them.

At that point they admitted that the representative had told them the same thing as on the Internet, so I asked how they got a better rate. They said, "We told them that we had gotten a Good Faith Estimate from another lender that was lower than the rate that we had just been quoted." The representative had said that they would meet that deal. My guess is that the representative was not given the authority to "fiddle" with pricing, but was just telling them that — whether it was truthful or not — to remove a barrier. 

This is not uncommon because the way lenders are organized today it is difficult for consumers to talk with a knowledgeable person or to know if they are getting the straight answer.

In fact, the first-line customer service people have one job: to GET THE APPLICATION!

Their job is not to solve problems or try to qualify people over the phone. A manager of such a call center once told me that he told his people, "It’s not your job to qualify people or to solve their problems. If there is a problem, we will discover it in the Underwriting Department. Your job is to get the application. Tell them whatever you have to, but get the application."

With that knowledge, you can understand that the poor customer who is in search of reliable information is in tough shape. He wants good information, but what is going to happen when he talks to people who will tell him anything to get him to take the next step?

This is especially dangerous with pricing because of peoples' innate desire to believe they have found a good deal. Let's assume you call three lenders and you hear 5 percent from one lender, 5.125 percent from another, and 4.875 percent from a third. Okay, you think you found a good deal.

Then I give you additional information. I tell you that one of those three lenders lied about rates. Which one do you think is lying? I will guarantee you wishful thinking enters the picture and that most people will still assume that the 4.875 percent is the truth. Is that possible? Sure. Is it likely? Nope; sorry.  ? ?

This further emphasizes the importance of dealing with honest people when getting a loan. There are some in your home town and you will do better dealing with one of them than calling 800 numbers listed or searching on the Internet.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower
articles, Randy is a mortgage broker who has financed over $1 billion
in properties. He writes about home buying and real estate finance
topics for CreditBloggers.com.

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Wednesday, November 25th, 2009

And I thought a 80-square foot house was tiny! Meet Jay Shafer, who lives in a 96-square-foot house. The owner of The Tumbleweed Tiny House Company in Sebastopol, California, Shafer has lived in tiny houses for a decade. His most recent one (which cost $17,000 in parts and 500 hours labor) has a kitchen, bathroom, closet, sleeping loft, and a living room. Shafer says he's had as many as nine people in the house at once.

The benefits of living in a tiny house are many. They are cheaper and easier to maintain, of course. You can build it with the highest quality materials since you don't need to buy a lot of them. And you can buy great furniture and fixtures because it takes so little to fill the house.

Shafer's house is very attractive and well-designed, and I would love to have one just like it up in the woods somewhere…. but to live in a place this small year-round? I'm not so sure.

Shafer got married last year and they are expecting a baby, so they are now living in a 500-square-foot house and keeping the 96-square-foot house (it's built on wheels) next to it.

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.

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FICO Mythbuster #345, Paying Off Installment Debt Will Improve Your Scores

Wednesday, November 25th, 2009

I’ve been telling people for years that installment debt is not terribly important when your FICO scores are concerned. And for years people have been looking at me like I’m crazy. Debt is debt, right? How in the world can it not matter? In this installment of FICO Mythbusters, I’ll reiterate my statement and provide a personal example.

First off, what is installment debt? There are three types of debt: installment, revolving, and open. Installment debt is a fixed payment for a fixed period of time. For example, an auto loan is installment debt. You pay some amount each month for a fixed number of months. Mortgages are installment debt. You pay the same mortgage payment for some fixed period of time.

Installment debt is generally secured by real property. auto loans are secured by your car. Mortgages are secured by your home. And if you stop making your payments, the lender will simply come take your car or kick you out of your home. Either way it’s a bad situation, so consumers tend to work harder at paying their installment loans on time. I mean, who wants to get kicked out of their home? What this means in the world of credit scoring is that installment debt tends to be much more stable than unsecured debt, debt which allows no repossession options.

This means installment debt, while it still does count in your credit scores, isn’t driving your scores one way or the other like credit card debt can. The upside is buying a new home and getting into several hundred thousands of dollars of debt generally doesn’t have that much of an impact to your scores. The downside is that paying off the debt doesn’t really help your scores that much either.

For example, I just sold a home. The loan on that home was $224,317 from Wells Fargo Mortgage. Yesterday that loan was updated on my credit reports to show “Paid in full.” I went from having an installment debt of almost a quarter of a million dollars to having it paid in full. The impact to my FICO score?: 4 points to the positive.

This is exactly why people who ask me if paying down their mortgage or car loans faster than required will help their FICO scores. No!! For those of you who have the extra cash each month and are contemplating an acceleration to pay down your installment loan, be advised that it will not result in a material score improvement. Paying down credit card debt: Yes, this is the answer! Paying down car loans and mortgages: No!

So, there you have it. We’ve busted FICO Myth #345. Take your extra money and pay off credit card debt or work to build your retirement nest egg. Leave those mortgages and car loans alone. By paying them on time each month, you’re pretty much getting maximum score value.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.

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Swoopo

Wednesday, November 25th, 2009

How would you like a brand new iPod for $15? A laptop for $23? A $1000 check for $300? Then head on over to Swoopo.com and join one of the many different auctions where bidding starts at a penny and increments one cent per bid.

But wait — before you head over there, read this New York Times story about Swoopo by Richard Thaler. It turns out that you have to be quite lucky to be a winning bidder at Swoopo. Thaler explains that every time you bid on an item in a penny auction at Swoopo, you get charged 60 cents. Swoopo keeps that money. So if an iPod sells for $15, that means Swoopo receives $900 (1,500 x .60) from the bidders who lost, plus $15 from the bidder who won.

Visiting the home page of Swoopo is certainly exciting, because it seems like digital cameras, video game consoles, and smart phones are being sold at ridiculously low prices, with only seconds to go before the auction closes. But those countdown timers are deceptive — every time someone places a bid, the auction deadline is extended by 20 seconds, so auctions can drag on for days.

Swoopo is nothing more than gambling, where a bunch of losers pay the few winners' jackpots, with the house keeping most of the money for themselves. If you are looking for a bargain, Swoopo is the wrong place to visit.

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.

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Advance Fee Loan Scam Alert: Credit Leader Inc.

Wednesday, November 25th, 2009

At Creditbloggers, we’ve been exposing advance fee loan scams for a number of years now. We like to help make sure that our readers don’t lose money to these bottom feeders that prey on consumers in difficult situations.

Today a reader posted a warning on the Credit.com forums about a company from Canada called Credit Leader INC. which “approved” her for a loan of $8,500.00. They told her she had to pay a $300.00 fee upfront to get her funds. Our astute reader “Tisha” smelled scam. So she started digging.

She couldn’t find the company online, nor was the phone number listed in Canadian directory assistance. When she asked the loan rep about the lack of a website, he said, “Well, web pages are so easy to hack, so we don’t have one.” As for the phone listing, he explained it was unlisted so banks “Wouldn’t harass them for taking business from them.” It would be comical if it weren’t so disgusting.

He then told her to set up a bank transfer to pay the fee, since it would be “traceable” and “secure.” But a call from Tisha to her bank confirmed that if she did this kind of transfer there would be no way to get her money back.

Now she reports that this company is calling her, threatening her with legal action for not paying their fees for the paperwork they prepared! They are telling her they are “going to take her home, car, and anything that is in her bank account” if she doesn’t pay the fees.

But she’s not intimidated. She says: “Don’t let anyone bully you into sending money. I have since contacted the police, and have them dealing with this case.”

Good advice, Tisha. And thanks for the heads up.

If you have a warning about an advance fee loan scam, please be sure to share it here or in our forums.

Gerri
Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt
recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis.

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Living on Severance and in Denial

Wednesday, November 25th, 2009

The Wall Street Journal has an article about people who continued to live high on the hog when they were laid off and given fat severance checks, and who are now scrambling to make ends meet.

• Paul Joegriner was CEO of a small bank, making $200,000 a year. When he got laid off in March of 2008, he received a $200,000 severance package. His family spent it all and is now rapidly going through the $100,000 they had in savings. They'll be out of money in six months.

• Michelle Patterson lost her job as executive director of marketing for a publishing company in January, making $140,000 a year. Since then she spent her $20,000 savings/severance on restaurant meals, pedicures, haircare, and "daily Starbucks runs." Now she is almost out of money and has had to cut her budget to the bone.

• Chuck Hipsher was laid off from an ad agency in Detroit in February 2008. The $60,000 he and his wife (also laid off) received in severance has evaporated to $600.

Hipsher's explanation is similar to the others featured in the article: "We were stupid. You become accustomed to a certain lifestyle. When your world changes and things dictate that you change, you're pretty stubborn to give things up."

The article goes on to describe the various ways these people are trying to make ends meet. The moral of the story seems to be this: Save as much money as you can while it's coming in. That way, if it stops coming in, not only will you have a nice nest egg, but you'll also be in the habit of frugal living.

Life on Severance: Comfort, Then Crisis

Mark Frauenfelder – Editor-in-chief of MAKE magazine and the founder of the popular Boing Boing weblog, Mark was an editor at Wired from 1993-1998 and is the founding editor of Wired Online.

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New PBS Frontline Special Airs Tonight — Don’t Miss It!

Tuesday, November 24th, 2009

For years, I have recommended a PBS Frontline special, "The Secret History of the Credit Card," which  exposes what went terribly wrong with the industry.

Tonight (Tuesday, Nov. 24th) a long-overdue new piece, The Card Game, airs at 9 pm Eastern Time. I haven't seen it yet, so I can't share my opinion yet, but if it's anything like the first one, I'll likely be recommending it for years to come. I'll be tuning in, and will share my observations with you tonight on Twitter and tomorrow on this blog.

In the meantime, here are the details from the producers:

Your readers might be interested in hearing about our new FRONTLINE report “The Card Game” which airs on PBS stations across the country tonight Tuesday, Nov. 24, at 9 p.m. Our veteran correspondent  Lowell Bergman, in a joint report with the New York Times, investigates the massive consumer loan industry and regulators’ attempts to make potentially historic changes in the consumer credit business.

“Newsday” gave this report an ‘A+’ and “Time” calls it ‘Must-See Recession-Era TV.’

Credit cards, banking fees, and personal finance issues are top-of-mind with consumers now as they gear up for “Black Friday” and the holiday shopping season, and “The Card Game” gives viewers an insightful glimpse into the practices of the financial services industry. 

This report also comes at a crucial time when industry insiders, regulators, politicians, and consumer advocates are all squaring off in Washington over attempts to reform the way the industry has done business for decades and how best to protect consumers.
 

Gerri
Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt
recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress:
Real Life Solutions for Solving Your Credit Crisis.

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