TedCo Software Financial Matters Blog

One of the best articles I’ve read about the credit crunch is from The San Diego Union-Tribune and is available on today’s SignOnSanDiego.com.

“Credit squeeze literally hits home as card limits, equity lines pared” explains the credit crunch well and includes a lot of helpful information. The Revolving Credit Card Crunch graphic shows the 5 steps in the credit card crunch cycle that impact credit scores. The article’s list of “Credit Do’s and Don’ts” may be obvious, but seeing them all in one list is helpful for consumers.

Interesting, too, is the explanation of the difficulty many are having obtaining car loans and student loans. Like it or not, what others do impacts you.

Read “Credit squeeze literally hits home as card limits, equity lines pared“.

Have you wondered what effect the 2005 changes to the US bankruptcy laws have had?

The answer is available in a June 2008 report made available by the AARP Public Policy Institute titled, “Generations of Struggle“, by Deborah Thorne, Elizabeth Warren and Teresa Sullivan. The conclusions may surprise you because the report indicates changes at both ends of the age continuum. And even with the changes

In short, younger Americans are filing at a lower rate but bankruptcy filings have significantly increased for those age 55 or older.

The full, 16 page, report is available from the AARP web site.

“Tighter credit”, is a phrase we hear in the news almost daily. And we hear references to the “credit squeeze” and “raising the bar for borrowers”. But what do these words mean in practical terms?

The credit squeeze is a real factor in our economy. Easy credit has been available for more than 10 years and it is disappearing.

Examples of easy credit include car dealer phrases like, “Bad credit? No credit? No problem! Drive off in a new car today!”

Interest rates have been low during the last decade which makes money cheaper and easier to obtain.

Another example of loose lending is that banks made it too easy to borrow money for houses. If you are old enough, you remember the time in our nation’s recent history when buying a home or refinancing one required significant effort. One had to prove his or her income for a period of time, share information about assets and liabilities, maintain a healthy debt level and meet underwriting standards that most financial institutions threw away during the last decade.

Tighter credit is the opposite of our last decade.

Lenders are scared of what our financial future holds and are making it more difficult (though some say “appropriately difficult”) to borrow money. Banks are no longer throwing money at you when you walk in their door and ask for it. Mortgage companies want proof (think IRS tax return-type proof) of your income and financial stability.

Another example of the credit crunch is that credit card companies are lowering the maximum credit limits for customers and interest rates are rising on credit cards.

Small and mid-sized businesses that frequently borrow money for operations may find it difficult to borrow money. And a business that cannot support its operation cannot continue in business.

Because consumers (you and me) are growing concerned about our collective financial future, we’re less likely to purchase a car in a way that gives the dealer a large profit. That hurts the dealer’s business. He makes a smaller profit (or no profit) and goes out of business.

As you can see, all the aspects of our economy are related to each other. You may have a perfectly affordable mortgage which you’ve paid flawlessly and have money left over each month for savings. However, because the different parts and pieces of our economy are connected, what greedy housing speculators have done with funny money loans and what greed on Wall Street has done to investment banks will have an impact on your financial life … at least a $700,000,000,000.00 impact on your financial future.

Additional Reading

The New York Times has an excellent article titled, “Pain Spreads as Credit Vise Grows Tighter“

How we think about something often determines how we interact with it. This is especially true about money.

Most people want more money. But having more money does not make most people happier. It fails to do so because there’s no magic in money. It holds no eternal value. It can bestow nothing of true value upon those who possess it. Money is just money.

Few people think of money as a product that can be bought or sold. But money is exactly that.

Banks do not give money away. Banks are in the money-selling business. They sell it in the form of loans.

When you borrow money from a bank or other lender, you are actually buying the money. What you pay for it, the cost of money, is the difference between the amount you borrow and the total amount paid over time in the form of interest and costs.

Of course, some money costs more than other money. If one lender “offers” you an interest rate of 8.75% to borrow $100,000 and another lender’s rate is of 6.0% (all other terms being equal), buying money from the first lender will cost you more.

A quick way to compare 135 loans at once is to use the LoanSpread Loan Comparison Calculator. The LoanSpread(tm) calculator makes the cost of money obvious and LoanSpread’s Loan Summary feature shows the details of the costs.

Smart people shop around for the best price when they make a purchase. It’s amazing, however, how many people don’t do the same when they’re buying money. Remember, money is for sale. It’s always wise to shop around for the best price. And LoanSpread(tm) makes it easy to understand the cost of money.

School is about to start again and college students will face a wall of credit card offers when they arrive on campus. At first it doesn’t make sense. Why would credit card companies want to give accounts to a group of people who are usually unemployed, low on funds, and have little hope of making their monthly payments?

It’s the debt trap. Credit card companies don’t make money from people who pay their balance each month. Credit card companies make billions from late payment fees and outrageous interest rates. College students are the perfect target audience.

And schools are in collusion with credit card companies! Many universities and alumni associations make money by referring students to apply for credit cards and even debit/student ID cards! The primary education students who fall for these offers being pushed by schools will probably come from the school of hard knocks.

We’re sacrificing a generation to the god of Greed. Capitalism is not a good system when it sucks the life out of a young person’s future.

Read about it in “Parents face a perfect storm: college kids and plastic“.

Credit card companies are the target of a lot of consumer angst. Between raising interest rates at will and making a killing off of fees, credit card companies seem to have all the power in the lender-borrower relationship they have with credit card customers. While most of what one reads in the news about credit card company behavior seems excessively one-sided (welcome to capitalism), credit card companies are required to declare an account’s rates, fees, billing practices and what triggers an increase in rate or fee.

This information is provided in what the credit card industry calls the “Schumer Box”, named for Senator Charles Schumer (NY) who sponsored the 1988 law that requires credit card companies to declare certain information in a simple format in every credit card application in the “Schumer Box”.

CNN and Money.com offer a great article that explains how to use the information in the Schumer Box to determine if a credit card offer is a good deal or a rip-off. The article is easy to read and understand and works through each of the Schumer Box numbers. Read “How to spot a credit-card rip-off” for more information.

You Know The Banking System Is Unsound When….
Credit card rates can go up … well, just because
Debit cards for your 401k

Not a lot of good news or positive views in these three, but certainly important considerations. I’d read them in the order provided. First Mish’s take on the banking system, then the eye-opening results of a survey of credit card companies that raise rates “just because”, and finally the worst idea of all … a firm that offers debit cards for 401k accounts … absolutely dumb.

The Federal Reserve Board has proposed rules to prohibit unfair practices regarding credit cards and overdraft services that would, among other provisions, protect consumers from unexpected increases in the rate charged on pre-existing credit card balances.

Highlights of the Proposed Rules Regarding Credit Cards and Overdraft Services:
http://www.federalreserve.gov/newsevents/press/bcreg/highlightscredit20080502.htm

The press release and request for public comments is here:
http://www.federalreserve.gov/newsevents/press/bcreg/20080502a.htm

Read the public comments of (literally) 1000’s of other citizens (most seem to greatly favor these new consumer-friendly regulations):
http://www.federalreserve.gov/newsevents/press/bcreg/highlightscredit20080502.htm

The rules, proposed for public comment under the Federal Trade Commission Act (FTC Act), also would forbid banks from imposing interest charges using the “two-cycle” billing method, would require that consumers receive a reasonable amount of time to make their credit card payments, and would prohibit the use of payment allocation methods that unfairly maximize interest charges. They also include protections for consumers that use overdraft services offered by their bank.

“The proposed rules are intended to establish a new baseline for fairness in how credit card plans operate,” said Federal Reserve Chairman Ben S. Bernanke. “Consumers relying on credit cards should be better able to predict how their decisions and actions will affect their costs.”

If you’ve ever wanted the chance to speak out against unfair practices by credit card companies and banks, this is your chance. Make your opinion known!

“Credit cleanup: Higher scores sought as lenders get more selective” by Eleanor Laise is about the movement among lenders to require higher FICO scores for borrowers who want to receive the best interest rates on loans.

It also explains how many are tweaking the system to improve their FICO scores. And for some consumers, raising their FICO score is a game they play to join the “700″ club, the group of consumers who have FICO’s of 700 or above.

The takeaway is that one’s FICO is a result of one’s financial behavior which can be changed to impact one’s FICO score for the better. The higher one’s FICO, the less one pays in interest when he or she borrows money. Enjoy the article!

It’s growing more difficult to find positive news about the economy. However, Visa has a funny new television ad created by Saatchi & Saatchi. The ad features a man running through the desert toward his wedding. He starts running naked and then (with the help of his Visa card, of course) he accumulates all he needs to stand at the altar fully clothed and coiffed at the end of his run.

View the ad: http://www.guardian.co.uk/media/video/2008/mar/20/advertising

The more cynical might suggest that in terms of the economy, the ad might be more accurate if watched backwards.