CreditBloggers

Minnesota Collectors Can Drain Your Accounts

How's this for debt escalation? The Star Tribune reported recently on a St. Cloud University student who saw a $180 college textbook balloon to $4,800 thanks to a few years of unpaid late fees (the student mistakenly thought the books were covered by her financial aid).

Unfortunately, there was no room for mistakes when a collections agency swooped in and siphoned a cool $200 straight from her bank account. And under state law, the debt collector's actions were 100 percent legal. Really?!?

According to the newspaper, Minnesota is one of the only states were debt collectors may file lawsuits and garnish debtor bank accounts without first making a court appearance. Attorney General Lori Swanson says such laws "stack the deck against consumers."

Here's to hoping the legislature responds with a clean shuffle.

College Students Have Their Pick of Credit Cards – and It Pays to Be Picky

Welcome to that time of year when college campuses are full of credit card marketers offering all sorts of freebies to get freshmen and returning students to sign up for their cards. No matter what come-on is being hawked – be it a t-shirt, Frisbee, baseball cap, free pizza, subs or candy, beach chairs, iTunes or phone cards – students would be wise to compare the actual credit card deals before they apply.

Here are a couple that I think are excellent choices for college students who can be trusted to manage their money:

The Citi Platinum Select Card for College Students comes with a 0% APR for 6 months on purchases, cash advances, and balance transfers. There’s no annual fee, zero liability for unauthorized charges, with typical online management tools and information about credit. However, students should be forewarned: The credit is not free! There’s the typical 3% fee on cash advances and balance transfers, so it’s not as though getting cash or transferring balances is without cost - although the lesson of transferring a balance and then paying it off at 0% over six months would be worth a lot more than what's taught in most college classes, imho.

Students who can charge wisely can use this card to pay for books and their initial living expenses, but still have a little time to pay off the bill. They better! After the 6 months are over, the rates on purchases and balance transfers goes to 12.99%,* which is a low rate for student cards, but the cash advance rate climbs to 19.99%. If they pay late, go over the credit limit, or bounce a check they send in for payment, the interest rates all go up to 28.99%.

Tip: As I was finishing off this blog, I clicked to close the Citi application and got a message that said, “WAIT BEFORE YOU GO … complete an application and get a $50 statement credit.” Now that’s a valuable freebie!

Commuting college students may really benefit from the Discover Student Open Road Card, which offers a generous 5% rebate on the first $100 in gas and car maintenance that is charged in each billing period - plus a 0% introductory rate on purchases for six months. After the six months, the rate goes up to 14.99%.

In case they do end up carrying a balance, I generally prefer to see students get the lowest rates possible. Still, this card's rate is fairly typical for college cards, even at two points higher than the Citi card, and the 5% cash back can sure help with fuel costs. Of course, carrying a balance at 14.99% wipes out the benefit of the 5% cash back on gas. Students need to understand this before they start charging.

Discover also offers rebates of up to 1% on other purchases, which are redeemable in amounts as low as $20. There’s no annual fee, 0% fraud liability, average fees, and if the bills are paid on time, this student credit card will help build a positive credit history, even if someone’s credit standing right now might be described as only good or fair.

A Card College Students Should Avoid Like the Plague
It's the MasterCard from the University of Michigan Alumni Association, which boasts, “We’ve crammed for you. Get a backpack full of benefits with this credit card.” Read a little further and you’ll see that the advertised the benefits are nothing of the sort. Instead, they’re typical features of all student cards: No annual fee or fraud liability, 24-hour customer service, and online management tools and credit education.

There is no introductory rate for purchases or cash advances, and the introductory rate on balance transfers is 4.99% for six months. The interest rate on purchases will either be 9.9% or 15.99% -- “based on your creditworthiness.” In other words, the alumni are more likely to get 9.9%, while the students get 15.99%, three full points higher than the Citi card, which is not affiliated with any school.

You might think that cards affiliated with a university would offer far more favorable terms, that the schools and alumni associations would do whatever they could to negotiate excellent deals for their students, as well as for themselves. I’m very sorry to say that you’d be wrong.

As Jessica Silver-Greenberg and Ben Elgin detail in their excellent BusinessWeek article, “The Credit Card Hustle,” multi-million dollar deals abound, with few benefits to students. For example, the University of Michigan Alumni Association’s contract with Bank of America means “the group gets 0.5% of purchases made on school-branded cards. In addition, the organization receives $6 a year for every active student account, vs. $5 for each alumnus account. The deal guarantees the Michigan alumni association $25.5 million over 11 years.”

If you’re wondering where the universities fit in, sometimes they get money, and as the authors report, “Schools usually approve the contracts and provide access to student information such as e-mail addresses and phone numbers. Some schools also allow on-campus hawking of credit cards through T-shirt giveaways, phone campaigns, and in-store promotions.”

The bank and the alumni association make out just fine, but at what cost? Instead of offering the best deal out there, they’re taking advantage of the students who should say NO! to deals like this and instead, choose credit cards that truly offer them benefits. For more info on how students are being taken advantage of by their univestities and its alumni, read “Selling Students into Credit Card Debt.”

Cart Before the Horse?
If the college students in your life might need some credit education, I suggest that these three articles be required reading … before any credit card applications are submitted:

With a little know-how and a fair amount of self-control, college students can take advantage of some great credit card offers – better than what many of the rest of us can get! Issuers want to be the first one in a student’s wallet, in the hope of a long and prosperous financial relationship .. and parents who will bail them out if they mess up.

As far as many of us older folks, there’s more of a credit history … and more reason for them to be cautious. But if you always pay you bills on time, winnow your debt down as low as possible – to 10% of your available credit, ideally – and take some other steps to improve your credit score, you, too, will get great offers, just like the college kids!

*All rates are as of today.

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 24 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.

FBI Saw Mortgage Crisis Coming

Widespread fraud. Hundreds of billions of dollars in losses. Thousands of displaced homeowners. You'd think somebody would have seen it coming…

Oh.

The Los Angeles Times reports that as early as 2004, the FBI accurately forecast the consequences of unscrupulous lending practices left unchecked. Unfortunately, despite the agency's assurances that it was combating the problem, its focus on "national security and other priorities" left white collar crimes a secondary priority.

How secondary? During the S&L bust of the '80s and '90s, the agency had 1,000 agents devoted to banking fraud. In 2007, the number of agents pursuing mortgage fraud totaled 100. To critics, that's a sign that the FBI dropped the ball. The agency, meanwhile, says it did the best it could—mortgage companies simply didn't want to hear its warnings about the growing fraud problem. And your home—oh yeah, that's the bank's now.

Let's hope the next time around, somebody is paying a little more attention.

These Financial Planners Don't Bite...Part I

I love to speak to audiences about the credit issues I cover, but I'll admit – this gig was leaving me with butterflies in my stomach. Why?

I was speaking to group of financial planners at the Garrett Planning Network's annual retreat. I was prepared and I know my topic inside and out, so why was I a bit more nervous than usual?

First, I was speaking to fee-only financial planners. These are smart people who have all taken numerous hours of courses in order to offer qualified advice. Most have passed a very difficult exam – the exam that earned them the right to call themselves Certified Financial Planners(tm).

And secondly, I wasn't sure if anyone would show up! (There was a concurrent session.) If they did, I just wasn't sure whether my presentation would be interesting or relevant to them. After all, they are used to working with clients with lots of money saved and invested - not people with debt - right?

Well, I couldn't have been more wrong. The room was packed and my audience was eager to find solutions for the people who have been referred to them with credit problems. Many of them also do pro bono planning work in their local communities or churches. They are hearing heart-breaking stories from people in over their heads and genuinely want to point them in the right direction.

After my presentation, I had the chance to have dinner with some of the planners and talk with others in the hallways between breaks. What an incredible group of people these were! All are fee-only financial planners (which means they don't push products for a commission) and many work with clients who don't have huge nest eggs, but want to make the best of what they do have.

At any rate, at the end of my presentation, I presented a question that I often hear and gave them the chance to respond for this blog. Here's the question:

Q: I have $5000 in credit card debt. I just got a new job with a 401(k) plan that provides a small employer match. Should I pay down this debt first or keep making small monthly payments and max out my 401(k)? I can’t afford to do both.

Tomorrow I'll share the answers I received with you!

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com. Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Stop Debt Collectors: How to Protect Your Rights and Resolve Your Debts

Graffiti Artist Takes on the Credit Crunch: Funny Money Friday

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.

You know the credit crunch has saturated culture when even graffiti artists start using it for inspiration. Out of the UK, Syd recently took on the British credit crisis with a mural circling a barn. His short video details the creation process:

If Banksy's next piece is about foreclosure rates, we know we're in real trouble!

Emily Davidson – Credit.com's Financial Expert and former TransUnion credit insider. Emily writes about credit reports, credit cards, loans and personal finance as the CreditBloggers.com moderator.

Save Auto Loan Money (and the Environment, too)

How do you encourage people not squander precious fuel? While $4-a-gallon gasoline prices might already be making people think twice, a Charlotte, N.C.-area credit union is giving consumers another reason to make their next automobile purchase a little greener: fuel efficient auto loans.

According to a news release from Truliant Federal Union, the company's loans will be available for use toward "any new or used vehicle, not just hybrids, that get 29 miles per gallon or more on the highway."

And for those motivated by a different type of green, there are some added perks—the loans offer a .50% rate discount and can be financed for up to 135% of the vehicle's total value. That's social engineering we can live with. If only they could work in a disincentive for shrill car alarms.

Humpty-Dumpty on the Real Estate Wall – Part 2

As a holder of an MBA from a prestigious university, you can deduce that I am a supporter of the capitalistic system of economic organization. Of course we all learned about Robber-Baron capitalism that existed in the late nineteenth and early twentieth centuries. The most severe practices were rendered illegal by the enactment of anti-trust legislation.

I was lucky enough to start my career in an ethically managed organization. My company's management gave us a thorough grounding in anti-trust law and told us the certainty of our immediate termination if we violated policy. So I did not break the law. Neither did I have to worry about my boss asking me to break the law or cover up someone else's illegal acts.

Of course, with public companies, there are additional safeguards built in, like professional auditors, the SEC, and other agencies. So one we would be led to believe that irregularities were just that, not just surface symptoms of some underlying cancer.

WRONG!

Somewhere along the way American business seems to have lost its way. Scandals like WorldCom and Enron and Tyco, once just sporadic events, have become commonplace.

When it came to FannieMae and FreddieMac, you had two enterprises that were basically chartered to help the American homeowner and potential homebuyer with access to reasonable capital to finance home ownership. Because they are government "sponsored," they have the ability to borrower money cheaper than other lenders and that advantage translates into lower rates for consumers.

Most of us had the impression that was that these outfits were run for the public benefit, not unlike the Postal Service. We knew it was a more capitalistic than that, but you see my point. Specifically, Fannie and Freddie were not set up so that insiders could feed at an ever larger and more sumptuous trough. They were supposed to use their advantage for the good of their customers.

After accounting irregularities were discovered in 2003 and 2004, the Office of Federal Housing Enterprise Oversight, OFHEO, was created within HUD to oversee Fannie and Freddie and assure that they were adequately capitalized. They also went back to see what went wrong. A 2006 report discussed FNMA's corporate culture.

Fannie Mae's 2000 Annual Report said, "… management of credit and interest rate risk contributes stability to the global financial system." Sounds great, but here's what the report says.

"This report demonstrates that the image of Fannie Mae communicated by Mr. Raines and his inner circle and promoted by the Enterprise's corporate culture was false. The report also describes how senior executives worked strenuously to hide Fannie Mae's operational deficiencies, significant risk exposures, and improper earnings management to smooth earnings from outside observers—the Board of Directors, its external auditor, OFHEO, the Congress, and the public."

Does this make you sick? Obviously, the Robber-Baron mentality was back in vogue at FannieMae. The innocent stockholders who thought it was being ethically run have taken a beating too. Its stock has lost 95% of its value and there is a clear possibility that its existence as a shareholder-owned company is in doubt.

These entities failed fundamental tests of what was required of entities that serve the common good. It wasn't the capitalistic organization that failed. Dishonesty, greed, and deceit went unchecked and that caused the downfall.

Today, Fannie and Freddie are operationally doing business as usual, trying to survive. The private sector mortgage business is practically dead in the water. Rates are so high that it is ridiculous. Just today I received notices from three big nationwide lenders talking about restricting or curtailing Jumbo lending programs.

Let me assure you that this country needs FannieMae and FreddieMac. I agree with those who say that some different structure needs to be found as I am not eager to see the total mortgage business under "government management," an obvious oxymoron. More to the point, I don't want to have to go to the Post Office to get my next mortgage.

An Early Warning System for Identity Theft

If there’s a questionable charge on your credit card, wouldn’t you rather learn about it almost instantaneously, while you’re still in the store – rather than up to a month later – and only if you carefully scrutinize your credit card bill? Visa and eight lenders have just begun a pilot program to that will alert cardholders … typically within seconds … when they may be the victims of fraud.

Along with PNC Bank, SunTrust Bank, U.S. Bank, Wachovia, and Wells Fargo in the United States, and Royal Bank of Canada, TD Bank Financial Group, and Vancity in Canada, Visa will test the delivery of real-time notifications with up to 2,000 Visa cardholders. The participants will get to set the “thresholds that will trigger a transaction alert,” according to Visa. The lucky cardholders testing the early warning system will be able to get these alerts when:

There’s been a cash withdrawal from an ATM.
There’s been a foreign transaction.
An Internet or telephone order was placed.
There's a charge that exceeds the threshold amount they've chosen.

When participants think a transaction is suspicious, they can get on the case immediately, rather than letting what might be the beginning of identity theft snowball into a stressful mess that takes time and money to straighten out.

Up until now, Visa and the other card companies, have shared this sort of information instantaneously with merchants and lenders. It’s great to see the people who actually pay the bills getting to take advantage of the technology! But assuming that you’re one of the billion or so Visa cardholders who won’t be participating in this pilot program, here are some do’s and don’ts to protect yourself from identity theft and to nip it in the bud:

Do’s

Check your credit reports, credit card statements, and other financial statements regularly. Look for unusual charges and accounts you didn’t open. If you see a problem, immediately call the lender.
Be careful with checks and other documents that include personal information! ID crooks commonly steal this sort of information.
Shred sensitive documents, receipts, and mail.
Use complicated passwords that combine numbers and letters – for example, zg58j3u. Then memorize them. Never write them down! The same holds for PIN numbers.
Consider using online banking and bill paying to prevent ID fraud.
Visit the Federal Trade Commission if your identity has been stolen – or if you think it may have been stolen. If you have an identity theft emergency, click here for Credit.com’s advice.

Don’ts

Don’t carry your Social Security card with you. Store it somewhere safe, a safe deposit box, for example.
Don't include your Social Security number or driver's license number on your checks.
Don’t respond to emails or calls requesting personal or financial information - even if it appears the communication is from your lenders, the IRS, or from anyone else, for that matter. Call the customer service number for your credit card, the number for your bank’s local branch ... yourself.
Don’t forget to make sure your computer has anti-virus and anti-spyware software, as well as a firewall. Be certain to regularly update them, along with your browser and operating system.
Don’t despair about being left out of Visa’s pilot program. You can get more advice from Credit.com on what you can do to keep your identity safe by clicking here.

Have you been chosen? If Visa has invited you to participate, please let us know! It’d be great to get some first-hand reports on this early warning system. Here’s hoping we can all take advantage of it soon!

Humpty-Dumpty on the Real Estate Wall - Part 1

The mortgage industry is supported in large part by FannieMae and FreddieMac the two Government Sponsored Enterprises, or GSE's. They account for a majority of the business and, speaking as a mortgage originator, they are really the only game in town. But by many measures, they are broken.

FannieMae's (FNM) stock is selling for $6 per share, down from a high of $80. FreddieMac's (FRE) stock is about $4, down from $70 per share. They look as if they are sliding down the hill to oblivion.

The problems arose a few years back when these entities both suffered from management and accounting problems. Prior management seemed to look upon these companies, both stockholder owned companies, as their private piggy-banks.

Here was one problem. Executive compensation was tied to the earnings of the company. In a simple company, that's easy. When the company makes more money, the owners make more money, and management ought to get bonuses for performance.

However, there are a lot of accounting rules that must be followed. The purpose of using rigid accounting rules is that the income statements and balance sheets can be relied upon by management, shareholders, and the public to give an accurate portrayal of the financial health of the business.

When you start fiddling with accounting so as to manipulate earnings, you can easily stray off the path. At some point the "books" are so distorted that that no one can believe in them. Let me just characterize it this way: the regulators found that a number of accounting rules were broken. That had the effect of increasing apparent earnings and, more to the point, executive bonuses.

For example, this is the compensation of Mr. Franklin Raines, CEO of FannieMae for the years listed.

1998 - $794,000

1999 - $1,329,000

2000 - $4,588,000

2001 - $6,803,000

2002 - $7,233,000

2003 - $11,621,000

That looks as if it started out as a "good" job and turned into a "great" job, at least one with great compensation. That would have been alright had the results had been there to support it, but they weren't. The regulator's special investigation is as exciting to read as some novels. Check out the report online.

The question is this: Can all the King's horses and all the King's men put Humpty-Dumpty together again?

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.