Credit/Debt Recovery

2nd video from FTC

Here's another video from the FTC regarding AnnualCreditReport.com:

Where to get your truly free credit reports

Here's the FTC's new PSA about Annualcreditreport.com:

Not hilarious, but hopefully some people will get the message: freecreditreport.com isn't free. 

By the way, if you do go to AnnualCreditReport.com, DON'T order your credit score. Only get the free credit reports. If you buy your score there, you'll get a worthless FAKO score. For a real credit score, use myFICO.com. 

Bad solutions to real problems

Bernie Sanders, (S-VT), has proposed new legislation limiting consumer loan interest rates to 15% or less. This would include credit cards. 

He proposes this law in response to news that credit card companies are raising rates on all their customers, even the ones who haven't had any late payments. I've complained about that problem on this blog, and was the target of such an interest rate increase recently. 

If you didn't know me very well, you might think that I'd like this proposed bill, since I think these rate increases are a real problem. But this bill misses the mark. 

What credit card borrowers need is contract enforcement, not usury laws. I didn't mind paying 17% on a credit card that I agreed to use. When my rate got increased to 23%, I closed the card and transferred my balance (to a new card with 7.4% interest). I recognize that not everyone can easily get a new card with a better rate, so if the Senate wants to enact a law, they only need to require that credit card lenders honor their original contracts and not raise interest rates unless specifically laid-out circumstances are met (like missed payments leading to penalty rates). 

If creditors want to re-negotiate the original terms of a credit card agreement, they should have to close the account and get a new signed agreement from the borrower. The way it's done now, the credit card rate increases happen automatically unless the borrower objects in writing by sending snail mail to an address buried in fine print. The burden is entirely on the borrower, even when it's the creditor who wants to change the terms of the agreement. 

This new national usury law wouldn't necessarily solve the problem. Yes, it would prevent my rate from going from 17% to 23%. But creditors aren't going to give 15% rate cards to people who are higher risk. That means anyone with low income or marginal credit history would be without any options for credit. Typically, the law will backfire and hurt the poor people it claims to protect. And because this bill would hurt the credtors' bottom line so deeply, it's likely that my current 7.4% rate would shoot up to the 15% allowed by law. So it's hard to see who wins if a law like this one passes. Politicians who want to woo gullible voters, I suppose.

If Senator Sanders really wants to help credit card borrowers, all he needs to do is make sure the creditors abide by their original, signed contracts. Beyond that, it should be up to us whether we want to borrow from credit card companies at usurious rates. 

Peter Schiff on Credit Cards

If you don't know who Peter Schiff is, you might want to spend some time searching for him on YouTube. He was the one guy who was right about the economy, and he went on cable tv regularly warning people about the crisis well before anyone else saw the signs. 

He faced repeated ridicule in 2006 and 2007 when he went on television to debate these issues, but he is the only one whose views were borne out by the events that followed.

I set this up so readers will understand that what Schiff writes should be taken seriously. This weekend he wrote this column, about credit cards.

From the first paragraph:

Savings, not credit, is the lifeblood of a healthy economy. When not used properly credit can be like a cancer that sickens an otherwise healthy economy.

Read the rest and remember that anyone who suggests credit should be used as a substitute for income is setting you up for disaster. Schiff is right when he says "Americans should be saving for a rainy day, not adopting the attitude that if it rains I'll whip out my credit card."

VideoCreditScore.com will teach you about your credit scores

If you're interested in getting more information about your all-important FICO® credit score, check out VideoCreditScore.com.

The site is run by a former FICO® exec, and he's really great at boiling things down to the essential basics. This is the place to get the truth about credit scoring and what you need to know about it.

Interestingly, one of the myths he dispels about credit scoring is that paying off highest-interest credit cards first is good for your score. I hadn't actually heard of that myth, but he explains that in the short term, you should pay off the highest utilized cards first, rather than the ones with the highest interest rates. That makes sense, if you're aim is to improve your score. I personally counsel readers to pay off the highest interest rate cards first because that makes the most sense financially, but if you need to improve your credit score in the short term, try to pay down the most utilized cards first.

Check out the videos on his site for more information about this and other credit score related topics.

How many categories should be in your budget?

What follows is a long and (probably) boring post about budgeting. I'm using this blog space to work out some math for my own edification, but I figured I'd post it here for future reference. As a personal finance author, this is the kind of stuff I think about way too much of the time:

I saw a blog recommending a budget that is "balanced" as follows:

20% for savings and debts

50% for needs

30% for wants

They wrote that this system came from a book; it wasn't something they made up themselves. I'm a little stunned that a published author would recommend a system like this. 

By contrast, here's the system I recommend in Repair Your Credit and Knock Out Your Debt:

Housing - 30-40%

Utilities - 8-15%

Food - 10-20%

Transportation 15-25%

Medical - 8-15%

Clothing 3-5%

Personal and Miscellaneous 5-10%

Savings 5-10%

Debt payments 10-20%

Clearly, these don't easily add up to 100%. That's by design, as each person needs to customize the budget to fit his/her own situation. Got full medical coverage from your employer? That's 8-15% you can apply to other areas of the budget. Ideally, you'll pay off the debts that are eating up 10-20% of your budget so you can devote that extra money toward savings; 20% is the ultimate goal for the savings part of your budget (the list above is designed for people actively trying to pay down their debts).

Returning to the initial budget I mentioned, I think 30% for wants is way out of line. People devoting nearly a third of their income toward discretionary spending is why they need books like mine in the first place. 

It's hard to set a baseline for individual spending, because everyone's income and habits vary so widely. I use the Bureau of Labor Statistics' numbers to make sure I'm not proposing anything out of step with reality.

Let's consider an income of $50,000, which is very close to what the U.S. Census Bureau tells us is the median income in the US. 18% of that is confiscated in income taxes, leaving not quite $41,000.

Let's use $3,415 as our monthly income, and try to figure out a budget:

Housing: 30% or $1,025

That's $670 toward the home loan

  $250 for real estate taxes

  $60 for insurance

  $45 for PMI

Utilities: 6% or $205

That's $156 for Gas, water, sewer, electric and phone

  $49 taxes

Food: 10% or $341

Transportation: 15% or $512

That's $375 car payment

   $71 gas

   $17 gas taxes

   $49 insurance

Medical: 3% or $95

Clothing: 3% or $95

That's $90 clothing

$5 sales taxes

Personal and Miscellaneous: 9% or $307

That's $290 spending

   $17 sales taxes

Savings: 10% or $341

Here you'll eventually pay capital gains taxes if your savings accrue

Debt: 14% or $494

You're financing the sales taxes on things you bought with credit cards

These are realistic numbers, based on tax rates in my state, and they add up to the $3,415 monthly after-tax income. This assumes one is devoted to paying off debts and is setting aside 10% towards an emergency savings fund. You can see that there's only 9% left for personal & miscellaneous spending, which encompasses a lot of wants. A real budget like this one requires some discipline.

Clearly, paying off that debt will free up a substantial amount of money and help make the savings goal of 20% attainable, and even leave another 4% free for extra spending on wants. 

But suppose this same budget was spent using that "balanced" method I mentioned first:

Savings: 20% or $683

Expenses:  $1708

Wants: $1024

The good news is that by saving $683 every month, it'll only take 3 or 4 months to save up enough money to pay your bankruptcy attorney, whom you'll need by then if you live with a budget like this. After this household pays their mortgage payment, they'll only have $683 more dollars for Transportation, Food, Utilities, Medical, and Clothing. I can't think of a good reason to recommend such a budget. It's almost as if the author had some hidden agenda to set people up to fail.

Repair Your Credit And Knock Out Your Debt on the Kindle

On my last royalty statement I noticed a slight uptick in the electronic sales of my book. I wondered what was generating that, and sure enough there's a Kindle version of the book for sale at Amazon:

Repair Your Credit and Knock Out Your Debt

I missed the first iteration of Kindle completely, as I was holding out hope that Apple would make an ebook reader. I've been reading ebooks for years; I first started buying them from Fictionwise back in 2003, when I used a Compaq PDA. I've got a few things on my iPhone now, but it's not the optimal ebook reader. 

So seeing my book available for Kindle was the excuse I needed to get one. I got it last week, and the short review is I like it. Some more thoughts:

• Battery life is very good. This is the number one reason I'm not crazy about using my iPhone as an ebook reader. The kindle will last for weeks on a charge, as long as its wireless network service is turned off. Having it connected to the 3G network makes a big difference in battery life.     
• The screen is good. Not great, but good. I don't think a text reader needs to display color, so it doesn't bother me that it's only black and white. The text is very crisp, too. This is the other big reason the Kindle is better than the iPhone for reading; the screen replicates the experience of reading from a page very well. 
  • The main change I'd like to see here is a bigger screen. It's currently a paperback-sized page; I'd like to see a hardback size. 
  • I also think the contrast could be better. The background isn't white, but light gray; it's more like reading off of newsprint than a standard book. Still very easy to read, but it would be better with greater contrast.
  • The screen "flashes" every time you turn a page, and while the new Kindle is said to be noticeably faster than the original model, it doesn't seem consistent. Sometimes it turns the page very quickly, other times, it takes a few seconds and interrupts the flow of reading a bit more than turning a paper page would.  
  • I see some ghosting on the screen sometimes; traces of the home menu or a previous page will appear faintly. It's usually not that distracting, but there are times when I wish the device had a "refresh" button that would flash the screen and reload the current page to wipe out any of those traces of previous screens that weren't fully wiped away. (Update: I found out you can press alt+g to refresh the screen.) 
• It's expensive. At $360, I can't recommend it for anyone who is in the market for my book. In fact, I'd like to have written a new introduction for the Kindle edition, something along the lines of "what are you doing buying a debt help book for a $360 device?" Nonetheless, perhaps many people who purchased a Kindle are uniquely in need of a book like mine.  
• It seems a bit fragile. My iPhone has taken a beating and still works (and looks) great. So far the Kindle doesn't inspire confidence that it would survive the same treatment.  I feel like I have to handle it very gingerly for fear of damaging it.
• Amazon supports this product well. I had some technical problems with it the first night (I couldn't get my computer to eject it after adding a bunch of ebooks to it), and I ended up having to call Amazon. I wasn't put on hold at all and got straight through to tech support. They were very responsive and helpful; if only credit card companies provided that level of customer service.
• There's tons of great content for it. Much of it free and sans DRM. I hear a lot of whining about the Kindle books being overpriced and wrapped in DRM. I'm not moved by either concern. I have over 100 books on my Kindle already, for which I paid a grand total of $27.06. 74 of the books were free, pulled down from Amazon (which has hundreds of free kindle books available) and Feedbooks. So I could read for a couple of years without spending another dime on content. I can also get all the old ebooks I've already read sent directly from Fictionwise to my new device. 
• •  I have another 50 or so ebooks that I got free from places like Project Gutenberg, Manybooks.net and other places. I took them off of my Kindle because they don't display the author's name, and in some cases the title displays incorrectly. That leaves me unable to sort the list of books properly. I'm not keen on having 150 books on the device and being unable to sort 1/3 of them the way I want. Right now, there's no way to fix that problem on a Mac without a good working knowledge of Perl, which has me stumped.
  • Feedbooks is a much better source of material, and it's formatted properly. The problem there is that there are some gaps in their content. (No H.L. Mencken, only one entry from Tom Paine ...)  
  • While I wish my book was priced lower for the Kindle, I don't generally think the books are overpriced. I paid $9.99 for a book that would have cost me $24.95 + tax at Borders. Another older book that's out on paperback would have cost me $14.95 at a bookstore, but cost $3.95 for the Kindle. And they both downloaded directly to the device in seconds. The argument that they're charging too much for the books doesn't hold water with me. In fact, I think many of the people complaining about the cost of a kindle editions aren't really readers. As an author, I can tell you that it's a rare sort of person who still regularly walks into a bookstore and spends $25 - $30 for a hardback book. Anyone in the habit of doing so isn't likely to complain about paying $10 for a kindle version of a new book.
  • On the DRM subject, I generally keep my books forever. My wife and I just finished organizing our library, and between us we have 1063 books. So the fact that I can't re-sell or give away Kindle books doesn't affect me personally, though I could see why some people wouldn't want to go digital and give up the ability to resell or give books away. 
• I think my book translates to this format pretty well. Generally, non-fiction books are not as good on a Kindle, because you can't flip through the pages and go straight to the chapter you need. (You can use the search function to go straight to what you're looking for, though. Plus you can add bookmarks as you read.) Also, the Kindle doesn't do a great job with charts and graphs. Fortunately, we didn't put too many in my book. I don't think any two people are going to create their budget the same way, so I didn't want to put out a book full of budget forms no one would ever use. I just want to teach the basic principles of budgeting and provide the motivational message to help people get started. I don't think the Kindle gets in the way of that.
• The folks at Amazon disappointed me by caving in to the bawling from the Author's Guild about the "text-to-speech" function of the device. For the record, I grant Amazon the right to enable text to speech on the Kindle for my book in perpetuity throughout the universe. 

The bottom line is, I'm happy to have a Kindle, but I don't recommend getting one unless you can afford to buy it outright. If anyone ran up $360+ in credit card debt buying one, then they really should consider my book.