July 20th, 2009, by

Q: I am a single parent and have always paid my credit cards and mortgage on time. I pay more than the minimum, and they keep raising my interest rates. I have four cards with balances. I have stopped using them and called, but they will not lower the rates. I can’t afford to pay them off totally, but I am working toward it. Short of not paying and ruining my credit, what recourse do people have, who are caught in the cycle of rising interest rates? One card went from 6.74% to 13.99%. My credit score is about 730. They basically told me be glad it didn’t go higher.

Grand Rapids, MI

A: You poor dear. But I’m afraid the rude person who told you that you should be glad your interest rate isn’t higher is, in a sick way, right. Many credit cardholders are seeing their low rates jump to 20% or more. As you know, we are in a recession. People are not paying their bills, so the card companies—the vultures that they are—are picking the bones of the poor souls who can pay.

Technically, if you go back and read your credit card agreement or the statements you get, you will find in fine print that the credit card issuer has the right to increase the interest rate on your card anytime and for any reason. That will change next year, when a new law takes affect; but, until then my dear, you are stuck.

Part of the reason they probably raised your rate is, I bet, you are overextended. By the very fact that you are carrying balances on four cards that you can’t pay off every month means you are overextended. If you are using more than 30% of the available balance on any one credit card, and more than 30% on the four cards together, you are reaching beyond what is financially wise.

It’s great that you still have a good credit score. It’s smart that you have stopped using the cards. If you can, consider transferring the remaining balances to a card with a lower rate. It may cause your credit score to drop a bit (because it may take you over that 30% threshold), but it’s worth it for the short term, if it will help you get this debt paid off soon.

If you can’t transfer any balances, you don’t have much of a choice but to live with the higher interest rates. If you become too overwhelmed and need help to negotiate a debt settlement go to debtadvice.org.

The thing you should avoid is giving up. Not paying will ruin your credit. But you are obligated to live with the higher rates. This may not be fair, but it is what you agreed to when you signed and used the cards to buy whatever you bought. You know the old saying: “When you play with fire, you can get burned.”

July 15th, 2009, by

Q: I have a niece that is about $30,000 in debt, primarily for credit cards. She is paying for a car as well (included in the $30K). She wants to consolidate the loans and start paying them off. She says that she has stopped using the credit cards. Her income is about $1,600 a month. My niece lives in a trailer, located on land that is paid for and owned by her.

She went to her local bank to try to consolidate the loans, but they will not loan her the money unless she has a co-signer. She has asked me to co-sign. I would prefer to help her to do it all herself rather than co-signing for her. Where is the best place for her to go for help (nonprofit place preferably)?

Most of her paycheck is either going for her car note, food or paying off her credit cards.

A: You are a good aunt to want to help your niece. But, so that you don’t miss my point right away, I will say, DO NOT CO-SIGN.

And the caps aren’t meant to scream at you, but to emphasis my point. No matter how much you want to help, do not bind yourself with your niece’s financial troubles, and that is what you would be doing if you co-signed for the loan.

Many people don’t really understand what it means to co-sign. And as the recession continues and people look to friends and relatives to help bail them out, many people will learn the hard way the dangers of co-signing.

When you co-sign, you are not agreeing to be a backup if the primary borrower defaults. You are agreeing to be equally and wholly responsible to pay back the loan. In fact, in many cases, even if one payment is missed, the lender can come after you.

Additionally, even if the primary borrower pays the loan, his/her payment history will appear on your credit reports. So, let’s say in this case, the niece makes payments, but they are always or often late. That information will appear on your credit reports and damage your credit history.

The loan will be counted toward how much debt you owe, which can also bring down your credit scores.

The thing is, your niece may have every intention of paying off the consolidation loan. But what if she gets laid off? What if she becomes ill and can’t pay her bills? There’s just too much you can’t control when you co-sign.

If you choose to ignore my advice—to NEVER co-sign unless the person is your spouse—then, please read this informational release by the Federal Trade Commission.

But, it sounds as if you are already wary of co-signing. So, you are right; your niece should seek help from a nonprofit consumer credit counseling agency. To find an agency near her, she should go to the National Foundation for Credit Counseling Web site.

A legitimate credit counseling agency may charge her a small fee, if anything, to help her get on a debt repayment plan.

Actually, rather than try to get a consolidation loan, I would rather she seek help from an agency, including learning how to budget. If she hasn’t gotten a good handle on how to manage her money, she could get a consolidation loan, clear off the credit card debt and then get right back into trouble.

July 10th, 2009, by

Q: What can I say to my 21-year-old who is living above her means by constantly spending her money on material things? She owes for a student loan, IRS and a credit card. She cries when she has no more money. I’ve discontinued bailing her out. Please offer something I can tell her.

Tondelayo Gamble, Hyattsville, MD

A: You’ve actually done the best you can do by cutting the apron string and line to your bank account.

But do this also. Get your kid my book, Spend Well, Live Rich: How to Get What You Want with the Money You Have. This is a basic personal finance book with a lot of common money sense I learned from my grandmother, Big Mama. It will probably reinforce the lessons you’ve tried to teach your daughter. But, sometimes it takes another person to get through to your child.

And in the book, leave a note to your daughter that you want the best for her. Tell her that if she continues to spend poorly, she will live poorly.

Then, just stand back. Be supportive and loving if she continues to live above her means, but still stand back. Continue your ban on bailing her out.

It will be hard if she continues to falter, but you have to let her. Just remember that when she was a little girl, you had to let her teeter, tootle and even topple, so that she could learn to walk. So too now will you have to let her go down, and perhaps hard, before she wises up and stops being a child when it comes to her money. Sometimes, you have to let your kid fall before he or she will learn to walk financially straight.

July 6th, 2009, by

Q: The amount of my home equity loan has decreased by $40,000 (of a formerly $150,000 loan). I don’t feel the remaining amount represents a true percentage value of my home. Is it possible that my home loan could be cancelled or called in? I have been borrowing from it, using it as an emergency fund. Now that I have a real emergency, I need to make sure that it stays in place.

Anonymous, Columbia, MD

A: I’m surprised the bank hasn’t yanked the loan entirely, as many financial institutions have done since the downturn in the housing market started and the recession kicked in.

In its most recent survey of banks, the Federal Reserve found that, on existing accounts for households, about 40% of domestic banks reported having reduced the sizes of existing home equity lines of credit.

It’s quite possible, and likely, the market value of your home has decreased, as it has for thousands of homes around the country.

And, if you read your credit contract, you will find that the bank has the right to freeze or reduce your line of credit if your home’s market value drops dramatically or the lender doesn’t think you can pay the loan because of a change in your financial situation.

But, you have some rights. The Truth in Lending Act, as implemented by Regulation Z, sets forth the circumstances under which a home equity line of credit can be terminated, suspended or reduced. Generally, a lender can’t accelerate the repayment of your outstanding balance. So, it’s unlikely you will have to pay back the loan in full, but the bank may be within its rights to reduce your line of credit.

The Federal Reserve recommends the following if your credit line has been reduced:

  • Talk with your lender. Find out what caused the lender to freeze or reduce your credit line and what, if anything, you can do to restore it.
  • Provide additional information to the lender that may help restore your line of credit, such as documentation showing that your house has retained its value or that there has not been a “material change” in your financial circumstances.
  • Get a new appraisal. However, if your lender agrees to an updated appraisal, be sure you discuss appraisal firms in advance, so that you know they will accept the new appraisal as valid.

Also consider this: A home equity line of credit should not be your emergency fund. Your rainy-day money should be in the form of cash savings. Honestly, if you are borrowing for an emergency, you are in deep trouble. If at all possible, stop the borrowing now. Cut your expenses, get another job, but stop digging that debt hole.

June 29th, 2009, by

Q: I was recently laid off and am trying to optimize my situation under the circumstances. I am an engineer and will be turning 50 in September. I am considering paying off the rest of my mortgage with part of my severance package. The remaining funds in possession will be around $30,000 in cash and $120,000 in an IRA. I will be receiving unemployment benefits starting in September, which should allow me not to touch the cash for at least eight months. Hopefully there will be a job for me by that time. Could you please comment on my plan and its potential drawbacks?

Anonymous, Minneapolis, MN

A: I’m so sorry you’ve lost your job. And I’m sure you know you are not alone. The unemployment rate continues to rise, increasing from 8.9% to 9% in the latest figures from the Bureau of Labor Statistics of the U.S. Department of Labor.

If you have enough from your severance to pay off the rest of your mortgage, that suggests you don’t have much of a mortgage left, which is great, especially when so many people who have lost their jobs also face losing their homes.

First, you can’t consider the $120,000 because you are only 50 years old. Touching that money before you are 551/2 means you will lose much of it to taxes and that nasty 10% penalty for early withdrawal. So, you can’t rely on being able to use those funds just yet.

That leaves the severance money to live off of until you find employment. I would hold up on paying off the mortgage for now. I’ve worked with a number of individuals in which it took more than a year for them to find employment once they were laid off. The number of long-term unemployed (those jobless for 27 weeks or more) increased to 3.9 million in May and has tripled since the start of the recession, according to the Labor Department.

So, right now, you should preserve as much cash as possible. With the severance, you have enough money to pay your expenses including your mortgage, which is a lot more than what most people have. If you pay off your mortgage, you would eliminate probably your largest expense, but a long-term stint of unemployment could wipe out your savings, leaving you to struggle. In most states, the weekly unemployment benefit is helpful but pitiful—in many cases, only about $300 a week.

The good thing is, if you do find a job quickly, you can still take the severance money and pay off the mortgage. In fact, once you’ve worked on the new job for awhile, I would go ahead and pay off the mortgage. Then, you need to really boost your retirement savings. You can do that with the money you used to pay toward the mortgage.

June 25th, 2009, by

Q: I just recently purchased a house and was going to file an amended return for 2008 to get the tax credit. The house is a green home and has a bunch of Energy Star improvements. If I re-file, will I be able to take advantage of those tax breaks or will I have to wait until I file in 2009?

Chris, Fuquay-Varina, NC

A: First, congratulations on your home purchase. For those who don’t know, since you bought your home in 2009, you may qualify for a first-time homeowner’s tax credit of up to $8,000 ($4,000 for married filing separately). The great thing about this credit is the law allows you to take it on your 2008 return or wait until you file your 2009 return.

Just be sure you read the fine print. You do not have to repay the credit, provided that you keep this as your principal residence for 36 months after your purchase date. Also, the amount of the credit begins to phase out for taxpayers whose adjusted gross income is more than $75,000 or $150,000 for joint filers. Finally, you are considered to be a first-time homebuyer if you, and your spouse if you are married, did not own any other main home during the three-year period ending on the date of purchase.

If all that applies, great; go for the credit, and why not get it now instead of waiting until next year.

Now, as for your energy tax credits.

It appears, as I read the details at the IRS Web site, you can’t take the energy credits on your 2008 return. You bought the home in 2009, so you have to take the credits on your 2009 return. You can certainly double check with a tax professional, but this is what the IRS says: “You may be able to claim a nonbusiness energy property credit of 30 percent of the cost of certain energy-efficient property or improvements you placed in service in 2009.”

The IRS says the credit can be applied for items that include high-efficiency heat pumps, air conditioners, and water heaters. It also may include energy-efficient windows, doors, insulation materials and certain roofs. The credit has been expanded to include certain asphalt roofs and stoves that burn biomass fuel.

Just so you know, the total amount of credit you can claim in 2009 and 2010 is limited to $1,500.

Click on this IRS link, “Energy Provisions of the American Recovery and Reinvestment Act of 2009,” for additional information about the energy provisions of the act.

June 24th, 2009, by

Q: How can we get car companies to stop selling us cars? Think about it, many of us are figuring out how to pay bills and buy food, and the president is funding car manufacturers to get us in more debt?

Santa Barbara, CA

A: What? Not sell cars? Are you nuts? Are you un-American?

Okay, I’m kidding. You’ve asked a good question, in part. You are right. There are too many people who are spending way too much money on their cars. Too many people are buying cars when they should be holding onto their beaters or hoopties.

But with financial troubles plaguing the U.S. auto industry, if you need to buy a car, this is the time. There are great price breaks.

In fact, the purchase of an average-priced new vehicle took only 21.5 weeks of median family income in first quarter 2009, according to Comerica Bank’s Auto Affordability Index. That’s down 1.3 weeks from the prior quarter and is the lowest on record. The total cost of buying an average-priced light vehicle fell to $26,000 in the first quarter, down $1,700 from the prior quarter.

“With consumers sharply cutting back on their spending in the context of the severe recession, the car companies became much more aggressive in offering reduced financing rates, as well as other types of discounts,” said Dana Johnson, chief economist at Comerica Bank, in a release about the company’s affordability index.

There’s also the new “cash for clunkers” program recently introduced. President Obama signed into law a program the National Highway Traffic Safety Administration calls the Car Allowance Rebate System (or CARS). This is a new federal program that helps you purchase a more fuel-efficient vehicle when you trade in a less fuel-efficient vehicle. If you trade in your gas-guzzler, you get a voucher toward the purchase of a new more fuel-efficient vehicle (doesn’t apply if you are buying a used car). The amount of the credit is $3,500 or $4,500, and generally depends on the type of vehicle you purchase and the difference in fuel economy between the vehicle you are purchasing and your trade-in. The program started July 1.

Overall, there is nothing wrong with selling cars to people who either can afford them or need them. But it is up to individuals to know their financial limit. You are not what you drive. And if you purchase a car you can’t afford, you could help drive yourself into the poor house.

As for me, I keep my cars until they are rusting off the road. I try to limit the amount of money I put into an asset that depreciates every year. It’s just one way to put yourself on the road to wealth!

June 22nd, 2009, by

Q: If you do not have the money to pay off debts, is it better just to file bankruptcy?

A: You wouldn’t be alone in seeking refuge in the bankruptcy court.

The total number of U.S. bankruptcies filed during the first three months of 2009 increased 34.5% over the same period in 2008 nationwide, according to data released by the Administrative Office of the U.S. Courts.

“Consumers and businesses are increasingly seeking bankruptcy protection in order to shelter themselves from the financial storms brought on by the current economic climate,” said Samuel J. Gerdano, executive director for the American Bankruptcy Institute. “As unemployment figures continue to rise and financing remains elusive, we expect filings to surge past 1.4 million cases by year-end.”

In some of these cases people could have avoided filing for bankruptcy. Often, with an overwhelming amount of debt, people just give in and file for bankruptcy. But in my book, you have to work your butt off before you get the right to file for bankruptcy. Filing for bankruptcy ruins your credit for 10 years. But just as importantly, there are moral implications. You are saying you are not a person of your word.

You need to do everything in your power to honor your debt obligations. Think about it. Behind those debts are companies with employees who provided you with goods or services for which they expected to be paid.

I’m not saying bankruptcy is a sin. The process is there and should be used by people with no other avenue. Crippling medical debt, for example, can torpedo a family. If you’ve lost your job by no fault of your own and just can’t make it, bankruptcy may be an option.

But I keep saying bankruptcy “may” be an option because you need to take some steps first. Here’s what I recommend before you file for bankruptcy:

  • Develop a budget to make sure you have cut everything possible to try and pay off your debts. If you have a $100 plus cable bill, you can cut that down; if not, cancel it. If you are spending $100 or more to keep your cell phone service, you need to cut that back.
  • Exhaust all avenues for income. If you have one job, can you get a second one? Can you get a part-time job and devote that income to paying down your debts?
  • Is there anything you can sell? Have a garage sale or put things on eBay or Craigslist. Could you downsize your car (if you aren’t upside down) and get a cheaper car, taking the extra funds and using it for your debts?

If you are still at a loss, go to the National Foundation for Credit Counseling Web site. From the home page, click on the link for “Find a Counselor.” You can contact a counselor either via the Internet on in person. Call the agency, and see if a counselor can help you set up a debt repayment plan. In fact, recently, the National Foundation for Credit Counseling negotiated with the nation’s top 10 credit card issuers to develop two special debt repayment plans. Under this new repayment program, debt-ridden consumers can qualify for a “standard” or “hardship” plan, with fixed monthly payments and a goal to be out of debt within 60 months. Those who qualify for the standard debt repayment plan would pay 2% of their outstanding debt each month. If the hardship plan applies, their payments would drop to 1.75%. To make the plans work over the five-year repayment period, creditors have agreed to immediately stop or lower fees and interest. However, principal balances are not reduced.

What I’ve laid out for you is the course of action to take before even considering bankruptcy. Go through these actions first, before you consider whether this is your best option for debt relief.

June 16th, 2009, by

Q: I’ve heard people on both sides of this debate: Is it more economical to buy a home or to continue to be a life-long renter?

Mariko Joplin, Fremont, CA

A: Whether you buy a home depends first and foremost on whether you can afford it. I’m a huge believer in homeownership. I purchased my first home a year after graduating college. But having said that, please know you are not a financial failure if you rent. Becoming a homeowner is just one way to improve your net worth; however, it’s not the only way.

As many people have discovered with the recent recession, home prices can and do decline. The S&P/Case-Shiller national index found that, in the first quarter of 2009, home prices fell 19.1%, the largest drop in the 21-year history of collecting such data. In looking at 20 large metropolitan areas, the index found home prices dropped a record 18.7% compared with a year ago.

So what’s this got to do with you?

It means you shouldn’t just look at buying a home as an investment, but a place to live. People often say that if you are renting you get nothing for your money. But that’s not true.

Look up. What do you see?

You see a roof over your head. That’s what you are getting for your money. And renting allows you to pick, and leave with less cost, something that is key in the current job market.

Buying a home costs money, not just in the mortgage and real estate cost, but also in the upkeep. Talk to any homeowner, and you’ll quickly learn it’s costly to keep your house in good shape.

If you rent, you don’t have to worry about such upkeep. That’s the landlord’s problem. If your toilet breaks, you get to call the landlord, who has to pay to fix it.

However, with renting, you often face rental increases.

So you see, there are costs to both sides of this equation.

To resolve this issue, you may try using a rent vs. own calculator at Bankrate.com.

Buying a home today is tougher, because lenders are going back to a time when they required a large down payment, 20% in many cases. You will also have to show you’ve got some money in the bank. If you can jump over or through the hoops, you may be ready and able to afford a home.

However, here’s my rule of thumb for buying a home. You should not be spending more than 36% of your net take-home pay on your housing cost, whether you are renting or buying.

Why 36%? Anymore and you won’t have much room to save, invest and pay for unexpected expenses.

Ultimately, for many people, their home is their largest asset (after accounting for what they owe on the place). Homeownership is definitely something to strive for, but only when the time is right for your budget.

June 11th, 2009, by

Q: Where’s the bailout for folks who lost homes, have to rent and pay taxes? Why are the breaks only for mortgage holders and lenders?

@Brentovations via Twitter

A: You’ve asked a great question. Reminds me of the 1980s Wendy TV commercial where an elderly lady asks, “Where’s the beef,” in referring to a competitor’s hamburger.

The same could be said for the lame attempts to help struggling homeowners. There have been a number of housing initiatives under both Presidents Bush and Obama, and yet hundreds of thousands of homeowners are still losing their homes. Now, some people should lose their homes because they just can’t afford to keep their houses, even with major concessions on the part of their lenders.

The Mortgage Bankers Association (MBA) reported at the end of May that the level of foreclosures started was a record high.

In fact, this is what the association said about current efforts to save homeowners: “Now that the guidelines of the administration’s loan modification programs are known, combined with the large number of vacant homes with past due mortgages, the pace of foreclosures has stepped up considerably.”

The sad part is a lot of people are falling behind on their mortgages not because they were irresponsible, but because they’ve lost their jobs.

“Looking forward, it does not appear the level of mortgage defaults will begin to fall until after the employment situation begins to improve,” said Jay Brinkmann, MBA’s chief economist. “MBA’s forecast, a view now shared by the Federal Reserve and others, is that the unemployment rate will not hit its peak until mid-2010. Since changes in mortgage performance lag changes in the level of employment, it is unlikely we will see much of an improvement until after that.”

It is in this country’s collective best interest to try and prevent the continued jump in foreclosures. Foreclosures cost us all. Mortgage defaults bring down the property values of homes nearby and make it difficult for other homeowners to sell their homes when they need to.

In theory, the lenders are being bailed out to save the economy at large. We’ve been told over and over again that some of these lenders are too big to fail. But, you are right; the economy at large could be better served by helping more individuals.

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