October 5th, 2009, by

Q: My sister opened an account in my name about four or five years ago, and now she’s lost her job and can’t make the payments, and I cannot afford to pay her monthly minimum, which is a crazy amount. Is there any way to negotiate with them without messing up my credit? I’ve worked really hard to have decent credit score.

A visitor, Chicago, IL

A: I just have to ask. Why would your sister open an account in your name without your permission?

I ask because, technically, what she did is called identity theft.

An identity thief will open new accounts in other people’s names and rack up debts on existing accounts. To do that, they may use people’s Social Security numbers, bank account information, addresses or phone numbers. Some people have been denied jobs or insurance or have been arrested for crimes they did not commit–all because their identity was stolen. Identity fraud occurs when someone takes illegally-obtained personal information to use for his or her own financial gain.

Identity theft in the U.S. increased 23% in 2008, to 10.1 million reported cases, according to the Javelin Strategy and Research 2009 Identity Fraud Survey Report. More than 36 million people have been victims of identity theft in the last four years, and identity theft was the top complaint to the FTC nine years in a row.

And the sad part about this crime is the perpetrator is often someone you know–your mama, daddy, cousin, brother and, yes, sister. An estimated 13% of all victims reported a family member or relative as the person responsible for misusing their personal information.

So, what should you do if you discover that a family member stole your identity?

You rat them out.

That’s right. Report the theft by filing a police report. And don’t feel one bit guilty about turning them in, because the person has violated you.

If you report the theft, then you are not responsible for the charges. Although the creditor might pursue them for payment, in all likelihood, the person won’t go to jail for stealing just your personal information.

It’s important to know that if you find out about the theft and you don’t take the necessary steps to dispute the charges, you become liable.

Two Web sites you should check out: IDTheft.gov and Privacy Rights Clearinghouse.

If you are unwilling to file a police report, then, yes, you can certainly try to negotiate for a more affordable monthly payment. It might work. If not, sorry, you are stuck.

Perhaps, while you are trying to fix this problem you did not create, you might get irate enough to see the injustice of your having to deal with a big ding to your good credit name.

October 1st, 2009, by

Q: I am paying down several credit cards, as well as two auto loans. I received a bonus recently and thought it might be best used to pay off the collateralized auto loans instead of putting that money into my six-month savings. Please advise.

A visitor, Ft Lauderdale, FL

A: It’s always a good idea to have an emergency fund. Six months is ideal. Three months is good. A year is fantastic, if you have a job or income that would be hard to replace right away if you’re laid off.

So, if you are fairly confident about your employment status, use some of the bonus money to pay down your debt.

But, pay it down in a systematic way.

I typically tell people to get a piece of paper and make a list of all their consumer debt (not including your home).

Put at the top of the list the debt with the lowest balance. So, this is an example of how you would make your list:

  1. Credit card #1 $1,000
  2. Credit card #2 $1,500
  3. Credit card #3 $5,000
  4. Auto loan #1 $15,000
  5. Auto loan #2 $28,000

You would concentrate on paying off the credit card with the balance of $1,000, but still make the required minimum payments on the other debts.

Don’t worry about the interest rates. This is a payoff strategy based on emotions, not necessarily math.

Let’s say the $28,000 loan has the highest interest rate, and your bonus is only $5,000. You would make a nice dent in the debt, but not big enough to give you an emotional boost to really make a dash to pay off your other debts.

But, if you took the $5,000 bonus and paid off the first two on the list and part of the third, imagine how that will make you feel? You would feel euphoric.

Based on my experience, you would get so charged up that you would aggressively want to begin to get rid of the rest of the debt.

I call this strategy the “debt dash.” (I talk about it at great length in my upcoming book, The Power to Prosper: 21 Days to Financial Freedom, which comes out in January 2010.)

Now dash off and get those debts paid off.

September 28th, 2009, by

Q: I owe about $7,300 on two credit cards. I have two certificates of deposit maturing, for about the same amount of money. My question is, do I pay off those cards, or do I take a loan using those CDs as collateral and pay about 4% interest on the loan to pay off the credit cards? I am thinking it will take me a long time to save that much money again.

A visitor, Rochester, NH

A: I get asked this type of question all the time. What people really are asking is: “Should I use debt to pay off debt?”

At least that’s how I view it.

If you are thinking of using a home equity loan, home equity line of credit, consolidation loan or, as this reader wants to do, take out a loan using your CDs as collateral, to “pay off” an auto loan, credit card debt or whatever, do this for me.

Get a small rock that can fit into the palm of your hand.

Go ahead; just do it.

Once you have the rock, move it back and forth between your hands. Do this a couple of times.

Are you getting my point?

When you use debt to pay off debt, you are not paying off the one debt. You are merely transferring it to another loan. You are shifting your debt load, not lifting it. It’s like moving the rock from one hand to the other.

Sure, in some cases, the math says you might save money by reducing your interest cost by shifting the debt to another loan.

But what I typically find is people shift their debt and then go right back and run up more debt. They don’t actually get ahead.

Painfully paying off your debt without using more debt has the opportunity of searing into your memory how hard it was to actually pay it off.

So, in this case, I wouldn’t take out another loan. I would put the credit card cards away. I would redo my budget and look for any and all ways to cut my expenses. Whatever money I could squeeze from my budget, I would apply it to the credit cards.

For example, could you save, say, $30 or $40 a month by reducing your cell phone plan to the basic plan? Yes, you might not be able to get Internet or send unlimited text messages, but you would be making a dent in your debt.

Could you cut eating out or at least cut back?

Could you get a second job, just for a short time?

There’s another alternative.

If you have a relatively stable job, and you are not concerned about being laid off, you could cash one CD out when it matures and use that to significantly pay down the credit card debt. Keep some money for emergencies.

With the debt that is left, you should be able to cut your expenses and get rid of it.

(Photo by Andres Rueda )

September 24th, 2009, by

Q: I was laid off six months ago. My health benefits with my former employer will expire soon. I was solicited by a contracting company, which traditionally does not offer benefits to a new contractor-employee. However, to bring me on board, they did offer me access to their medical and dental plan and sent me a 30-page PowerPoint presentation.

Aside from the plan being generally weak, with large deductibles and premiums, compared to what I was used to with a large, well-established company, I noticed that I would not qualify for coverage, as I have a pre-existing condition.

It appears that no matter what hourly pay I make, seeking health coverage through the contracting company or through the private health insurance market will be a problem for people like me. Could you comment?

A visitor, Reston, Virginia

A: You may soon join the millions of others who do not have health insurance. The number of people without coverage rose from 45.7 million in 2007 to 46.3 million in 2008, according to the latest available data from the U.S. Census Bureau.

As you’ve noticed in seeking new employment, many employers are asking workers to carry more of the health insurance burden.

But let’s hope you can keep some kind of coverage.

There are a couple of things you should know that may help in your situation.

First, there have been some changes to the health benefit provisions of the Consolidated Omnibus Budget Reconciliation Act, which is commonly referred to as COBRA. The new law includes a temporary COBRA premium reduction.

Under the new law, eligible terminated employees enrolled in their employer’s health plan can get a subsidy to help fund the cost of their insurance. So, for up to nine months, laid-off workers only have to pay 35% of the COBRA premium. Employers pay the remaining 65% and recoup that money by applying for a credit on their quarterly federal employment tax return. You may also be eligible for the subsidy for group health insurance coverage provided under state laws similar to COBRA.

Under COBRA, employers are required by law to offer the option of continuing health insurance for up to 18 months. Coverage can be extended up to 36 months under some circumstances, such as a divorce, disability or the death of the policyholder.

The problem for many people is that COBRA is, or was, too expensive to carry. Family coverage can cost, on average, about $1,000 a month, according to the national nonprofit Families USA. The average monthly COBRA premium for individual coverage is $388.

To qualify for the reduced COBRA payment, you must be involuntarily separated from your job between September 1, 2008 and December 31, 2009. Those who are eligible for other group coverage (such as a spouse’s plan or Medicare) are not eligible for the premium reduction.

The subsidy phases out for individuals whose modified adjusted gross income exceeds $125,000, or $250,000 for those filing joint returns. Taxpayers with modified adjusted gross income exceeding $145,000, or $290,000 for those filing joint returns, do not qualify for the subsidy. If your company closed or went bankrupt, and there is no longer a group health plan, there is no COBRA subsidy available.

There’s another catch to this payment break. The premium reduction applies to coverage beginning on or after February 17, 2009, when the law was enacted. You cannot get a refund for premium payments made prior to the law’s enactment.

In your case, if you opt not to take the insurance from the contracting company, you could continue your coverage–at least for nine months–under the new COBRA provision. That might give you some time to look for a more affordable plan.

For more details on the COBRA subsidy, go to the Department of Labor’s Web site. You can also call the Employee Benefits Security Administration at (866) 444-3272.

But, if you don’t think you will be switching jobs or can’t get coverage on your own, I would still consider the package offered by the new employer. This is the new dawn of a time when workers will have to get used to higher premiums and deductibles.

This year, premiums for employer-sponsored health insurance rose to $13,375 annually for family coverage–with employees, on average, paying $3,515 and employers paying $9,860, according to a recent survey by the Kaiser Family Foundation and the Health Research & Educational Trust.

The survey found–as you and so many others have discovered–the smaller the firm, the less likely it is to offer health benefits, with fewer than half (46%) of the smallest employers (three to nine workers) offering them.

Among those firms offering benefits, 21% report they reduced the scope or increased cost-sharing, due to the economic downturn, and 15% report they increased the worker’s share of the premium.

As you are learning, it’s rough out there if you lose your good job with a big company, which is more likely to offer affordable healthcare.

But, I do have some good news about your pre-existing condition.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) is a federal law that limits the ability of a new employer plan to exclude coverage for pre-existing conditions. The law also prohibits discrimination against employees and their dependent family members based on any health factors they may have, including prior medical conditions, previous claims experience and genetic information.

Additionally, there may be a law in your state that also offers some protections. Contact your state insurance commissioner’s office to find out. You can go to the National Association of Insurance Commissioners site to help figure out who to contact.

Specifically, HIPAA says that a pre-existing condition exclusion can be imposed only if medical advice, diagnosis, care or treatment was recommended or received during the 6 months prior to your enrollment date in the plan, according to the Department of Labor.

But, let’s say you did seek treatment in the last six months. If you have a pre-existing condition that can be excluded from your plan coverage, then there is a limit on how long the plan can exclude coverage for that condition. The law limits the pre-existing condition exclusion period, for most people, to 12 months (18 months if you enroll late).

If you have a history of prior health coverage, you may be able to reduce the exclusion period even further, using what’s called “creditable coverage.”

You should also know that the pre-existing condition exclusion relates only to benefits for that particular problem. You can still enroll in the plan and receive the other health benefits.

Click here for more information about the Health Insurance Portability and Accountability Act. Please read the information and double check with your employer. You may find that you are wrong and that your pre-existing condition can’t be excluded.

If you do choose to opt out of joining the new health plan, you can get help in finding insurance with a pre-existing condition by contacting the Foundation for Health Coverage Education at (800) 234-1317.

Your question, and others like it, put a real face on the healthcare debate.

(Photo by Lab2112)

September 22nd, 2009, by

Q: I’ve been doing contract publicity work since experiencing a “reduction in force” in January. How do you recommend I handle earnings to avoid tax problems? I’ve never had tax problems, and I don’t need to start any.

Tracey New, Dallas TX

A: First, I’m sorry you lost your job, but it’s great that you are finding work.

This is actually a great question for our times. Many people who have lost their “day” jobs are turning to contract work or becoming consultants, and now are self-employed.

And, I’m afraid many people who work for themselves fail to pay their taxes and, as a result, get into deep trouble with the IRS.

You do not want to get into tax trouble with the IRS.

So, good for you, for trying to make sure you are paying the taxes you owe. I’m going to give you some general information, but I suggest you find a tax professional who is experienced in dealing with self-employed individuals. And, now is a good time to sit down with someone, before the end of the year and before the crush of tax season.

In general, if you are self-employed, you must pay the self-employment tax, which is a Social Security and Medicare tax for individuals who work for themselves. This is much like the Social Security and Medicare taxes your former employer withheld from your pay.

The rate for this tax is 15.3% on self-employment income up to $106,800. If your net earnings are more than $106,800, you pay only the Medicare portion of the Social Security tax.

This tax is divided into two parts–2.9% for Medicare (hospital insurance) and 12.4% for Social Security (old-age, survivors and disability insurance).

The good news is you can deduct half of your self-employment tax in figuring your adjusted gross income.

You also need to know that our federal income tax system is a pay-as-you-go system. When you are a wage earner your employer withholds your taxes. Now that you are working for yourself, you are expected to make estimated tax payments.

According to the IRS, you must pay estimated tax for 2009 if both of the following apply:

  • You expect to owe at least $1,000 in tax for 2009 after subtracting your withholding and credits.
  • You expect your withholding and credits to be less than the smaller of: 90% of the tax to be shown on your 2009 tax return, or 100% of the tax shown on your 2008 tax return. Your 2008 tax return must cover all 12 months.

For estimated tax purposes, the year is divided into four payment periods. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty.

To make estimated payments, use the Electronic Federal Tax Payment System. This allows you to make estimated tax payments on the phone or online.

As I said, I highly recommend you hire a tax professional. You can also find a great deal of helpful information about the self-employment tax and making estimated tax payments on the IRS Web site.

(Photo by CarbonNYC)

September 18th, 2009, by

Q: I love your show Singletary Says on TV One. I am learning a lot. However, I was unemployed for eight months. I’ve had a part-time job for the past year. I have just gotten a roommate, but I am having a hard time building my savings account back up, due to trying to “catch up.” Can you help me?

A Viewer, Suffolk, VA

A: I’m not sure if it’s any consolation, but you are not alone in giving up looking for finding full-time work.

The number of long-term unemployed (those who are jobless for 27 weeks or more) rose by 584,000 in July, to 5 million. In July, one in three unemployed persons were jobless for 27 weeks or more, according to the Bureau of Labor Statistics.

The number of persons working part-time for economic reasons (sometimes referred to as “involuntary part-time workers”) was little changed in July, at 8.8 million.

But you didn’t stop looking, and that’s important.

And, you got a roommate. Good for you.

Now give yourself a pat on the back for not giving up. That’s huge, considering this economy.

As for building back up your savings, be patient, because it will take time. You’ve had a major hit. Although you have a roommate now, you’re still probably just getting by. The important thing right now is to concentrate on keeping up with your basic necessities.

I hope you’ve called any creditors to see if you can get on an extended payment plan or ask for a forbearance, to give you some breathing room until you can find full-time employment.

However, having said that, if you can put away a tiny bit of savings–even $10 a paycheck–do it! Even a small savings can help keep you from having to borrow if you get into a financial jam.

The key is to still stick to a budget. Click here to access some helpful resources, especially the “Monthly Spending Plan” worksheet (PDF). Also, check the “Creating A Budget” tipsheet, where you will find useful information.

Mostly, I want to you to stay encouraged.

This too shall pass.

(Photo by prawnpie)

September 15th, 2009, by

Q: My significant other just got approved for a home loan. I asked her to co-sign for a car for me. Would this affect the amount she was approved for? I don’t want it to affect her chances of getting the house of her dreams. So, I need some advice.

Veronica, Houston, TX

A: You are right to be concerned. If your partner co-signs for that loan, it may affect not just the amount for which she gets approved for a home loan, but also the interest rate she will pay.

When someone agrees to co-sign, they are agreeing to be your backup, just in case you don’t pay. The person is agreeing to pay the debt in full should you fail to make the payment. In some cases, the lender will contact the co-signer even if one payment is missed.

The debt belongs to both the primary borrower and the co-signer.

I suggest you and your significant other read an advisory from the Federal Trade Commission (FTC). As many as three out of four co-signers are asked to repay the loan, according to the FTC.

But if you need a co-signer for your car, that means you probably can’t afford the car, or you are getting a car that is too much for your budget.

My advice: Borrow on your own two feet.

September 9th, 2009, by

Q: I’m a 52-year-old disabled lady on Social Security. When I was working, I was able to save around $30,000 in a retirement fund. Currently, it is still with the company. What is the best way to grow this money? I have lost several thousand dollars because of the stock market. Is it better to roll it over to an IRA? This is my only savings. I’m driving a 1995 car, and I will need this money for a car one day. I don’t know if I’ll ever be able to work again. If so, it would only be part-time.

Laury, Minneapolis, MN

A: If you are not happy with the company retirement plan or your investing options, then yes, you can open what’s called a “rollover IRA.”

With a rollover IRA, you decide how to invest the money. (I’ll get to that in a bit.)

It’s important to know that if you choose to roll the money over into an IRA, make sure the money is transferred directly from the account at your former employer-sponsored plan to the new IRA. If your company managing the employer plan makes the check payable to you, the investment company is required to withhold 20% of the money for tax purposes. And, you are responsible for making up the missing 20% to avoid the 10% penalty for taking a nonqualified distribution before you’re 55½. If you replace the 20%, you get it back when you file your next federal tax return. If you can’t make up the 20%, it is included in your gross taxable income.

But, here’s my main concern. You don’t really have a lot of money. And, you certainly can’t afford to lose any more of your money, if this is all the retirement savings you have.

No one knows how long it will take the stock market to recover recent losses. So you might consider pulling what you have left out of the stock market, especially if you’ll need to use some of the money to buy a car (a reliable used car I hope).

You might consider laddering certificates of deposit (CDs). CD laddering allows you to take advantage of typically higher rates offered by longer-term CDs while maintaining access to some of your money. So instead of buying a five-year CD, you might divide your money into equal portions and buy a series of CDs that mature at different times. For this purpose, you could buy 30-day, 60-day, 90-day or six-month CDs. This way, you don’t have to tie all your money up in lower-paying CDs.

You can find the highest yielding CDs at Bankrate.com. On the site, you can also find a CD ladder calculator to help you figure out how to ladder your $30,000.

It’s great that you were able to save $30,000, but right now you need to protect that money, since you will need it in the short-term.

(Photo by m kasahara)

September 3rd, 2009, by

Q: Over the years, I’ve had bad luck managing my checking accounts. The “occasional” overdraft fee averaged $2,500 annually. I’ve since closed my accounts and gone with a pre-paid debit card company. These days, with banks collapsing without notice, how can I be sure of the integrity of this “new” industry and of a particular “bank” or company?

David, Las Vegas, NV

A: Can I do some truth-slaying before I get to your questions?

David, it’s not a matter of “bad luck” to have $2,500 a year in overdraft charges. That’s bad money management. Bad luck would mean, on a number of occasions, you were walking down the street and tripped, causing you to end up in an emergency room, which then kept you from depositing your paychecks.

But, what you are tripping over is not balancing your checkbook or overspending or the lack of a good budget, or all three bad moves. Even if you’ve eliminated the overdraft problem, I’m willing to bet you still have a money management problem. Fix that, and you wouldn’t have to resort to an alternative-banking situation.

Now, as to your questions.

Right now, in this economy, with insured banks going under at an alarming rate, I would be very cautious about putting my cash in an uninsured institution. As it were, the insured institutions are suffering.

Insured commercial banks and savings institutions posted a $3.7 billion net loss in the second quarter, according to data released August 27, 2009 by the Federal Deposit Insurance Corporation (FDIC). That was a decline of $8.5 billion from the $4.8 billion in profits the industry reported in the second quarter of 2008.

“The difficult and necessary process of recognizing loan losses and cleaning up balance sheets continues to be reflected in the industry’s bottom line,” said FDIC Chairman Sheila Bair.

Bair made that statement on the release of the banking financial information. Then she said: “The FDIC was created specifically for times such as these. No matter how challenging the environment, the FDIC has ample resources to continue protecting depositors, as we have for the last 75 years. No insured depositor has ever lost a penny of insured deposits…and no one ever will.”

That’s an important point and the greatest reason to put your money in an institution that is FDIC-insured.

With a prepaid debit card, your spending is limited to the amount of money loaded onto the card, which acts pretty much just like a bank- or credit union-issued debit card. If the card carries the Visa or MasterCard logo, you’ll get fraud protection, and the card will be widely accepted.

You should make sure you have deposited the funds that are stored on the prepaid debit card with an institution that is FDIC-insured. If the bank is insured, then your funds are insured up to the insurance limit, which is at least $100,000. You can check whether the institution is insured by going to the FDIC’s Web site.

If the funds are not in an insured institution, and the institution goes belly up, you have no protection. Then, you stand in line with other creditors, with just a prayer you’ll get your money.

(Photo by Roo Reynolds )

August 27th, 2009, by

Q: I need to buy a new home for me and my family. However, I had co-signed on a house for my mom, just before I got married. I’ve been told that I need a down payment that I have no way of accumulating any time soon, since I’m the only one working. I never benefited from the first-time homebuyer program, since that was not offered to us at the time. Is there any chance that I could benefit from that now, eight years later? If not, any chance that I may need less down payment for a family of six?

Miami, FL

A: First, you may have trouble even qualifying for a home large enough for your family of six, because you are already obligated on another mortgage. This is why I strongly discourage people from co-signing. Legally, it’s as if you have a mortgage already. You are equally responsible for the mortgage you co-signed for your mother. I would suggest you see if your mother can refinance and get you off that mortgage.

But, in this market, she may not be able to refinance.

At the same time, you should contact a Housing and Urban Development (HUD)-approved housing counseling organization in your area. This federal agency sponsors these organizations throughout the country that can provide advice on buying a home. Click here to help locate one in your local area, or call HUD’s interactive voice system at (800) 569-4287. For example, when I searched the list for your area, I found the Miami Beach Community Development Corp. It has a first-time homebuyer assistance program that provides training, counseling and financing to assist qualified homebuyers in the purchase of property to be used as their principle residence.

You will find, for the most part, that the first-time buyer programs have income limits. Contact a housing agency to see if you qualify. The agency can also help you determine if you might qualify for a loan despite having co-signed. Additionally, many of the programs will provide down payment assistance.

But, even if you can find a program where you don’t need a down payment or where you may only need a small one, you still need to try and save before you buy a home. As the sole earner in the household, you need a cash cushion.

I recommend you take some home buying classes, which will help you prepare to finally be a homeowner. And, despite your obstacles, with the proper education and savings, it’s not too late to realize the American dream of homeownership.

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