July 7th, 2011, by

Q: I have talked to a debt management agency, and the names/words that have come up are MSP (Member Service Provider), EFS (Education Finance Services/Educational Financial Services) and Membership Fulfillment Center. I would like to get from under my 29.9% interest, but am I getting myself into more trouble? All my payments are current. The savings they quoted to me seem really good.

New York

A: This is an example of the famous Shakespeare line, “What’s in a name? That which we call a rose by any other name would smell as sweet.”

What you have encountered are various names for the same service I don’t recommend to people. You are looking for a savior, and it will cost you. Yes, for anywhere from several hundred dollars to thousands of dollars, you too can get a promise that your debt (or, in your case, your interest rate) can be reduced.

Or, how about this often used but always true statement: If it sounds too good to be true, it is.

Many debt management agencies will promise or guarantee they can reduce your interest rate, but that’s not likely.

Don’t do it.

Rather, if you need help, look up a nonprofit consumer credit counseling service (CCCS) that is affiliated with the National Foundation for Credit Counseling. An agency might be able to help you get that interest rated lowered if you enter into a debt management plan.

Even so, why not just buckle down, cut your expenses until you can’t cut anymore and pay off the debt? The quicker you get rid of the debt, the less time you have to deal with that high interest rate or the cost of entering into a contract with a debt management company.

July 4th, 2011, by

Q: I want to start investing, but I’m not sure where to start. I am 43 years young. Can you advise me on getting into futures?

Tara Hills, CA

A: The fact that you say you want to start investing and then ask about futures means you need to do a lot of homework before you put any of your money at risk investing.

A futures contract is an agreement to buy or sell a specific quantity of a commodity or financial instrument at a specified price on a particular date in the future. Commodities include bulk goods, such as grains, metals and foods; financial instruments include U.S. and foreign currencies.

Investing in futures should be left to sophisticated investors. “Futures markets are inherently volatile, complex, and risky,” says the Commodity Futures Trading Commission, the federal agency that regulates futures trading. The CFTC says investors need to be very careful about Web sites that offer high-yield investment opportunities in futures.

It also says investors lose millions of dollars every year in phony commodity pools.

Because trading in futures and options is appropriate only for certain businesses and individuals, the CFTC requires that a broker provide you with a disclosure document that describes the risks involved in entering into futures and option contracts. If you are determined to invest in futures, consider a commodity mutual fund or an Exchange Traded Fund that tracks individual indices or a basket of several commodities. A good article entitled “Community Funds 101” can be found on the Investopedia.com Web site.

For many individual investors, the best way to start investing is through mutual funds, especially index funds. If you have access to a workplace retirement plan, such as a 401(k), that’s a good place to start investing, especially if your employer offers a match. Often, people will ask me how to start investing, and I find out they are investing in their company’s 401(k). That is investing. Nonetheless, before investing, read the guides by Choose to Save, which will give you the basics you should know before putting your money at risk.

June 30th, 2011, by

Q: What are some legit credit counseling sites I can review for consolidating my credit card balance?

Plainfield, NJ

A: I get this question so very often. If there is nothing else we have learned from the recession it’s that far too many people got into far too much credit card debt. The good news is many of these people, like you, are desperate to get out of debt. The bad news is many people want an easy way out.

What you really need is not consolidation, but a debt repayment plan. I’m assuming that’s what you mean. Because consolidating the debt with one lender, as opposed to several credit card companies, often just grows the debt. Yes, you may have lower monthly payments, but the price for that convenience of writing one lower check is spending more years digging your way out of debt.

So, you are right. Look for a legitimate nonprofit credit counseling agency. The key word is nonprofit. A good nonprofit agency will assess the amount of debt you have and, if possible, put you in a debt management plan. Again, if possible, they can help negotiate with your credit card companies to cut interest rates or lower fees or eliminate certain penalties or all of the aforementioned. You will then write one check, send it to the agency, and they will distribute the money to your various creditors. Typically, such a plan takes three to five years, depending on how much debt you have.

So, where do you find the nonprofit? Go to the Web site of the National Foundation for Credit Counseling.

June 27th, 2011, by

Q: What is going on with these debt collection agencies reviving debts that were written off by the initial account holder, yet, after somehow being either purchased or transferred to these collection agencies, they have come back to life? Some are 13 to 15 years old. First, is it legal? And if not, how do we combat this issue?

El Paso, TX

A: Debts that have been sold are still collectible in many cases. Although the original creditor might have written the debt off as uncollectable, the company can sell the right to collect the debt to someone else. Or the creditor might have hired a collection agency to still go after old debts.

That is what you see happening. The company with the right to collect the debt is coming after you. Now, here are a few things to keep in mind.

Make sure the debt is really yours. Ask for proof before admitting you owe the debt. It’s possible you paid it. And if you did, I hope you kept good records. If you agree to settle the debt for less than what you owe (and you should), get everything in writing before you send any money. If you have cash, you are more likely to be able to get the company to take less than you owe.

Let’s say the debt is yours. Still ask for proof. And check to make sure any debt that is older than seven years has not reappeared on your credit reports. Read up on the rights that you have under the Fair Debt Collection Practices Act. For example, if you send the debt collector a letter stating that you don’t owe any or all of the money, or asking for verification of the debt, that collector must stop contacting you. You have to send that letter within 30 days after you receive the validation notice. But, a collector can begin contacting you again if it sends you written verification of the debt, like a copy of a bill for the amount you owe.

The “Facts for Consumers” page of the Federal Trade Commission’s Web site has more information.

You should also check to see if your state’s statute of limitations for the debt has expired. That doesn’t mean you don’t still owe the debt or the creditors can’t come after you, but it could limit legal action that they may take, such as garnishing your wages.

June 23rd, 2011, by

Q: Will working with credit card companies on debt pay-down plans affect credit? My husband is at a job on which he cannot have bad credit. We have to shut down our family business, but owe on some credit accounts. The credit company said they would report it as “closed with assistance,” but they could not tell me if that is a bad thing (lower score) on our report.

Concord, NC

A: I would work very closely with the credit card companies to be sure that they don’t report that you are not paying on your cards as agreed.

To be honest, I don’t have much faith in what someone might have told you on the telephone. Get any promises in writing.

But, you really have two issues at play here.

First, closing the accounts could affect your credit scores because you still have debt left on the cards. When you close an account, it reduces your available credit, and that impacts your scores. What most affects your score when an account is closed is the existence of outstanding balances on other open accounts—not the closure of the account itself. The credit-scoring algorithm looks at the credit utilization rate for each active account and, separately, a person’s credit usage for several accounts together.

So, as long as you have outstanding balances, it’s not helpful to close the accounts. Try to keep them open for now.

Second, what you want to work on with the credit card companies is a debt payment plan in which they agree to report that you are “paying as agreed.” That’s the phasing you need. If they allow you to make lower payments, you need the card companies to continue to report you are paying on time per whatever agreement you come up with.

If the companies won’t agree to a debt plan, go to the Web site of the National Foundation for Credit Counseling and get a nonprofit credit counseling company to help you negotiate with them. Under these plans, you could get a break in fees, penalties or interest rates. But again, as part of any plan, be sure the credit card companies report that you are paying as agreed.

June 20th, 2011, by

Q: With today’s economy, what is good stock to invest in that will benefit in the long term?

Chicago, IL

A: If I knew for certain what stocks would perform well over the long term, I would be kicking back on a Caribbean beach, in a paid-for villa.

Individual stock picking is not my gift. I don’t invest in individual stocks. I have mutual funds. I don’t have the time or the patience to do the kind of research you really need to do to pick single stocks.

If you want to invest like that, you need a stockbroker or a lot of time to do your own research. There are companies that help individual investors select stocks on their own at relatively low prices. I’m sure you’ve seen the commercials with the talking babies for E*TRADE.

But before investing, I suggest you go to the Web site for the Investor Protection Trust, which is a nonprofit organization devoted to investor education. The site has a number of booklets to help you, if you want to invest in individual stocks. I also suggest you read The Basics for Investing in Stocks (PDF).

Good luck finding your stocks.

June 16th, 2011, by

Q: How safe are these debt consolidation companies, and how do I choose a reputable one?

A: I am not a fan of debt consolidation companies. So let me be up front. I don’t recommend them to anyone.

Debt consolidation companies promise to help reduce the amount of debt people owe by negotiating with their creditors. And for this help, people are charged several hundred to several thousand dollars (money you could just as well use to pay down your debts).

In return for their fee, some debt settlement companies claim that they can help reduce your debt for anywhere from 30% to 70% of the balance.

As the Federal Trade Commission points out, the companies can’t guarantee they will be able to persuade a credit card company to accept partial payment of a debt you truly owe. Even if they can, you must put aside money for your creditors each month. Meanwhile, it may be months—or even years—before the debt settlement company negotiates with your credit card company to settle your debts. And, if you stop making your payments in the meantime, the credit card company usually adds late fees and interest to the debt each month. That can cause your original debt to double or triple.

There were so many consumers complaining about the debt settlement industry that the FTC issued new rules that went into effect October 2010. Now, for-profit companies that sell debt relief services over the telephone can’t charge a fee before they settle or reduce a customer’s credit card or other unsecured debt. The ban covers telemarketers of for-profit debt relief services, including credit counseling, debt settlement and debt negotiation services.

If you decide to go with a debt consolidation company, the FTC says you should know that the company is not allowed to collect a fee until:
• The debt relief service successfully renegotiates, settles, reduces or otherwise changes the terms of at least one of your debts;
• There is a written settlement agreement, debt management plan or other agreement;
• You have made at least one payment to the creditor as a result of the agreement negotiated by the debt relief provider.

Additionally, here are some red flags to look out for, according to the FTC:
• The company charges any fees before it settles your debts.
• It touts a “new government program” to bail out personal credit card debt.
• It guarantees it can make your unsecured debt go away.
• It tells you to stop communicating with your creditors.
• It tells you it can stop all debt collection calls and lawsuits.
• It guarantees that your unsecured debts can be paid off for just pennies on the dollar.

Rather than a debt settlement company, I recommend instead that you find a nonprofit credit counseling company at the National Foundation for Credit Counseling’s Web site.

June 13th, 2011, by

Q: I am in my 60s and would like to retire soon; however, I am not sure if I will outlive my savings. I read a report somewhere stating that if you want to know if you have enough money to live comfortably in retirement, multiply your salary by 20 years. Is this a true statement?

Silver Spring, MD

A: If it were true that people should only retire if they have 20 years of their current gross salary saved (I’m assuming the myth doesn’t refer to net pay), a lot of people would never have enough to retire.

How about you look at it another way. You need to first figure out how much you need to live on in retirement. Is it $20,000 a year, $50,000? In other words, look at the expenses you expect to have to determine how much you will need.

In determining the retirement income you should take into account, savings, pensions, investments and Social Security. And, of course, there is inflation to think about. With all this information, you can calculate if you have enough to retire.

I suggest you use the retirement Ballpark E$timate at www.choosetosave.org. It’s an easy-to-use online worksheet that will help you figure out how much you need to have to fund your retirement.

Before doing the calculation, you’ll have to gather up some documents. Get your last Social Security statement that indicates how much you can expect in benefits.

I need to give you a word of caution before you use the retirement calculator. Don’t panic when you see what you should have or need to have. It’s just that – an estimation. You can make changes that will help you retire comfortably. For example, you could work longer so you can save more. If you pay off your mortgage (if you have one) before you retire, that would for most people eliminate 20 percent to 40 percent of their expenses in retirement.

Most importantly, before you quit your job and retire, run the numbers. Don’t just guess at what you need. Know what you need.

June 9th, 2011, by

Q: I just finalized my bankruptcy, and my attorney referred me to a lender who helps folks like me get a car loan. I purchased a 2006 Jeep Liberty with 60,000 miles for $12,500 and my interest rate is 18 percent. My car payment is $408 a month. My credit score right now is 560. I would like to refinance my car loan as quickly as possible, but I know I have to increase my credit score first. What is the fastest way to do that? My online research suggests that I need to pay all my bills on time and get a secured credit card with a bank that reports to all three of the credit agencies on a regular basis. I am already paying all my bills on time. I bank with Wachovia, and they said they offer such a card, but I would need to open the account with $300. If I obtain a secured credit card with a $300 limit and charge $45 every month and pay it off before the due date, will this help speed up the credit building process?

Roswell, GA

A: Can I take a step back with you before I answer your question about refinancing the car?

I, of course, don’t know why you filed for bankruptcy. Maybe you got into unmanageable debt by no fault of your own. Or perhaps you, like many Americans, lived above your means.

I don’t know why you needed to get another car. Was it possible to hang on to your hoopty? If you didn’t have a car, could you have carpooled or taken public transportation until you saved up for a lower-priced used car?

Even without your backstory, I would not have recommended you go into debt so soon after the bankruptcy. I wouldn’t have purchased a $12,500 car. I certainly wouldn’t have taken out a loan for 18 percent. Your attorney did not do you a favor. In fact, I wonder why he would have such a cozy relationship with a lender that he’s referring bankruptcy clients, who just got out of debt.

Certainly the lender is taking on risk lending you money, but not enough, in my opinion, to justify the rate you got. As of the last week in May, the average national interest rate on a used car with a 48-month term was 4.81 percent. It was 3.91 percent for a new car. Compare that with the rate you got and the lender is making out pretty darn good. And that lender and your bankruptcy attorney know you’re a better risk to collect the debt because you can’t file for bankruptcy for another eight years.

If I had been you, I would have scraped together whatever cash I could get and bought whatever car I could get for the money. You can still find a decent car for less than $12,500. People do all the time. The last thing you needed to do was to take on new debt, which, by the way, would have lowered your credit scores.

But you’re not me and you’ve asked my advice on how to refinance.

So what you are doing is going to help. You are paying your bills on time. You’ve gotten a secured credit card. You’ve used it. And, as you point out, it’s important not to charge more than some experts say 30 percent (not 20 percent) of the available balance. In fact, you don’t actually have to use the card anymore. You’ve charged enough to establish you can use it and pay the money back.

Now how long will it take your credit scores to rise?

No one really knows for sure. The inside box of how certain actions (paying bills on time, establishing good credit habits) affect your credit scores are complicated and not revealed to the public. But based on what I’ve seen with others, you should see your score moving up within the year.

After about a year, check various lenders, including your own bank, to see what interest rate they may offer you on a refinancing. Also include a credit union, which often has lower rates than banks.

June 6th, 2011, by

Q: I am almost 62 and started a PhD program in my field after being laid off in 2008, because the doctorate is highly valued in industry in my field. I have been unemployed for over two years since the layoff and have had only intermittent consulting work coming in since. I am amassing student loan debt in the amount of $21,000+ per year. It will take me five years to complete my degree, dissertation and all; so, by the time I finish, I will be $100,000 in debt; but there is no guarantee I will have an employer before then that will offset the education costs.

When I am working full-time in my field, I earn $100,000. Currently, I only owe about $21,000. Due to the lack of employment opportunities, no income whatsoever and savings depleted, I plan to apply for early Social Security benefits this year.

What do you recommend? I can still get jobs in my field without the PhD. I love my studies, but I don’t relish the idea that my Social Security would be garnished if I default on a huge student loan debt. Should I stop my losses now?

A: I’m so sorry for your situation. There’s a lot to consider, but I wouldn’t take out any more loans. Take a leave from school and find whatever work you can. As you said, there’s no guarantee you will get a job that could service $100,000 student loan debt.

Think about it. Even if you got a higher-paying job, the extra money (the difference between a job with the PhD and without) may be just enough to cover the loan. So, you would be working to cover a loan and not really getting ahead. And, you are right that, if you default, the lender could attack your Social Security benefits.

Cut your losses now.

And, by the way, whatever you do, don’t go into default. If you don’t go into default, you should qualify for IBR (income-based repayment), which will help set your loan payments based on your current income. If you don’t have much, your payments won’t be much. IBR is available to all student loan borrowers with federal loans who have high debt relative to their income. Go to the IBR info Web site to learn more.

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