Credit/Debt Recovery

Shameless

I was talking to Thom the other day about obsessive-compulsive behavior. (Thom was my co-author on the book that started this blog.) He revealed that only this month did his fiancee finally talk him into lightening up on his tracking.

See, when we were writing the book , we had Thom follow all of the debt advice we were giving, to make sure it worked. I've always maintained that all the debt books by my competitors have great things to offer, but so many of them are written by wealthy "celebrity" debt advisors... I'd prefer a book written by people with the same money troubles I'm having.

Anyway. I won't reveal Thom's finances here, but he's done an amazing job getting by and paying down debts (medical, student loan, and credit card) while making a modest income. And he's done it by using the methods described in Repair Your Credit And Knock Out Your Debt . Yeah, I know Thom co-wrote the book, and we can't expect everyone to use it as thoroughly as he has, but the point is, it works. Follow the advice, take it seriously, and you can get through amazingly tough financial situations without ending up destitute.

And it doesn't involve tricks or scams. You don't have to commit fraud, or "beat" the credit bureaus at their own game. There are plenty of books that'll help you go down that road; we prefer to offer advice that is ethical and legal. Not everyone likes that; if you're looking for ways to cheat the system, find another book.

Anyway, I don't spend much time on this blog actively plugging the book, but after talking to Thom this week, I feel really good about how successful he's been by following it to the letter. And I do hear from readers who get something out of the book; I just normally don't like to be such a brazen self-promoter.

I'm going out of town for a few days; be back by the middle of next week!

The End of Homeownership?

I've long advocated buying a home as THE key step toward building wealth. In every seminar I have presented (hundreds? I've lost count) I tell people that their financial goals should, without exception, include homeownership.

There are a million good reasons to become a homeowner. It's a great way to build wealth while enjoying the practical use of that asset every day--and real estate has outperformed the stockmarket with near-total consistency.

And that message was getting out there. More and more people were learning the power of homeownership. Time Magazine did a cover story on the housing boom.

Then the Supreme Court ruled against homeowners everywhere last Thursday, declaring it consitutional for cities to sieze private property, affirming the assumption that the "best" use of property is the one that makes the most money.

A very brilliant friend of mine argued that "strip mining is more profitable than less environmentally intrusive mining methods, so by all means, let's take mines away from even slightly environmentally sensitive mining companies and give it back to strip miners..."

And there are a million other ways the faulty logic of this ruling breaks down with even a few minutes' desultory consideration. But the side effect of this ruling, the one that bothers me that is consistent with the subject of this blog, is what this does to the notion of homeownership.

Already, people are reacting. Here's a blog questioning the logic of becoming a homeowner. This guy is very smart; I'd like to be able to tell him that it's still a good idea, that ownership still has all the advantages, but given the fact that all of us now only own our homes at the pleasure of the government, I can't make that argument. Does homeownership mean anything anymore?

And check out this column by Neil Boortz His analysis is excellent, and contains this particularly relevant passage:

Considering this ruling, how likely are you to invest in real estate at this point? If you saw a tract of land that was placed squarely in the path of growth, would you buy that property in hopes that you could later sell it for a substantial profit? I wouldn't. I wouldn't be interesting in investing in that property because I know that when it came time to sell, the potential purchaser would lowball me on the price. I would never get a true market value based on the highest and best use of that property. And why not? Because the developer wanting that property would simply tell me that if I didn't accept his lowball offer he would just go to the local government and start the eminent domain process. This ruling also means that virtually every piece of raw land out there has decreased in value. The threat of eminent domain for private economic development has severely damaged in most cases, and destroyed in many others, the American dream of investing in real estate.

See, the title of my post, "The End of Homeownership," is not an exaggeration. If you're fortunate enough to live in a wealthy neighborhood with a high property tax base, then you probably won't ever run up against an eminent domain ruling. But the rest of us, we've lost our right to property. And that makes any argument I make in favor of homeownership completely hollow.

Debt Suicide Story From Great Britain

British credit laws don't work quite like ours do, and they don't typically have the problems with crushing debt that we have, but here's a heartbreaking story that could just as easily have happened in the U.S.

Mark McDonald, a 43-year-old father of two, was driven to suicide by £65,000 in debt. A suicide note and 80 collections letters were found with his body.

His widow criticizes the credit industry for extending so much credit to someone who only made £20,000 per year; she has a good point. In the old days, there were no over-limit fees, because they wouldn't let you go over your credit limit. Now, it's frighteningly easy to run up enormous debts beyond your ability to repay. I've seen little old ladies get into six figure debt just by cashing the checks the nice credit card companies send them. They didn't even actively seek the loans, and they ended up so deep in debt they'll never get out.

One interesting side note about that story from thisismoney.co.uk: they call Consumer Credit Counseling Service a "charity." Wonder if we could use the same language here in the states...

Now, all of this is just the setup: read this story for the gruesome punchline. The banks to whom the man owed all that money are hounding his widow looking for their (literal) blood money. It's not enough to drive a man to suicide is it? They have to hound his widow and two children. If this story doesn't make you want to shred your credit cards right now, I don't know what will.

More on the stolen MasterCard numbers

The 40 million stolen MasterCard account numbers really hit the news cycle this week, but card holders still might not know if they were affected.

The creditors involved in this fiasco are trying to avoid alerting the 40m account holders that their information may have been compromised, according to this story from ZDNet. They prefer to alert the customer only if the compromised account number is actually used for fraud.

Obviously, they don't want any of those customers to close their accounts and take their borrowing elsewhere. And they sure don't want to have to send out 40 million notices admitting they may have allowed your account numbers to fall into the wrong hands (and close those accounts and open new ones, as they should).

The problem is, they increasingly make retailers bear the burden of the theft losses. Online retailers in particular suffer a lot of fraud-related losses.

Maybe it's time for the retailers to get together and act. With 40 million compromised MasterCard accounts out there, maybe retailers should stop accepting MasterCard. That would teach the creditors to do a better job securing their data about us.

Now it's MasterCard

Huge security breaches are all over the news lately. I've blogged a couple of them here. And now MasterCard has seen 40 million credit card accounts breached.

According to this story, MasterCard blames CardSystems Solutions for the security breach.

I've long wondered how the major creditors can withstand so many identity-theft related losses. After all, we don't usually pay (in money) when we are victims of identity theft (which is not to discount the lost time, stress, etc. we endure). The creditor is the one who loses, right?

Maybe not. I'm hearing more and more about chargeback fees; the creditors are charging the merchant a $25 dollar fee when these fraudulent credit transactions go bad. What percentage of credit purchases are under $25 in the first place?

It seems that merchants are paying for identity theft as much as creditors are. Legally, consumers can be liable for the first $50 of a fraudulent credit transaction. I haven't heard much about consumers actually having to pay that $50, but if identity theft keeps rising the way it has, that may change soon.

Military Taking Action on Payday Loans

I've been blogging about this for a while now. The military is deeply concerned about the effect payday loans are having on servicemen and women. Now they're taking some baby steps to do something about it.

Sam Graves (R-MO) has introduced legislation to limit interest on payday loans to 36% for military personnel (Why can't we cap all interest on all loans at 36%? That's already far too high anyway.)

The military is also warning soldiers about the risks of payday lending. I don't know how effective that will be; 1 in 10 soldiers are currently getting payday loans.

For those of us who already think the mainstream creditors' policies are beyond usurious, these payday lending stories are chilling. The current average APR for these loans is over 400%, with examples going as high as 750%. For their part, the payday lenders contend that only one percent of their customers are military personnel. I don't believe that statistic for a minute. They also say their target market is middle-class suburbanites, which I don't believe for even half a minute. Who are these guys trying to kid? I live in a middle-class suburb, and I have to drive to a blighted part of town to find a payday lending outfit.

I predict some version of Graves' bill will pass; the payday lending industry's ineffective denials will seal their fate.

Hello Kitty card marketed to kids

Sanrio has licensed the popular "Hello Kitty" brand for use on a prepaid debit card for kids. Check out this story in the Post for more details.

Though the card was targeted to young teenagers, apparently kids as young as 8 or 9 have been given these cards by their parents.

I've blogged about similar topics before, and my conclusion was that it's not a bad idea for parents to have a pre-paid credit card product to help educate their kids about the wise use of credit.

I know the "consumer advocates" of the world hate this; I'm not sure what any creditor could do that would meet their approval, short of going out of business. The Hello Kitty card is expensive (too expensive, imo), but there are alternatives out there that aren't as bad and will achieve the same worthy goals.

I continue to recommend ecount's prepaid 20/20 MasterCard, which is what I use. They also have a product for consumers under 18. And commenter Craig highly recommended Dave Ramsey's Financial Peace, Jr.

Ramsey sells a LOT of stuff on his website (and makes a lot of money, I'm sure). Much of it carries a heavy price tag; that's probably my only reservation about Ramsey's operation. But the Financial Peace Jr. product is around $20, which is completely affordable and I'm certain worth every penny.

That's what the "consumer advocates" are missing here. Responsible parents will do anything to help their kids succeed. They just need the right tools. Even a too-expensive Hello Kitty card would probably save a lot of parents money and teach the kid valuable lessons about budgeting and setting priorities. But parents have to help drive that point home. As a former school teacher, the most important thing kids need to understand is that you have to work before you get paid. The only thing worse than a kid who doesn't understand that concept is an adult who doesn't understand that concept. Money doesn't grow on trees, nor does it spring from a magical plastic cards. Put your kid on an allowance that's tied to their share of the household chores, and teach them that lesson.

Critics say that kids will learn to "buy, buy, buy, spend, spend, spend" with a prepaid card. I say that depends on the parents. If the card has a fixed pre-paid amount that comes in every week or month or whatever (like your paycheck) and doesn't fluxuate (like your paycheck) and you don't cave in and give the kid more money whenever they ask for it (like your boss wouldn't), then it won't take the child long to realize that they can't "buy, buy, buy, spend, spend, spend" when there's no money left on the card. They'll learn that they have to be more frugal with day-to-day spending if they want to use their money to buy the things that are really important to them. They might even learn to save.

Living Paycheck-to-Paycheck

I keep harping on how consumers in this country don't save, and how that has to change. It's one of the tangential reasons I supported the deeply flawed bankruptcy reform bill; more people will borrow less and save more. Hopefully.

AC Nielsen has released a press release that shows 28% of Americans have no spare cash after they have covered their essential living expenses.

I have two reactions:

1) I told you so.

2) Wha?

I hope everyone takes the Nielsen survey seriously, because we can't continue to teeter on the edge like this. But, I'm not sure I'm convinced.

Oh, sure, 28% of us have no money left after we pay our bills. And that's serious. It's the use of the phrase "essential living expenses" that I'm not sure I buy.

What's "essential"? Cable television? Cell phones? There is a class of working poor in this country who struggle to make ends meet from week to week. But they're not 28% of the nation's population. Most of that 28% need to learn to give up instant gratification and make a few sacrifices. It's not fair to compare someone who lives in, say, Southern California where housing costs eat up most of one's income, to someone who has fallen behind because of high credit card bills from shopping, dining out, or vacationing. They may both be tapped out at the end of the month, but the first person had no choice; the second person did. If we could get an accurate, unbiased picture of the plight of the truly struggling American consumers, it would be easier to help them.

All this goes back to financial education. We save less, invest less, and know less about our money than other developed nations. That's gotta change.

One bright spot on the survey: home improvements has actually gone up as a spending area for Americans. More and more of us are recognizing that our home is our most important asset, so in a way, it's not fair to say that those people aren't investing... they're just not investing in the stock market. And lately, investing in real estate has been a way smarter move anyway.

FICO vs FAKO scores

I was sent this column by Michelle Singletary of the Washington Post yesterday. She's usally right on the money (no pun intended) with her analysis of financial issues.

This column is about the difference between the Fair Isaac credit score--FICO--and the ones supplied by the credit bureaus, which we* call FAKO scores. Equifax's ScorePower, Experian's PLUS score, and Transunion's Credit score are just the credit bureau's guesses at what your FICO score should be.

The truth is, only Fair Isaac knows how FICO scores are calculated, and their formula is kept very secret. Other credit scores can sometimes come close to the mark, but they can be off by as much as 100 points either way.

This is important because lenders don't use FAKO scores; they almost always use FICO. So it does you no good to know a score that a) isn't correct, b) won't be considered by lenders.

I've always told people to check their own credit reports (and scores) before they apply for a loan. Now you know that not all scores are created equal. FAKO scores are worthless. If you want a true picture of your credit health, stick with FICO.

*FAKO or Fake-O has been around for years, but the term was popularized by Suze Orman fairly recently. Orman is, admittedly, on Fair Isaac's payroll. But whether she's a sold-out shill or not doesn't change the fact that most lenders use FICO scores, and that makes it the only score that's worth your money.

Minimum payments are going to stay higher

I've blogged here every time a major creditor has raised their minimum payments. I've maintained all along that this was a good thing--in fact, the creditors are only doing it because the OCC (Office of the Comptroller of the Currency) recommended it. For the good of consumers.

This WHOTV article spells out the problem creditors have. Specifically, the line "While it seems like a good way to get people out of debt faster, consumer advocates say it doesn't make the transition any less painful." Ah, yes, my old friends the "consumer advocates." The creditors could hand out sacks of money, and the "consumer advocates" of the world would find a way to make them into villains. According to the article, "Some of the companies that have already made the switch say they've seen their default rates skyrocket." So what are they supposed to do? Lower the minimums back down to where consumers pay only interest and stay in debt forever? The "consumer advocates" wouldn't like that.

The truth is, the creditors are doing the right thing here (for once). And if any consumer is stretched so thin that a change from 2% to 4% minimum payments is going to send them into default, there's a great solution already in place: credit counseling.