Tune-in: Two Important Stories

There are two great personal finance stories you should tune into online. First, Jean Chatzky appeared on the Today Show yesterday to discuss the importance of credit scores in light of the credit crunch. She mentioned Credit.com as a source for her credit score facts:

After you watch that clip, tune into this American Life to listen to their episode on the housing crisis. The latest episode of This American Life brings the credit and real estate problems in the US back to a "Giant Pool of Money." It's a great, easy-to-understand explanation of what is happening to the economy.

Emily Davidson – A former TransUnion insider and a member of Credit.com's expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.


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Reader Question: Is Piggybacking Gone?

Dear Gerri:

I read that you said that piggyback someone else's credit card could help boost your credit score.  My brother called his credit card company to add me as an authorized user and they said it would not help me. I would be a secondary on the card, not a primary.  If I was added as an actual person on the account they have to run my credit score and that would actually hurt me.

Please clarify this for me.  I am very confused.  I am working on increasing my credit so that I can by a house and get a better deal.

Thank you so much for your assistance with this matter.

- Confused

Dear Confused Homebuyer:

Piggybacking used to be a great way to boost your credit quickly. It sounds like you understand the concept, but let me repeat it. You would ask a friend or relative with a major credit card to add you on to their credit card as an authorized user provided they had

a. paid it on time for years and

b. didn't have a high balance relative to the credit limit.

You never even had to use the card for it to appear on your credit reports. Most card issuers reported authorized users to the credit reporting agencies and reported the entire account history when they did. That would result in a positive account with a longstanding credit history on your credit report – and that usually meant a boost to your credit score.

However, due to abuses by credit repair companies that were brokering the rental of authorized user slots on credit cards, this tactic is in the process of being blocked by the credit agencies. We have reported on that change previously on this blog several times. The card issuer could be warning you of this change. It's also possible your brother's card issuer does not report authorized users to the credit bureaus, a policy that may even have been in place before the brouhaha over rented tradelines.

I don't know the extent of your credit issues, or what kinds of problems they are causing you in getting a lower home loan rate, but I would suggest you be cautious about quick fixes. As we've seen with the mortgage meltdown, stretching things to squeak into a loan isn't a great long-term strategy.

If you do want to fully understand your credit report and scores, I would highly recommend my colleague John Ulzheimer's book, You're Nothing But a Number. Read John's straightforward advice and by the time you get done you'll probably know more about credit reports than your loan officer!

Best of luck with your home loan shopping.

Gerri Detweiler – Personal finance author, radio host and credit expert. Gerri contributes budgeting, debt recovery and savings information online.


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Funny Money Friday: Icon of the Mortgage Bubble

Money doesn't have to be boring! Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

Big economic bubbles seem to always come with mascot or posterchild. For the dot com bubble, the Pets.com sock puppet became an icon for internet companies that were all marketing and no sense. For the 1920's stock bubble, it was the flashy Jay Gatsby. For the 1637 tulip mania, there was the red and white tulip bulb, Semper Augustus, that sold for 6,000 florins when the average yearly income was around 150.

What will emerge as the icon for the housing bubble? I'm putting my money on Ameriquests' "Don't Judge" advertising campaign.

Ameriquest was the nation's largest subprime lender. And they put on an extensive television advertising campaign with the tag line "Don't Judge too Quickly, We Won't". The funny ads presented people being inaccurately judged when caught in embarrassing situations and ended with the phrase "Ameriquest. An open-minded, equal opportunity lender." Here's a sample:

The idea being that Ameriquest understands your embarrassing financial situation and will still give you a mortgage loan. Marketing genius!....Until the company started a tailspin in 2006 with predatory lending lawsuits and big layoffs. In September 2007, Ameriquest stopped taking new loan applications. They were officially #41 on the Mortgage Implode-o-Meter.

It turns out that judging is kind of an important part of the mortgage process. You might know it better by it's other name: underwriting.

Emily Davidson – A former TransUnion insider and a member of Credit.com's expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.


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Depressing News

It was pretty depressing reading the paper this morning.  The first article I read was about Bank of America and its potential acquisition of Countrywide, a deal made several months ago but not yet consummated.  Several analysts were questioning whether BofA should go ahead with the deal.

A little background information is in order. Countrywide was, like many lenders, running short on cash last year as the credit crisis started. In August 2007 they stuck a deal wherein BofA purchased $2 billion in Countrywide Preferred stock. The capital thus injected allowed Countrywide to continue normal operations in spite of the beginnings of the capital market freeze that is now obvious to everyone.

At the time, Countrywide's common stock was selling for about $22 per share, just about half what it had been earlier in the year.  While Countrywide maintained a positive outlook, even forecasting profitability after their first quarterly loss in its history, the reality of the marketplace was that losses were mounting, as has now been acknowledged.

There was obviously a lot more going on behind the scenes and in January 2008, BofA and Countrywide announced that they were merging. At the share price on the day it was announced, Countrywide shareholders would have gotten about $7 in BofA stock for their Countrywide stock. The stock closed today at about $5 per share.

The questions that was being posed today was, "Should or will BofA go ahead with the merger?"  The question revolves around the issue that everyone in mortgage lending faces today: maybe the assets worth less than I think they are and maybe the liabilities are larger than they appear today.

On the one hand, they are buying a company for about $4 billion that had a market value of $25 billion the year before.  Plus they have access to Countrywide’s customer base and can sell them other BofA products. Sounds like a good deal. But the crown jewel is the Countrywide servicing portfolio.

Remember that servicing is the collecting of payments from borrowers and transmitting the money to the institution that bought the loan. In round numbers, the value of servicing varies as to type of loan but in general the servicing is worth a little less than 1% of the value of loans being serviced.

Countrywide's servicing portfolio is almost $1.5 trillion. That means that the value of servicing is a little less than $15 billion. The way I see it, if you pay $6 billion and get a servicing portfolio worth $15 billion, you got yourself a good deal. You get all the rest of the company, its many offices, its tens of thousands of employees, and all the rest of those assets for free.

But then again there are those liabilities. As Countrywide noted in a press release of first quarter 2008 results:

"securities retained in prior securitizations and nonagency inventory subject to fair value adjustments were written down."

The question is what else is there in the woodpile that you don't know about. 

As much as I worry about am insensitive, bureaucratic, behemoth lender that will have a market share of the mortgage business in excess of 25%, I worry even more about what might happen if they don't do the deal. I don't see how Countrywide can avoid bankruptcy and who knows where that will lead.

As if that wasn't depressing enough, in the next article I read about analysts questioning whether FannieMae and FreddieMac have enough capital!  I'll talk more about that next week.  Stay tuned.


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The Economic State of Young America: It's Not So Hot

Today’s young adults are the first generation not to surpass their parents’ standard of living. That’s the key finding of “The Economic State of Young America,” a new research report from Demos, which attributes this change to four main factors:

1. Declining incomes for most young workers. Most strikingly, the earnings for young men – ages 25 to 34 – with only high school diplomas fell by 29%. Unfotrunately, racial disparities continue -- the typical incomes for white young adults were 25% higher than for African Americans in 2006 and 30% higher than for Latinos. Asian-Americans had the highest incomes—11% higher than for whites

2. Growing debt. Here, the statistics are quite amazing:

  • On average, credit card debt has increased by 47% between 1989 and 2004 for this age group.
  •  Young adults with card debt in 2004 “spent on average 25 cents of every dollar of income to pay all their debt obligations—more than double what Baby Boomers of the same age spent on debt payments in 1989.”
  • There has been a 734% increase in the amount college students borrowed in private loans, which typically carry higher interest rates and less flexible payment options than federal loans.

3. High costs – of education, housing, health care, and so on. For example:

  • In 2005, 43 percent of young adults spent more than 33% of their salaries on rent, up from 18 percent in 1970.
  • Young workers are more likely to have jobs with few or no benefits.
  • One-third of young adults do not have health insurance, which makes this generation the one with the highest percentage of uninsured.

4. The expense of child care. Over half of women with a child under age one are in the labor force (up from 31% in 1976). Yet only 39% received paid maternity leave. Full-time care for a toddler costs them between $3,794 and $10,920 a year, according to Demos, while full-time care for an infant rages from $4,388 to $14,647.

"For this generation of young workers, the economy no longer generates widespread opportunity and security, and our public policies haven't evolved to pick up any of the slack,” explains Tamara Draut, director of the Economic Opportunity Program at Demos, who wrote the report. “In fact, many of the problems we see today are a direct result of a disinvestment in the policies meant to ensure that the opportunity ladder is firmly in place."

What Should Be Done?
The Economic State of Young America ends with a series of policy recommendations, many of which have to do with the creation of more good jobs, including:

  • “Green collar” jobs, where people would be trained to install energy efficient technology or renewable sources of energy on homes and businesses.
  •  Career ladder programs in health and education, where people can receive on-the-job training and time-off for certification to help them move up in these growing fields.
  • The removal of barriers to unionization, for example, “in the ever-growing food and retail industry.”
  • Making college more affordable and accessible, through what Demos calls “The Contract for College,” where the assorted federal financial aid programs would be transformed into one guaranteed financial aid package for students, with grants making up the bulk of aid for students from low and moderate-income families.
  • The regulation of private college loan programs. Demos want Congress to restrict rates and fees, improve disclosures, and restore the right of borrowers to get relief from private student loans in bankruptcy court, which was taken away in the 2005 “reform” of the bankruptcy laws.

Demos also wants Congress to end abusive, deceptive, and unfair credit card practices (for example, universal default), and to create “a universal, easily accessible, portable, and equitable savings vehicle,” which would include incentives to save – for example, a matching tax credit could be direct-deposited into workers’ accounts, say for a down payment on a home. And if Demos has its way, there’d be an end to deceptive mortgage practices and a reduction in foreclosures for people with subprime mortgages. Finally, Demos supports legislation that would put families first, including paid parental leave and a universal, voluntary, early learning and care program.

These all sound like excellent ideas to me. What do you think? What policies would help the young adults in your life – including you, if you are one – to be on a better financial track?

Nancy Castleman – Co-author of "Invest in Yourself: Six Secrets to a Rich Life" and founder of Good Advice Press. Nancy has spent the last 23 years teaching people how to get out of debt, save money, and live better on less. She writes on all these subjects for CreditBloggers.com.


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Jose Canseco Makes "Mathematical Decison" to Walk Away from His Mortgage

It seems that the debate over athletes as role models resurfaces at least once or twice a year. When professional athletes make headlines with doping scandals, infidelity, gambling, dog fighting, etc. the nation responds with a hearty chorus of "what about the children?!"

The latest athlete scandal might have us saying "what about the homeowners?!"

Jose Canseco announced this week that he was making a fiscal decision to foreclose on his mansion:

"I do have a judgment on my home and it to me is very strange because it didn’t make financial sense for me to keep paying a mortgage on a home that was basically owned by someone else," he said.

Canseco said the foreclosure was not a difficult issue emotionally. But he sympathized with the millions of other Americans who have already lost or face losing their homes because of soaring interest rates on sub-prime loans.

Celebrity foreclosures aren't anything new. But the tone of this particular announcement does seem to be different and in tune with what is happening in the real estate market across the country. Calling a foreclosure a "mathematical decision" and "not a difficult issue emotionally" doesn't really set the tone desired by the struggling mortgage industry.

Could it be that the national foreclosure trend is hitting celebrities and athletes too? If so, would the stigma of foreclosure start disappearing as celebs are seen turning over the keys? What do you think?

Emily Davidson – A former TransUnion insider and a member of Credit.com's expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.


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Debunking Credit Scoring Myths- Go Ahead, Pay Off that Credit Card!

Lurking among many other credit related myths is the belief that paying off credit cards may cause your credit score to decline. I continue to hear this and other related credit scoring myths from consumers that I interact with on a daily basis. In reality, when you pay off credit cards you decrease your overall utilization - your total balances vs. your total available credit - which improves your score.

In fact, utilization accounts for approximately 30% of your credit score. It is best that you keep your overall utilization below 10%. For example, if your total available credit on all credit cards is $25,000, then you want to keep your collective balance at less than $2,500. And, the lower your utilization is the better your credit score. So, the idea that paying off balances will negatively affect your score is simply not true!

However, the above scenario should not be confused with closing credit card accounts, which could have an adverse affect on your score for two important reasons. First, as discussed above, you have to consider how it will affect your utilization. Typically, closing an account will cause your utilization to increase and, as a result, your credit score to decrease. So, it is important to do the math before making a final decision. (Keep in mind how it could affect your utilization in the future as well!)

Additionally, you have to consider the age of the account. If it is one of your older credit cards, then it could also adversely affect the length of your credit history which makes up 15% of your FICO Score. Most of the time it is better to just "sock drawer" the card if you do not plan to use it anymore. That way having an account in good standing and the available credit is continuing to help your credit score.

Just be sure to remember to use the card about once per year for a small purchase, then pay in full when you get your statement. Doing so will help the account stay active and reporting as such to the three major credit bureaus. Reporting your on-time payments (preferably to all three major credit bureaus) is an effective way to boost your credit score. On a related note, it's also a good idea to check with your creditor to find out which bureaus they are reporting to.


Do you have a credit score related question or what you feel might be a myth that you'd like debunked? Please share your questions and comments below!

Curtis Arnold - Curtis is the CEO/Founder of CardRatings.com, a website that provides credit card ratings and reviews of over 20,000 offers. He is also the author of How to Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line (FT Press, 2008).


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Household Debt has Grown 152% - Credit Card Debt is Up 75%

A big shift has occurred in the levels of debt carried by US households, the government and businesses. In the past 10 years:

  • Household debt has grown 152%
  • Household credit card debt has grown by 75%
  • Business debt has grown by 110%
  • Government debt has grown by 72%

I had recently tracked these Federal Reserve consumer debt numbers for a reporter. They're even more shocking when put in comparison to government and business debts, as the Nilson Report, a credit card industry journal, did in their latest issue:

Debtgrowth


























Keep in mind that these numbers don't consider inflation (2.2% a year on average).

If you are part of the growing household debt statistic, take action! It is an ideal time to get out of debt. Use your tax refund and economic stimulus check for a jump start. Negotiate reduced interest rates with your banks. Sign up for a free financial tracking program like Mint.com. Or consider getting professional debt help.

Are you working on reducing your debts? Share your questions or tips in the comments section below.

Emily Davidson – A former TransUnion insider and a member of Credit.com's expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.


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Funny Money Friday: A Sign of the Times

Money doesn't have to be boring! Each week, CreditBloggers.com takes a look at the lighter side of the personal finance world in a series called Funny Money Friday.

This week's Funny Money Friday post is less funny-ha-ha and more funny-to-keep-from-crying. There are a couple apartments on my walk to work that have been on the market for 6+ months. In San Francisco...that's pretty darn rare. I was just commenting on it, when I saw that one of the owners had taken matters into her own hands:
Sign











Taped over her realtor's - apparently ineffective - sign was a hand drawn plea to make a deal. Not only will the lucky buyer get a parking spot in the garage, but you'll get a small car thrown in to boot. This is an extensively remodeled building on a a pretty decent street in San Francisco. Truly a sign of the times!

Emily Davidson – A former TransUnion insider and a member of Credit.com's expert team. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com editor.


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Call Me With Your Credit Questions!

I love to answer credit questions, but it can be tough to keep up with all the requests these days. Here's your chance to get my personal advice on your debt or credit issue -- for free!

On Sunday May 4th at 8 pm Eastern Time I will be a guest on Marc Perlman's live radio show:
YourMoneyMattersRadio.com. You can call in to have your questions answered live on the air at 877-333-0696 or email your questions ahead of time to Question@yourmoneymattersradio.com. The program is live on 1520 am and heard in over 13 states.

Don't be shy! Feel free to call in. I'd love to help!

Gerri Detweiler – Personal finance author, radio host and credit expert. Gerri contributes budgeting, debt recovery and savings information online. 


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Bringing together leading experts to discuss credit, loan, debt and identity theft topics, CreditBloggers provides readers with unique insight and straight answers about the financial world. This credit blog is moderated by Emily Davidson, formerly a TransUnion consumer credit expert.

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Disclaimer: This information has been compiled and provided by Creditbloggers.com as a service to the public. While our goal is to provide information that will help consumers to manage their credit and debt, this information should not be considered legal advice. Such advice must be specific to the various circumstances of each person's situation, and the general information provided on these pages should not be used as a substitute for the advice of competent legal counsel.