Credit Card Industry Feels the Pinch

Credit cards were assumed to be doing pretty well in this credit crunch. Consumers were defaulting on their mortgages but still keeping those credit card payments on track. But the latest issue of industry journal, The Nilson Report, paints a different picture:

Credit Card Profits Decline at Most Top U.S. Issuers in 2007 vs. 2006

It's a 15.6% net income decline for the top 10 most profitable credit card companies, in fact. A pretty major drop.  Only Capital One, US Bancorp and Target had profit increases. At the same time, the contribution of credit cards to their parent banks increased. The article cites Citigroup, where the net income for card business fell 26% and still contributed 79% of the company's total (up from 18% the previous year).

It's not clear exactly where the decline comes from. The article cites increased credit card loan losses. There is also tightening in the secondary markets for credit card balances in the same way there has been for mortgages.

What does this mean for you? Watch out for rising fees and rates. All those APR hikes, credit limit reductions and fee increases make sense when you see these credit card industry numbers. As the credit crunch gets worse your credit card could get a lot more expensive.

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.

Funny Money Friday: Recession Blues

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.

I'm starting to get a little woozy from all the economic ups and downs. Fed rate changes used to be big news, now they're reported along with the daily weather. Can someone stop the ride, I want to get off? One of my friends told me that her company announced major cutbacks yesterday and she's selling her car to better afford her mortgage. Yikes.

Time to sit back with your can of cold baked beans and sing along with B.B. King's The Recession Blues:

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.

What to Do if your Can't Pay Your Tax Bill

I dinner with friends earlier this week who were lamenting their big tax bill. At almost $4,000 and right smack in the middle of their debt reduction campaign. They just didn't have the money to pay it.

If a big April 15th deadline is staring you down, don't fret. You have options. Gerri Detweiler, an expert with CreditBloggers.com and Credit.com, wrote a fantastic article about what to do if you can't pay your tax bill.

In the article, she compares the costs and consequences of:

• Paying your taxes by credit card.
• Applying for a personal loan.
• Setting up a monthly payment plan with the IRS.
• Requesting a short-term extension.
• Requesting an offer in compromise.

The only thing that is not an option is not paying your taxes at all. Tax liens are easily the meanest credit report record you can have. The lien record will remain on your credit report indefinitely if left unpaid, the only negative record that doesn't have an expiration. And even if you do pay it, the record will stay on for another 7 years from the payment date.

You may also want to consider borrowing money from relatives, requesting an advance on your paycheck or selling some things.

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

The Wrong Kind of Appraisal Fix – Part 1

Of all the proposals to "fix" the mortgage industry that are floating about, perhaps the worst is one that was hammered out – and I use the term in its most direct meaning – between the Attorney General of New York and mortgage giants FannieMae and FreddieMac.  It will turn the entire appraisal industry on its head.  It's an incredibly stupid move.

Here is a little background.  A fundamental tenant of the appraisal process is the market value determined by the appraiser ought to be based upon a logical analysis of the facts. In fact, the rules the govern appraisers was created by The Appraisal Foundation. The rules are known as The Uniform Standards of Professional Appraisal Practice. At its core, the process is supposed to be independent with appraisers able to do their work without influence or pressure. The Foundation also helps the States create licensing standards.

Large lenders like the big banks and S&Ls typically had their own appraisal departments. Most of these lenders were doing loans for their own portfolio so if there was pressure put on the appraisers, it would have been to come in with "conservative" – read "lower" – values.

In addition there is a huge body of independent appraisers and it was from this group brokers like me chose appraisers. I think that this system has worked well and I have a collected a stable of reliable appraisers throughout the State of California.

But all appraisers are not created equal.  There are good ones and bad ones. The best are responsive, thorough, and their work holds up under scrutiny, such as an appraisal review. On the other hand, some are, first by reason of experience, just not very good. In fact, I can recall some disasters when we have had to use some doufus appraiser that has been forced upon us by one of the mega-lenders.

One development that started a few years ago it the creating of what are known as "appraisal management [you have to use that term loosely] companies."  There is no doubt that a lender would not know about appraisers in every community in which it might need an appraisal done. So companies like First American set up shop as central clearing houses. It would make arrangements with appraisers all across the country so that when a lender ordered an appraisal, it would be farmed out to a local appraiser in that area. They would also, theoretically, offer a quality control function to assure quality.

Well things can go wrong in that process. The New York State Attorney General, Andrew Cuomo, found that Washington Mutual, one of the nation’s largest lenders, put undue, and perhaps illegal, pressure on First American, allegedly forcing them to raise appraised values. But he has no jurisdiction over Federal chartered lenders like WaMu who is supervised by the Office of Thrift Supervision.  So, unable to nail the real culprit, he looked for someone to blame and found most of the rest of the industry.

Independence is important, no doubt, but it is important that the people who know about mortgages, not a bunch of lawyers, make decisions about the future of the industry. Between USPAP and state licensing, there are plenty of rules on the books. Someone just needs to enforce them, and it's not Mr. Cuomo. 

There are times when we have had to use "appraisal management companies." It hasn't been fun.  They take 40% of the fee for doing NOTHING!!!!! The appraiser gets 60%. 

Does this improve loan quality? No. Does it make the process more efficient? No. Does it reduce costs to consumers? No. Is appraisal quality going to go up? No. In fact, many good appraisers will just leave the industry rather than take a 40% pay cut. Who will be left? You can figure that one out.

So why are FannieMae and FreddieMac about to cave in to this stupid idea? You would have to chalk it up to political pressure.  But it sure isn't going help consumers.

Legislation to Watch: The Credit Cardholders’ “Bill of Rights”

Are you sick and tired of unfair credit card practices? Do you think the current rules let lenders trap us into paying far more than we should, with interest rates and fees that are too high and arbitrary? Have I got a bill for you: H.R. 5244, the Credit Cardholders' Bill of Rights Act, which was introduced in the House by Representatives Carolyn Maloney and Barney Frank.

Here are the top five changes the “Credit Cardholders' Bill of Rights Act” would bring:

1. Credit card companies would no longer be able to change the terms “at any time, for any reason,” which all too often seems to be “no reason,” if Bank of America’s recent rate hikes are any indication. Instead, lenders would have to be up-front about the specific reasons why they would change the terms.

2. Lenders could not practice “double-cycle billing,” that is, they could no longer calculate interest on your average daily balance over this billing cycle and the last one. Even if you pay off a balance during the grace period, if your card is from a lender who practices double-cycle billing, you’re going to pay interest. Many issuers have stopped using this method. If yours hasn’t, switch!

3. Card companies would not be able to assign all our payments to the balance at the lowest interest rate, as they do now. Instead, they would be required to divvy-up our payments proportionately, even if balance transfers are at 0% and purchases are at 13.99%.

4. Retroactive rate hikes would be prohibited. Let’s say a card issuer extends credit to you at 7.99%, and you have an outstanding balance of $2,000. Even if your credit score changes, the lender would not be allowed to raise the rate on your $2,000 balance because of a change in your credit score. 

5. The rules defining an on-time payment would be clarified. No matter what the issuer, payments received by 5 PM Eastern time would be considered on-time, and lenders would have to mail out bills at least 25 days before payment is required.

Who Supports the Bill?
The legislation has already received support from many of the best consumer advocates we have in Washington, including Consumers Union, Consumer Federation of America, Center for Responsible Lending, Consumer Action, U.S. Public Interest Research Group, and the Service Employees International Union.

They want the legislation to be even more consumer friendly, and are calling for the prohibition of universal default rate hikes and over-limit fees when the transaction has already been approved by the issuer. They want Congress to require that the size of penalties charged by issuers be directly related to actual costs incurred. Finally, they are calling for more protection against low-credit, high-fee cards―known as sub-prime cards. 

Creditors Won’t Make It Easy
Card issuers are not thrilled about this legislation, to say the least! They are lobbying Congress hard, in ways we might not have expected. For example, earlier this month, five real, live cardholders were invited to testify about this bill. But, “they couldn't talk unless they would sign a waiver that would permit the credit card companies to make public anything they wanted to tell about their financial records, their credit histories, their purchases, and so on," as Harvard Professor Elizabeth Warren explains it. "The Republicans and Democrats had worked out a deal ‘to be fair to the credit card lenders.’ These people couldn't say anything unless they were willing to let the credit card companies strip them naked in public.”

You can read what three of these cardholders would have testified about on Consumer Action’s site – one had concerns about fees, and the other two had issues with unfair rate hikes – nothing we have not discussed on Creditbloggers time and time again. Yet the lenders were so concerned about what they would say, they made it virtually impossible for them to speak.

Stay tuned! We’ll be sure to keep you posted about this important legislation. This should be quite a fight.

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.

Reader Question: Can Unpaid Credit Card Debt Be Added to My Mortgage?

"Marcia" from Texas contacted me because she was considering entering a debt settlement program (with a company I'd never heard of) to negotiate payment on the substantial debt she owed. But the representative warned her that since one of her larger credit card balances was with the same company that held her mortgage, she should leave it out of the program. Otherwise, the creditor could add her unpaid credit card debt to her mortgage loan. "Is that true?" she wondered.

It didn't sound right to me, but I checked with the experts to confirm my suspicions.

Consumer Law Attorney and author John Ventura said:

The only way I know that you could add unpaid credit card debt to a mortgage is when a person signs a contract containing a cross collateralization clause. That is a clause that says that if you have a loan that is collateralized with something, normally a car, you agree that any additional money you borrow from the company is also collateralized. I have not seen this much.

This consumer would have to read the contract she signed and see if there is any language in the contract that cross collateralizes any other loans with the collateral from a separate loan. I do not think this works in Texas on a homesteaded property anyway, because Texas law says that you can only take liens on homesteads in limited circumstances such as a purchase money loan, remodeling loan, or with tax liens. Texas does not let unsecured creditors obtain liens on homesteads after a default. You cannot get a lien on a homestead in Texas, even if the creditor gets a judgment. I would recommend this consumer talk with a real estate attorney to confirm this.

Debt negotiation expert Charles Phelan says:

I've never seen this happen in ten years of doing settlements. I don't see how they could just add an unsecured debt on top of a collateralized mortgage without rewriting the home loan. Also, I've had many clients successfully settle unsecured debts when the same creditor held a mortgage. I would advise the client to include the account in the settlement program, with the aim of settling before charge-off. It's extremely unlikely that the mortgage would ever even come up in the negotiations.

The bottom line is, I don't think this consumer needs to worry about unpaid credit card debt getting tacked onto her mortgage. But I do think she needs to find a knowledgeable debt settlement firm! I would recommend she read my advice about debt settlement, and then get a free consultation from a reputable firm.

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

Better News for ARM Borrowers

In addition to the subprime borrowers and other homeowners with toxic loans, there has been a great deal of concern expressed about the potential damage to the economy due to resetting of other types of ARMs. This concern was well warranted back in 2007 when the index values that these loans were tied were all high.

But recent action by the Federal Reserve has lowered short-term rates and that means the index values that ARMs are tied to have dropped too.

Here are a couple of examples:

Example #1 - A 5/1 ARM tied to 1-year Constant Maturity Index (CMT) with a margin of 2.75%

During most of 2007, this index was about 5% so if you were to add the margin of 2.75, you would end up with an interest rate of 7.75%. If a borrower's initial ARM rate was 5%, you can see that he would be in for a big increase. On a $300,000 loan at 5%, the payment would be $1,610 but would increase upon adjustment to 7.75% it would rise to $2,080, an increase of about 30%.

Today, however, the CMT is only 1.54% so adding 2.75% and (likely) rounding up to the next .125% yields 4.375%.  In other words, both the rate and the payment would actually go down to $1,511. 

Example #2 - A 3/1 ARM tied to 6-month LIBOR with a margin of 2.25%.

This index was about 5.5% most of last year so when a LIBOR loan would have reset, it would have gone to 7.75% too. The payment would have increased in the same way the CMT loan payment did.

Today, LIBOR is not as low as the CMT index, but it is about 3%. That means that a LIBOR ARM would reset to 3% + 2.25% = 5.25%.  That would mean a very small adjustment to the borrower whose loan started at 5%.

Strangely, even with this good news, the media are still talking about another million homeowners facing foreclosure due to their ARM loan resetting. 

That doesn't mean that there aren't many, perhaps a million, homeowners whose loan balance is higher than the current value of their properties, but at least if they have an ARM like these, they will still be able to afford the payment and won't lose their homes.

It also doesn't mean that ARM borrowers who have enough equity and the intention of staying in their homes for a long while shouldn't consider a refinance into a long-term fixed rate mortgage. They probably should. But I know one problem and that is that some people whose loan will adjust down, let's say to 4.25%, will look at a 30-year loan at 5.5% and see that the payment will go up somewhat.

Some of these people will be tempted to wait. Bad decision! They will think that they can out-guess the market and refinance just before rates move up. Not a smart move because no one, especially amateurs, can make that call successfully.

The benefit of a refinance will come down the road when interest rates inevitably move higher. That is the purpose of long-term rate PROTECTION.  [Emphasis added on purpose.] 

So if you have an ARM, get out your loan documents and acquaint yourself with the terms so you know what is going to happen to you. They make a plan and execute it.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower articles. Randy is a mortgage broker who has financed over $1 billion in properties. He writes about home buying and real estate finance topics for CreditBloggers.com.

Funny Money Friday: The Credit Crunch Fix

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.

I'm not an economist or an investment banker...just a lowly credit expert...so all the news of recent credit crunch bailouts and bank rescue programs are a little above my pay grade. Maybe you're smarter than me. Can you explain this?

How is a government plan to encourage banks to issue subprime loans and to then buy those loans supposed to help us get out of a financial crisis caused by too many subprime loans and too much buying of those junky loans?

I don't know about you, but when I'm poisoned, "eat more poison" isn't exactly at the top of my to-do list. Is this one of those the-venom-is-the-cure situations like you'd see on MacGyver?

Have a great weekend!

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.

Our Veterans (Still) Deserve Better

In honor of the fifth anniversary of the invasion of Iraq, let's take a few minutes to think about our veterans. Wouldn't you expect, after all the stories about how our veterans were being mistreated last year, that their situation would be much improved? Unfortunately, that doesn't seem to be the case. Veterans still don't get the attention they deserve. For example, consider the fact that our elected officials in Washington left VA loans out of that big bipartisan stimulus package.

You Can't Remember Everything
"On Capitol Hill, it's known as the biggest goof-up relating to housing in years," reports real estate columnist Kenneth R. Harney on RealtyTimes. "The stimulus increased loan maximums for Fannie Mae, Freddie Mac and the FHA to $729,750 from the previous $417,000, but totally forgot about a program that helps finance more than 11,000 homes a month: VA loans for veterans."

While $417,000 may seem like a lot for a home, it's not enough in many parts of the country, for example, near Washington, DC or in many parts of CA or NY. Vets in these areas who might have benefited from VA loans are out of luck … until Congress gets its act together and decides to give vets the same break that the rest of us can get.

VA loans are a good deal for vets, according to the Veterans Administration, which says the most important advantage is that no down payment is required in most cases. That's right. Vets can still get 100% financing – plus there's no monthly mortgage insurance premium to pay and limits on closing costs.

I agree that VA loans are a good deal, but how come the VA didn't go to bat for the 27 million veterans that it says are eligible for VA financing – and make sure this program was included in the stimulus bill? What possible excuse could the VA have?

My dad was a veteran of the Army of Occupation after World War II, and my family was able to benefit from a VA loan way back when. Today, the loan limit would be too low to buy the very modest home where I grew up. "Someone's head should roll for that," would be my dad's response to how the VA was asleep at the wheel.

Speaking of head and other injuries, there's a very moving story in Money Magazine about first lieutenant Ivan Castro, who was hit by mortar fire in Iraq and sustained many serious wounds. He spent a month in intensive care, had to endure many surgeries, ended up blind, and was faced with a complicated financial picture. As author George Mannes details in "A soldier's story: Financial rehab," Money's financial adviser was able to help Ivan and his family come up with a sound path forward. Every veteran deserves that, no?

One Great Loan Program for Vets
If you already have a VA loan, but the rates are lower now than when you closed, the VA can help you get a refi. Known as an Interest Rate Reduction Refinancing Loan (IRRRL), there's generally no credit check or appraisal. The closing costs, if any, are minimal, and most can be folded into the new mortgage. Call the lender that currently has your mortgage and also shop around to find your best IRRRL deal.

How Many Homeless Vets Is OK?
The VA issued a press release the other day: "Number of Homeless Vets Drops 21 Percent." Now there are "only" 154,000 veterans without a home on a typical night, as opposed to 195,000 a year ago. In explaining this reduction, the VA says it's "thanks to the services offered by the Department of Veterans Affairs (VA) and its partners in community- and faith-based organizations, plus changing demographics and improvements in survey techniques." I don't care how they count the numbers, I don't think any number of homeless vets is acceptable. How about you?

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.

Must Read: Who is to Blame for the Credit Crisis?

The Wall Street Journal has an excellent and detailed article today about the factors that led to the current credit crisis. It covers the influence of government pressure on increasing homeownership rates, reduced lending industry regulation and the rise of seemingly lucrative subprime loans. Click here to read the full article.

All this brought to mind an incident that happened last year. I was on a talk radio call in program along with a mortgage broker. We were talking about finding a mortgage and credit tips. At one point, the lender was talking about how she was so excited to be helping consumers become homeowners.  And how it was her job to do everything she possibly could to give someone the loan they wanted.

I asked "What if they can't afford it? What if homeownership isn't right for them?" And there was this pause. She replied "Oh...I've never thought of it that way."

Homeownership is a noble goal. But how did we get to a time where borrowing $300,000+ was the right answer for nearly every person in country?

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.

Top 10 Ways to Get out of Debt

We're deep in the heart of debt season. Most of us are still working on catching up from holiday spending and many are facing a big tax bill in the next few weeks (I know I am!). If you're struggling with debts, here are ten ways you can get out:

1. Stop Charging - This one may seem obvious but you'd be amazed at how many people continue using their credit cards while also trying to get them paid off. It doesn't help.

2. Bank Online - Sign up for a free money management program online. I use a program called MoneyCenter from Yodlee. These systems let you easily track your total debt balances, payment due dates and net worth. Log in at least once a week to see your progress.

3. Look for a Low Rate - A higher interest rate makes it that much harder to get debt-free. If you have a good credit, look for a credit card with a low rate/0% introductory period and an affordable balance transfer plan.

4. Do the Math - Face your debt demons head on. Use an online calculator to see exactly how much time and money it will take to pay off your debts.  Adjust the numbers to find a  payment you can afford.

5. Get Professional Help - If you're feeling overwhelmed by your debts, talk to a trusted debt adviser. Credit.com can help you decide if a debt consolidation, debt counseling or debt settlement program might be right for your situation.

6. Put on the Freeze - Having a hard time with #1? Try leaving your credit cards at home in a locked drawer. If temptation still strikes, you can freeze your credit cards in a block of ice (ziplock bag filled with water). If you need to use the cards, you have to wait for them to thaw out first.

7. Cut Back - You can easily cut a couple hundred dollars out of your monthly spending by canceling cable, pausing your gym membership or selling an extra car (insurance and loan payments, a double whammy). Putting this extra money toward your debts could make a big difference.

8. Negotiate -  You have some power when it comes to your contract with the credit card companies. Call the remediation department at your banks to see if you can negotiate a reduced APR. Play hardball.

9. Budget -  The dreaded "B" word.  Does it help to call it a "Spending Plan" instead? Not really. Our downloadable budgeting worksheet makes it a little less painful to set some financial goals.

10. Make More Money - There are really only two fundamental ways to get out of debt: spend less or make more money. Both would be ideal. You could ask for a raise at work, take on overtime, get a second job, hold a garage sale or sell somethings online. Put all your extra funds straight toward your debts.

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.

Survey: Spending your Tax Refund and Rebate Checks

The average family of four could receive $4,000 between tax refunds and economic stimulus rebate checks this spring. That's quite a windfall!

Officials wants consumers to spend it and boost the economy. But many people are planning to save or pay off their debts with the amount. How are you planning to spend your refund and rebate?

Opinion Polls & Market Research

Foreclosures and the Government

I remember and old joke that went: Beware of someone showing up and saying, "I'm from the G'ubment and I'm here to he'p you."  That still seems funny today because when someone from the Government says that, we all laugh, hold onto our wallets, and run for the nearest door. 

Well, these aren’t the old days anymore and it's not a joke. There are tragic consequences of relying upon government intervention.  For example, I really feel sorry for anyone along the Gulf Coast who expected disaster relief from the ravages of hurricane Katrina. Mismanagement of that tragedy continues.

With that in mind, it's not all that difficult to imagine why so little has been accomplished by the government's efforts to lessen the impact of the foreclosure problems on the citizens.  There are a number of initiatives that have been launched to help people by restructuring debts to help people stay in their homes.

It is very difficult to get a handle on the exact number of people who have benefited from initiatives like the Hope Now Alliance, the expansion of FHA loan limits, and increasing loan limits at FannieMae’s and FreddieMac. For example, the Hope Now Alliance, a consortium of the majority of lenders, counseling services, and trade associations stated that over a million homeowners had been helped. For the press release, see http://www.fsround.org/hope_now/pdfs/17-28FebruaryRelease.pdf

If you recall, the number of homes that had been predicted to be foreclosed upon was estimated to be something like two million. Thus you might be led to believe that half of them had been helped. The talk from the street paints a different picture.  It has been claimed by some groups that over half of the borrowers who are in foreclosure never even bother to call their lenders.  More and more seem to be moving out and mailing their keys to the lenders.

Other stories tell of phone calls never returned. Obviously no help there. Still others say that rather than being restructured, in many cases borrowers are just being given more time to catch up on payments. That seems to me to be a little like allowing a condemned man one additional cigarette before letting the firing squad get on with its business.

Meanwhile the Foreclosure Train is rocketing down the tracks and as housing prices drop, more and more homeowners find themselves upside down, owing more then their homes are worth. About ten percent of homeowners now find themselves in that position. That group will include many otherwise creditworthy borrowers who cannot now refinance out of toxic loans because their equity has evaporated. Without equity and facing more stringent lending standards, they are unable to refinance.

Regardless of the arguments against a bailout, I think that there is a role to be played by government beyond being a cheerleader. Perhaps they  just don't see how they personally are affected by something like the buy out of troubled investment bank Bear Stearns by JP Morgan Chase for a mere $2 per share. That stock was selling for more than $150 per share last year.

That is just a portion of the losses and write-downs that have been made public so far, something like $160 billion.  The larger problem is that, by some estimates, the total problem may be as high as $800 billion and that will touch EVERYONE. The economy lost 63,000 jobs in the last reporting period, and some of those losses were due to the credit crunch affecting employers.

This country is in a severe credit crisis.  Critics of government intervention don't yet see that the damage that can potentially be done by intervention is less than what will occur by doing nothing.

Funny Money Friday: Online Banking Can Save the World

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.

Who doesn't love online banking? It's so easy to check your balance or look up that deposited check when you can do it directly from your desktop. But did you know that online banking is the solution to everything?

Online banking has been reported as:

• One of the three greatest things about the internet.
• A way for consumers to be more aware of fees and interest charges.
• Making it easier for consumers to set up savings programs.
• Helping you save an average of $6 a month on stamps.
• Revolutionizing the way you keep track of your money.
• Reducing identity theft cases by allowing consumers to track their accounts closely.

And just today, I heard that online banking is also saving the environment! BankServ has created a calculator that shows how much gas, greenhouse emissions and fuel costs you can save each year by skipping trips to the bank. Banking online instead of making a weekly trip to the bank is apparently the equivalent of planting a tree.

If online banking can do all of this, what else can it do? Maybe online banking could:

• Bring peace to the Middle East.
• Carpool with you to work.
• End the recession and solve the credit crunch.
• Make you a sandwich.
• Find a cure for scurvy.

Happy Friday!

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.

What's the Story with "Emerging" or "Unbanked" Credit Scores?

Every six months or so, a new credit score option gets talked up in a press release. The new scores purport to solve the problem not being able to consumers without credit cards or loan accounts by evaluating payment history on rent and utility payments. More than 50 million consumers fit in to this category, so it's a potential ripe market.

Unfortunately, these programs rarely seem to take hold. The problem with so many innovations in the credit industry is that they aren't put into practice by the industry. Anyone can make a credit score, the trick is to get it to be used by banks and adopted as an industry standard. 

Here's a quick summary of a couple of the companies with these initiatives:

FICO Expansion Score - This one actually has some legs. The established credit scoring company launched this score a few years ago. It evaluates non-bureau data through ScoreNet, things like checking account records, payment plans and payday loans.  It uses the same 300-850 scale and has the FICO name, making it a bit friendlier for banks to plug into their underwriting systems.

Experian Emerging Score - This is the latest offering from Experian and uses data from a company called eBureau (formerly xTech) that tracks payment programs and other small accounts. It was just announced this month.

PRBC - This company has been touting themselves as a great way to build credit...but there are some big holes in their plans. Not only does the company charge consumers to "build" their credit file, the information is self reported and only minimally verified. Consumers aren't like to go through all this trouble to report negative records and late payments, so the company is skipping the information that lenders really want. They use the FICO Expansion score.

There are numerous other companies and scoring models out there trying to do the same thing (if you have one in particular you'd like more info on, send us an email). But until the systems gets more established and banks actually using these analytics, they're not likely to revolutionize lending.  The recent credit crunch has made banks especially skittish about anyone below traditional prime (700+ FICO) and probably set this back a bit.

One more point: these expansion programs aren't combined with the standard credit bureau data. If you qualify for a traditional credit score based on Equifax, Experian or TransUnion data, you're not going to have an expansion score used for your application. This isolates the data used for unbanked customers from the "real" credit data, making it a little unfair for both sides since they're being evaluated with different rulers. A smarter industry move would be for the big bureaus to start working with a wider net of financial companies to augment their data.

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.

If the IRS Calls, Hang Up!

The FTC issued a consumer alert the other day about the latest phishing expedition: "Extra! Extra! Count on Scammers and Schemers to Follow the News." It seems the fact that more than 130 million rebate checks will be coming our way in May, has gotten the attention of crooks, and they're baiting their traps to catch as many of our checks as they can.

Phishing is when a scammer calls or emails you, claiming to be from your bank, credit card company, a government agency, or an online merchant, and tries to get you to reveal personal information that would be useful in stealing your identity.

The Latest in Phishing
Be on the lookout for a call from someone who claims to be from the IRS. You'll be asked to verify some information so your rebate check can be deposited directly into your account. You might be asked for your checking account or Social Security number, for example. Don't bite!

As the FTC puts it:

"The IRS does not gather information for rebates by telephone. Nor does it send unsolicited e-mail to taxpayers about tax account matters. Filing a tax return is the only way to apply for a tax refund; there is no separate application form."

Do's and Don'ts

• Don't give out personal information to callers.
• Don't respond to emails or pop-ups requesting personal information.
• Don't click on any links in an email or pop-up that might be spam.
• Don't take any chances. It's sometimes hard to tell if an email is from your bank or a scammer.
• Do install spam, virus, spyware, and firewall protection on your PC, and update them regularly.
• Do click here for more of Credit.com's phishing tips.

If you do get an email from someone claiming to be from the IRS, the FTC advises you to forward it to phishing@irs.gov, and then delete it. If you think you may have already been a victim of this or any other scam, file a complaint with at the FTC or call toll-free, 1-877-FTC-HELP.

What's in Your Inbox?
Although I haven't received a call or message about my tax rebate, I do get my fair share of phish in an inbox that I keep just to stay on top of the latest schemes. Here's hoping no one is trying to phish for information from you. But if you do get a suspicious call or email, resist the bait and give us a head's up. We'll help spread the word.

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.

Do You Owe Taxes for Forgiven Income?

I just heard from "Missy," a woman whom I had spoken with some time ago about her debt. She is now out of debt. She's scrimped, saved, budgeted and settled her debts. But now she's run into a hurdle.

While working on her taxes, she's discovered that she may owe the IRS a big chunk of change due to debts she negotiated with her creditors.

Here's what happened: She managed to get some of her creditors to agree to accept less than the total amount owed in order to resolve her debts. In other words, they "forgave" some of the interest and penalties they had assessed. The problem is that the IRS considers forgiven debt "income" and expects you to pay taxes on that amount as if you received it.

"But they only wrote off only interest and penalties that were outrageous to begin with" argues Missy. Unfortunately, Uncle Sam doesn't care.

We are not talking about a small amount here. In Missy's case, the forgiven debt (reported by her creditors on Form 1099C) totals around $20,000. That could definitely result in a big bill from the IRS come April 15th.

Missy's tax preparer wasn't familiar with Form 982, which may allow her to avoid paying tax on that income. She must find out if she qualifies by demonstrating that she was insolvent when the debt was forgiven.  If so, Form 982 will allow her resolve the issue and avoid going back into debt to pay the IRS.

Given all the credit problems we're seeing, the IRS may be seeing a lot of Form 982s!

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

Reader Question: What to Do When Your Wallet is Stolen

A CreditBloggers reader and financial planner recently wrote in with this question:

A client of mine just called me.  His wallet was stolen while he was in Las Vegas (maybe they did him a favor….kidding).

Anyway, he does NOT have any credit cards, but I told him to contact the three bureaus and implement a security freeze or fraud alert on his accounts.  It appears that it must be done in writing. 

Having your wallet stolen while on vacation is the pits. Just the process of going through the airport's secondary screening line without an ID is a hassle. Moving quickly to report the crime can help mitigate the stress. 

Luckily, the theft of a wallet rarely leads to a serious identity theft case. You only have to be really concerned if you had your Social Security card was also stolen. Otherwise, you just need to be cautious about credit card, debit card and insurance fraud.

Your first step should be to call your debit card companies to have the cards canceled and re-issued. If you've left photocopies of the front and back of all your cards at home, you'll be ahead of the game. If not, you can look up the bank's fraud contacts online.

After this is done, you should call one of the three credit bureaus to place a 90-day fraud alert on your report. You're basically done with the urgent steps now and can work on getting home. A fraud alert is different than a file freeze. A file freeze completely locks your credit records and requires either writing the bureaus or buying their monitoring programs.

Once you're at home, you'll need to talk to your insurance companies about getting new cards. Pay especially close attention to your medical insurance. Since hospitals don't check IDs, it is fairly easy for a thief to use your medical insurance and stick you with the bill.

Keep a close eye on your financial statements for the next couple months. If you spot any fraudulent transactions, immediately contact the bank to report the incident.

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.

Funny Money Friday: Dunk the Scammer

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.

Another National Consumer Protection Week has come and gone. But helping you understand credit and avoid scams is always a top priority here at CreditBloggers.com.

For Funny Money Friday this week, I found an educational anti-fraud game that is actually fun to play. eBay Australia created "Dunk the Scammer" to help teach their users about avoiding online fraud. After a few rounds, I could only get to level 3:

Have a great weekend!

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.

The Connection Between Recession and Crime Rates

National Consumer Protection Week is all about helping people identify and defend themselves against fraud and scams. Over the past few years, the rising rates of identity theft and fraud have been somewhat mitigated by growing consumer awareness.

But now, as we enter what looks to be a recession, there are new risks to consider. Periods of economic downturn commonly bring with them increased crime rates. The 1989 recession led to higher crime rates in New York and other cities. Alcoholism and drug use are also thought to increase in a recession. This is particularly worrisome because, there is often a tie between drug use (especially Methamphetamines) and identity theft.

Could a recession this year mean an increase in financial fraud and identity theft rates along with other crime rates? The 1989 recession predated the boom in technology driven financial fraud and the 2002 recession was fairly minor, so there isn't much of a precedent. Since this downturn is particularly tied to the financial industry, it could be especially easy for consumers to fall for loan and credit scams. What do you think will happen?

Opinion Polls & Market Research

National Consumer Protection Week next year may be even more important.

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.

And the 2008 Bad Bank Award goes to...

National Consumer Protection Week is a great time to give out our "Bad Bank" awards (or "BaBas" if you're in the know). There were a lot of great entries into this year's competition. It seems like almost ever financial institution managed to do something bad for consumers lately.

First, our runners up:

• Ameriquest Mortgage. One of the largest subprime mortgage lenders. Made big contributions in taking down the housing market along with 233 other, now defunct, lenders.
• Macy's/Citi Cards. In October, these card issuers took the unprecedented and bold move to close 3.5 million dormant Macy's accounts (one credit score ding) and open up new Citi accounts on an opt-out basis (another credit score ding).

And now our winner:

• Bank of America
• They should have seen this one coming miles away. This has been a banner year for the nation's largest commercial bank and credit card issuer. There are two main reasons they're our 2008 winner:
• First, their move this January to raise the interest rates between 10-20% across the board for long term credit card holders with no real rationale right smack in the middle of the credit crisis. This alone would have earned them the BaBa.
• Second, Bank of America earned the dubious distinction this year of having by far the highest frequency of identity theft complaints to the Federal Trade Commission. They're expensive and potential fraught with fraud danger...excellent!
• Bonus! As if this all wasn't enough, Bank of America also led the charge in raising non-customer ATM fees to $3 in September.

I know that there are at least 60 angry CreditBloggers.com readers who support the granting of this year's award. What do you think? Who would you give the BaBa to this year?

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.

Retirement Keeps Getting More Expensive

A 65-year-old couple retiring this year will need approximately $225,000 – just  to cover medical costs, assuming they don't have an employer-sponsored retiree health plan. That's the latest health care cost estimate from Fidelity Investments, which has been calculating this cost since 2002. Over the last six years, Fidelity reports that it has risen 41%, with an average annual increase of 5.8%. Since last year, the increase is "only" 4.7% higher than 2007's estimate.

In coming up with its estimate, Fidelity assumes that seniors will have to pick up the cost of Medicare Part B (doctor and outpatient) and D (prescription drug) premiums, as well as any co-payments, deductibles, and out-of-pocket expenses. Not included in that $225,000 health care nest egg are the cost of over-the-counter medications, most dental services, or long-term care. In other words, it could cost us even more than that. Ugh!

How Much Will You Need?
I thought it might help to see how much you'd need to save a month to come up with a $225,000 nest egg by the time you're 65. I'm assuming that your money will earn 7.5% (10.5% interest - 3% for inflation).

If You Are	Years to Retirement	Monthly Investment
25	40	$77
35	30	$167
45	20	$406
55	10	$1,265

Ways to Save

Fidelity, which is the largest mutual fund company in the US, has five suggestions for how to save the money you'll need:

1. Create an individual retirement plan. Whether you take advantage of a plan at work or open an IRA, the tax advantages can't be beat.

2. Start early and maximize opportunities to save. Fidelity points to Health Savings Accounts (HSAs), where people  enrolled in a high-deductible health plan can set aside incom