Pre-Holiday Financial Check-Up

Hi,
The fall is always a good time to take inventory of our financial affairs. Once the holiday season is in full swing, many people find themselves short of time to address financial matters. Here are some steps to take so that you can go into the holiday season with the peace of mind that you know your financial standing.
1) First look at your credit cards and and audit the following:
a) Make sure the current interest rate being charged is the same interest rate which came with the card when you applied for it. If it has gone up, contact the credit card company to ask why.
b) Make sure the due dates on your cards are the same as when the cards were obtained. Once again, if any were changed, make sure that you get clarification as to why.
c) Check for any unusual late fees or finance charges and if anything seems out of
the ordinary, immediately contact the credit card company.
d) Check your credit limit on all your cards and make sure to write down the limits so you are aware of them going into the holiday season. Exceeding your credit limit will cost anywhere between $35.00 - $50.00 per card plus the risk of increased interest rates.
e) Find out what extras each of your cards offer in the form of frequent flyer miles, service protection, life insurance etc., All cards are different and knowing which card benefits your situation might help you decide which card you want to use.
2) Audit your bank statements:
a) Make sure service charges haven't arbitrarily risen without your knowledge and that any interest on savings and checking accounts has been paid as agreed.
b) Look out for extraordinary items such as direct withdrawals that have been cancelled continuing to be debited.
Many banks are notorious for increasing fees for services without our knowledge. In some instances, notices are sent masquerading as junk mail, so as not to alert the customer of proposed charges.
3) Personal loans and car loans: It's a good idea to request a printout of all activity on any outstanding personal loans. It is important to check to make sure that all payments have been applied in an appropriate manner and that the financial institution has not added unwarranted late fees or other finance charges. By auditing personal loans, it will ensure that the interest rates have not increased and that your credit score is not being affected by any errors committed by the financial institution.
4) Cell phones and other telephone bills: Cell phone bills should be monitored on a monthly basis but in most cases, are not examined carefully each month. This allows cell phone companies to include unauthorized charges and third party billings on the bill of the consumer. If these charges are never questioned, they will never be corrected. Therefore it is imperative to catch them as soon as possible. Some examples unauthorized billings are ring tones, games, jokes of the week etc., If your cell phone bill includes a high number of calls, it is essential to make sure you are paying for calls you made and not mistaken charges. Last but not least, if you have had any new services added to your bill, you need to make sure all charges appear on your bill as agreed.
5) If you struggled with high utility bills last winter, take steps to avoid that problem this year. These steps could include contacting your local utility company to become enrolled in a monthly averaging program. This will allow you to budget the same amount for utilities every month of the year.
6) Get a printout of your past twelve month transaction history from your mortgage company. Make sure all payments have been applied correctly and that no extraordinary finance charges or late fees have been added. Check to see that all other mortgage terms are documented as agreed. If you have any questions, contact your mortgage company as soon as possible for clarification.
Until later,
Alan

Merchant Cards Masquerading as Credit Cards

Hi,
I ran across a mailer today, addressed to a 19 yr old, that I would like to share. First, let me describe the mailer as best I can. Attached on the top right hand corner is a card designed to look like a credit card. The only difference between a credit card and the attached card is that there is no magnetic strip. The mailer insert then goes on to describe the following:

Congratulations, your card has arrived. Call immediately to activate this card. Credit purchase limit: $6,500.00. Cash on demand approved: yes. Interest rate: none. No cash deposit required for security. By calling to activate your card today we'll offset our standard member card activation fee of $200.00 by giving you $200.00 in credit.

The above is what is described on the front page of the insert. On the back of the mailer is quite a bit of interesting small print such as:

The activation fee for the card is $199.00, the annual membership fee is $198.00, and the user is encouraged to purchase the "security guard feature" for $99.00. The customer is encouraged to sign up for rush processing which prioritizes the order for $29.99. This card may only be used for merchandise contained in the card issuer's catalogs. A more detailed description is given about the "cash on demand" advertised on the front of the mailer. Without getting into too much detail, the best way to describe the program for cash on demand is that the card issuer is allied with a payday loan company.

Let's examine some of the reasons a company would issue large amounts of credit by mail forgoing normal credit qualifying procedures:

The bulk of the merchandise in the catalog is clothing and/or shoes. The mark-up in these areas is usually a minimum of 500% and may go as high as 1200%. Let's look at a sample mailing of 10,000 cards. As the target audience is young people who would be attracted by the mailing, for discussion's sake, let's take a conservative estimate that out of 10,000 cards, 1,000 cards are activated.
Immediate cash flow to the card issuer:
$199.+$198.+$99.=$496.x1,000=
$496,000.
Let's assume that 1,000 cards utilize their $6,500. credit limit.
$6,500.x1,000=
$6,500,000. (6.5mil per 1,000!)
Due to the high risk of the borrowers, let's assume 25% of the card holders go delinquent on their cards for a total of $1,625,000. Let's assume the remaining card holders pay off their balances which would total $4,875,000. Now to calculate the profit of the card holder using this scenario, we need to make a conservative assumption that the merchandise is marked up 500%. That would put the cost of goods sold at $1,300,000. To calculate the card issuer's profit, let's take the $4,875,00 of the card holders who pay off their balance, subtract the cost of goods of $1,300,000 which equals $3,575,000 plus the instant cash flow of $496,000 from the various fees, for a total of $4,710,000 plus a very conservative estimate of a minimum of $400,000. from the collection effort on the 25% of accounts that were delinquent. This leaves the profit on issuing these so called credit cards in the neighborhood of $4,470,000. The ramifications of these merchant cards being sent to young people today are as follows:

1) They will ruin their credit before they even get a chance to establish credit.
2) In order to use their cards, they will only buy from the catalogs. They will not learn the frugal habits of comparison shopping for price and quality.
3) Due to the excessive credit limit, they will buy far more than they could afford to purchase on a cash basis.
4) A large percentage of card holders will enter the world of payday loans through the "cash on demand" feature of these merchant cards. There is neither time or space on this blog to list all the reasons why that is not a good idea.

It is important for young people to be aware that these types of cards exist and to be warned to steer clear from them.

Until later,
Alan

Avoiding Maxed Out Credit Cards

Hi,
This blog is not intended for any readers who pay off their credit cards without exception at the end of each month. For the rest of us, to maintain control over our credit card balances, it is a good idea to avoid the following:
1) Consistently charging groceries on a credit card. The reason is that statistics show people purchase food on credit which they otherwise wouldn't purchase if using cash.
2) Putting utility bills on a credit card. Utility bills should be part of the monthly fixed expenses and be paid on a cash basis each month.
3) Making a car payment with a credit card. There are many reasons for this, but a significant one is that it's a sign that "Peter is being robbed to pay Paul".
4) When traveling to places like Las Vegas, many people find it much safer if they leave the majority of their credit cards at home.
5) Avoid using credit cards for large purchases of stock or any other investment vehicles.
To maintain a handle on our financial health at all times, it is necessary to pay for our fixed monthly expenses on a cash basis. It is imperative to maintain the clarity of the difference between our cash position and our credit position. Using credit in lieu of cash is analogous to using chips in Las Vegas in lieu of cash.
Until later,
Alan

Caught In The Minimum Payment Trap

Hi,
The last two blogs set the table for how one can get caught making minimum payments on credit cards. Today I am writing about being caught in the trap. After the cardholder receives an additional credit card he or she gets some instant gratification from being able to cover monthly expenses. Thirty days later two credit card bills arrive and once again, due to lack of cash, only the minimum payments are made. Before long, the card holder has maxed out the second credit card. In many instances this scenario will continue over a one to two year period resulting in the individual maxing out seven to ten bank cards to the tune of $40,000-$50,000. The last resort that some borrowers choose is to transfer the balances from existing maxed out cards to new cards. This is a perfect example of "robbing Peter to pay Paul". Once the borrower has exhausted all means of generating cash from credit cards, he or she might resort to tapping into his or her home equity. By the time the borrower applies for a home equity loan, the borrower's credit score has declined considerably and he or she will only be able to borrow on a non-conventional high interest mortgage. The result of the home equity loan is that the borrower has access to cash covering expenses for a few months, but without substantial income, falls behind and soon finds himself or herself in financial chaos. This scenario has unfolded around the country on numerous occasions over the past thirty years. I have written the last three blogs for the purpose of letting new credit card holders some of the pitfalls of using credit cards.
Have a good weekend!
Alan

The Minimum Payment Trap Part 2

Hi,
Yesterday, I discussed the simple version of the minimum payment trap. Today I'm going to discuss a more complicated and common minimum payment trap. This is how a more complex version of the minimum payment trap unfolds:
A relatively new cardholder uses his or her card for a couple of years and pays off the balance faithfully every month. At the end of two years, the cardholder's credit limit has been quadrupled. In addition, he or she has received numerous additional solicitations to obtain other money cards from different banks. Two and a half years into activating the first card, the cardholder has an emergency that requires him or her to use most of the credit limit on the card. He or she does not have the financial resources to pay it off at the end of the month, as he or she has been doing for the previous thirty months. When the bill arrives, he or she does the right thing, and pays every available dollar on the credit card, but still leaves a substantial balance. The following month, the cardholder's car breaks down. The card holder needs to max out the credit card to get the car fixed. Once again, when the bill arrives, the cardholder does the honorable thing and sends every dollar he or she can to reduce the balance, however a substantial balance remains. The next month, the card holder gets laid off from his or her job. Due to the amount of money put on the credit cards over the last two months, his or her savings have been almost wiped out. When the next bill arrives, the card holder succumbs to the infamous box in bold letters saying "minimum payment due" because he or she needs all the cash on hand. Over the next two months, the cardholder realizes that gainful employment is not coming as soon as he or she expected. During this time, the cardholder is still receiving solicitations for more credit, and due to his or her need for immediate cash, takes advantage of the offers. I will continue "part 2"
tomorrow.
Until then,
Alan

A Word of Caution About The Minimum Payment Trap for New Cardholders

Hi,
One of the biggest risks for new credit card holders is falling into the minimum payment trap. The minimum payment trap can be described as the following:
The card holder is very careful in making purchases that he or she can pay off with their monthly paychecks. The minimum payment trap begins when a cardholder purchases an item or items that that exceed his or her ability to pay off with the end of the month paycheck. The majority of the time, the purchases are prudent and made financial sense. A good example is when he or she comes across a sale of needed office attire that is significantly reduced in price. When the credit card bill arrives, the card holder is aware that there will be a large balance due. He or she usually has the best intentions of paying a significant amount of money on the bill and getting things back on track over the next few months. When the bill arrives, the number that jumps out on the statement is next to the phrase "minimum payment due." It is, of course, substantially lower than the card holder had anticipated he or she would have to pay. In many instances the minimum payment is no more than interest on the credit card with just a small principal reduction included. A portion of new card holders might succumb to only making the minimum payment each month. These card holders will find, on an annual basis, that the balance on their credit card might very well remain the same, even though they have made twelve payments over the year. For these credit card borrowers, after a year of making minimum payments, a very interesting phenomenon takes place. The credit card company increases the borrowers credit limit "for making timely" payments. Many times this scenario is repeated on a year by year basis until such time as the borrower is buried in a mountain of debt with no chance of getting out from under it. Tomorrow I will talk about "the minimum payment trap- part 2!!!".
Until then,
Alan

Young Adults: First Credit Card

Hi,
When young adults apply for their first credit card, they need to be aware of hidden costs and fees, interest rate fluctuations, and the minimum payment trap. If ever it's the time to read the small fine print on the back of forms, applying for a credit card is when to do it. No one should feel embarrassed if he or she does not understand all the verbiage on the back of one of those forms. It's important to ask someone who does understand to explain all the terms and conditions to the prospective card holder. Here is a list of some of the items typically included in the small print:
1) If payment is late, by even one day, the interest rate may rise to the maximum allowed by state law in which the card is issued. For example, if the card is offered at 6% and the payment is one day late, the credit card holder reserves the right to reserve the interest rate to 19.9%+.
2) Most credit cards assess a $35.00 additional fee for any payment that is late.
3) If the credit limit is exceeded by even a penny, a $35.00 fee is assessed.
4) On many cards, when only the minimum payment is made, the principal is not reduced at all and only interest is being paid. Paying only the minimum payment is the start of falling into the minimum payment trap.
Tomorrow I will write more about the minimum payment trap.
Until then,
Alan

Using Credit

Hi,
Credit only became a common financial instrument available to virtually anyone over the last thirty years. Before credit cards were made so widely available and marketed aggressively, applying for credit had a sense of seriousness to it which is lost in our current culture of debt. When my father started using credit, his intention was to consolidate purchases into one monthly bill and pay it at the end of each month. The thought of carrying a balance would have been appalling to him. Now we accept credit card balances and interest as a way of life. The barrage of credit card applications that students receive is unbelievable. It's possible that one reason many of them start early adulthood as indentured servants to the credit industry is that they were bombarded with credit card applications and applied for and received credit they were ill equipped to repay. Many of them started using credit without understanding how the credit agreements they signed even work. Over the next week, I'm going to write about how to make decisions regarding how to use credit, how to maintain and protect a good credit score, and how to get back on track if credit use is getting out of hand.
Until then,
Alan

Taking a Financial Inventory After the Divorce Decree

Hi,
After the divorce is final and the court has decided financial responsibilities, it's time to take a financial inventory. Since all situations are different, this is a list of possible suggestions which may be of use:
1) Living situation: Should downsizing be a consideration? Depending upon the circumstances, some people find it comfortable and financial rewarding to get a room mate instead of selling their home.
2) Transportation: Can we comfortably maintain our present vehicle, or do we need to get a less expensive one?
3) Outstanding credit cards: Look at all credit cards and determine balances, and monthly payments. It is a good idea to reassess whether or not all cards are needed and if it is a good idea to eliminate some of them.
4) Check all incoming bills to make sure the name of the ex-spouse is dropped from the statements.
5) Check beneficiaries listed on policies and make changes where deemed applicable.
Tomorrow I'm going to write about a budget based upon current income and expenses.
Until then,
Alan

Managing Debts During The Divorce Process

Hi,
When a divorce is filed, it is easy for the parties involved to adopt the belief that their debts can wait until the divorce is finalized. Putting this belief into practice can severely damage the financial future of both parties. Any financial obligations that either party takes care of during the divorce, that could in turn be ordered the other's responsibility, will be adjusted accordingly by a judge during the final divorce decree. Showing financial responsibility during a divorce may influence numerous decisions made by the court. Now that we have gathered all financial information available to us on debts for which we are liable, we need to notify our creditors of the situation. Different states have different laws in respect to who is responsible for marital debts in the event of a divorce. When calling creditors, it is important to establish a paper trail that:
1) The name of the person paying the debt after the divorce is filed is documented.
2)Credit cards such Visa, MasterCard, Discover or American Express etc., need to be notified that we wish to have our name removed, and that we are not responsible for any charges incurred after the date of our phone call to them. In most cases they will request that we follow up the phone call with a letter. At the same time, we can inquire about getting a card issued to us in our own name.
3)If we are the homemaker in the marriage and do not have an income to pay on any debts for which we are responsible, it is important to immediately contact our creditors. When contacting creditors, we need to explain the situation and let them know that we have no means of paying the debts at this time. We will keep them advised of our future financial situation once the divorce is finalized and our financial status is clarified.
As always, it is imperative to get the first and last names of any creditor with whom we speak. If we find ourselves blindsided, and left without any means to manage the situation, we need to ask a trusted friend to help us locate any available resources in our area. Tomorrow I'll talk about financial life after a divorce.
Until then,
Alan

Intermediate Financial Planning After The Death of a Spouse

Hi,
Now that basic survival needs have been met and the household can function, trusted friends can initiate contacts with:
1) Life Insurance-
The life insurance company needs to be contacted to find out what steps need to be taken to obtain the funds from the policy and the expected date of disbursement.
2)Brokerage Firms-
When calling a brokerage firm, ask if there is a broker of record and request to speak to him or her. Ask that a copy of the most recent brokerage statement be sent to the surviving spouse. If the brokerage account is not a joint account, ask what steps need to be taken for the spouse to access the funds in the account. Most brokerage firms freeze accounts in the event of the death of the primary account holder. If the account is a joint account, do not make any immediate decisions to sell anything on the advice of the broker during the phone call. This is an information gathering call and it is wise to keep it as such.
3)Credit cards-
A trusted friend should contact all the companies which issued credit cards to the deceased. Inquire as to whether any life insurance was included in their particular contracts. Some credit card companies have policies for accidental death, but do not for life insurance. If a policy is discovered, obtain the pertinent information needed to access the funds.
4) Safety Deposit Box
Banks have different procedures for gaining access to safety deposit boxes after a death. Have a friend inquire about the procedure to allow the surviving spouse access to the safety deposit box.
Tomorrow I will discuss steps to create a financial plan for the future.
Until then,
Alan

Immediate Financial Planning After the Death of A Spouse

Hi,
It's impossible to concentrate on mundane matters after a loss of such magnitude. Yet, daily issues won't allow themselves to be put on hold until we are in the frame of mind to be able to think about them. So, it's essential to enlist the aid of a friend to help cope with these mundane concerns in order to maintain the function of the household. First and foremost, we need to gather as much financial information as we can which includes, but is not limited, to the following assets and liabilities:

1) Assets : bank accounts, brokerage firm accounts, misc. investments including royalties and other dividends not held by brokerage firms, retirement and pension accounts, life insurance proceeds, and any other assets.
2) Liabilities: mortgage or rent payment and due date, utility statements and due dates, credit card balances and due dates, misc charge card balances and due dates, any other misc loans with monthly payments, IE car loans, tuition etc., plus any other debt.

Sometimes a spouse is unaware of all assets, investments, and outstanding debts. Assets, investments and debts generate mail. Any unaccounted for assets or debts will surface over the course of the year in the form of correspondence from the entities.

After a death, people may be flooded with statements and bills which seem to materialize out of no where. Depending upon the circumstances, they may be from medical institutions, medical supply companies, ambulance companies, bills for transporting the deceased, etc., These bills are not emergencies. We will talk about verifying these bills and others tomorrow.

Immediate financial needs of the household include covering the mortgage/rent, utilities and food. Hopefully there are funds available to meet these basic needs.

Tomorrow I will talk about what to do if funds are not available to meet living expenses the month following the death of a spouse.
Until then,
Alan

Risks Associated With Other Personal Unsecured Loans

Hi,
Some other unsecured personal loans take the form of charge cards for department stores, gas stations, credit cards for home improvement stores, small businesses which have open charge accounts, etc.,. There are inherent risks associated with each one of these. Many times we find ourselves purchasing goods at a department store or home improvement store, because that is where we have a credit card, even though the same items might be available for less at another store. The same scenario applies to gas purchases and is particularly important due to the large fluctuations in gas prices from one station to another. Also, charge cards influence us to use convenience as a value when buying, rather than price. These are some examples of various unsecured loans we grant ourselves. Using these types of loans can become risky if we are experiencing financial difficulty. When experiencing financial trouble, it is imperative to contact these creditors as soon as possible.
Tomorrow I will discuss secured loans.
Until then,
Alan

Unsecured Personal Loans

Hi,
Unsecured loans have come a long way since their inception. The pinnacle has been reached in the form of bank credit cards that allow the consumer to take out many little unsecured loans. Every time you make a purchase on your credit card, you are, in effect, taking out another loan from your credit card company. At the end of each month your credit card company combines all your many little unsecured loans and bills you for the total. Compared to fifty years ago, when most unsecured loans involved going and talking to your bank, filling out applications, and going through an approval process, today receiving unsolicited pre-approved credit cards in the mail is considered a streamlined way to get consumer credit business. This practice of the lending industry results in many financial problems for the credit user. One of the major advantages of past credit practices was the full disclosure of the terms and conditions of the loans to the customers. This allowed consumers to be fully aware of the terms, conditions, and obligations of their loans before they accepted them. In today's credit market, full disclosure is given often times in a labyrinth of small light print on the back page of one of the credit application forms. Tomorrow I'm going to talk about some of the old school loan habits you can use to manage your financial affairs in today's credit market.
Until then,
Alan

The Never Decreasing Balances

Hi,
Now let's look at those bills that never seem to go down. Generally these balances are comprised of unexpected expenses which occur for all of us. Because these balances are unexpected, and not part of our monthly budget, we rationalize that it's ok not to pay them off as they occur. Or, we simply might not have the financial resources to do it. Your credit card company sets up your statement to specifically take advantage of this situation with the infamous "minimum payment due" option. When people make a minimum payment, they feel that they have made their monthly credit card payment. However, in many cases, making a minimum payment means that only the interest on the balance has been paid. Many times a person will pay the minimum payment for twelve months and be surprised that their balance has not decreased at all over the year. The only way to move this situation in a positive direction is to call the credit card company to ask them to work with you in finding a solution. Depending upon your situation, the credit card company might be able to reduce your interest rate, freeze your interest rate, and in some cases, reduce your balance. Tomorrow we will talk about stretching your bill paying dollar.
Until then,
Alan