TedCo Software Financial Matters Blog

We Americans have a lot of revolving debt, about 850 billion dollars worth of it. Most of that is credit card debt, and more than a bit of it is overdue. If you are contributing to that ugly pile of overdue debt it is time to work on getting yourself out from under that ugly pile. Excess debt can damage your ability to save, invest, and achieve the things you really want in the future. Here are a few tips to helping get out of the hole.

1. Fix the cash flow. If you can’t get yourself to a positive cash flow your situation will just continue to deteriorate. Simply put, you can’t spend more than you bring home (for very long) without problems. Usually the spending side is easier to reduce than the income side is to increase, so get a handle on your spending.
2. Paying off debt is a type of investing. Prioritize paying down debt within a reasonable time frame over saving and investing. Work on savings after you have a handle on cash flow that includes paying off debt. As an example, say you have a credit card balance of $8,000 with a 14% interest rate. Given current market performance, paying off the card before investing is a no-brainer. But even if the stock market was experiencing an annual gain between 8% and 9%, paying off debt would still be your better bet.
3. Negotiate with your credit card companies. Just call them up and ask for a better rate. It can’t hurt. More than half of people who request a reduction receive one. A drop of seven to ten percent will sure help in the quest to eliminate debt.
4. Consolidate at a lower rate if you can. Not only does it make it easier to keep on top of the payment a lower rate means you can pay down principle that much faster. A few extra hundred dollars paid against principle is sure a nice way to speed up the process.

Even if it takes a few years paying off, that debt will be an important step in securing your future.

Editor’s Note: For an organized approach to reducing your debt load checkout the software application DebtDasher at www.DebtDasher.com.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm. Phone (909) 373-5204 Facsimile (909) 912-8290 www.myfinancialcompass.net

It doesn’t take much these days to damage a credit score. Before the recession, late payments and blasting through credit limits would take its toll. But in the past year, Fair Isaac,& Co. the company that developed the algorithm that is the leading determinant of our credit (FICO) scores, made an important change in its formula.

It’s now putting much more emphasis on the size of your balances and how close they are to your total credit limit. It’s a behavior trigger that creditors see as a bigger worry than ever. So the best thing you can do for your credit score is to get your balances down to under half of your credit limit.

Even better, pay them off entirely and use them only when you know you can pay them off at the end of the month. Inactive accounts will ding your credit score, but quick payments can only help.

The latest revision in the FICO system will actually allow a bit of lenience on late payment – something that might affect more than a few consumers with the downturn in the economy. Obviously, this won’t mean that someone can chronically pay late, but once or twice won’t make the same impact as in earlier FICO versions.

Yet credit utilization – the amount of credit you’re actually using relative to your credit limit – is a much bigger deal simply because high balances are still prevalent among consumers. From the lender’s perspective, high balances mixed with a tough economy means a higher risk of default among customers.

So, one more time. What’s a good target utilization rate for all your revolving credit accounts? No more than 50 percent of your credit limit, and if you can get it significantly lower than that over time, that’s a good plan. The lower your credit utilization, the better your score.

What does that mean for ordinary Americans who don’t meet that under-50 percent goal? It means you shouldn’t be applying for new credit or refinancing for awhile, and that includes something as innocuous as a department store charge.

So maybe that means deferring gratification for awhile until you get things under control. But look at it this way – you can use this time as a way to develop more knowledge about credit and be in a better position long-term. Here are some things you need to know:

You’ll need at least a 740 score for the best rates: You’ll often hear that credit scores of 700 and up will get you best customer status with lenders. That’s true, but you need to aim significantly higher. For the lowest rates and best terms, you need to get your credit score above 740 (the top credit score, by the way, is 850), so keep that target in mind.

Budget: If you’ve never reviewed your spending and picked out areas where you can cut, you’ve never done a budget. Start tracking your spending either on paper or with financial planning software (such as DebtDasher) and start pinpointing what spending you can shift over to paying off debt.

Get some advice: Remember that debt is just one part of your overall financial picture. It might not be a bad time to sit down with a financial planner to talk about your debt issues, planning for retirement, your kids’ college education and any other key financial goals.

Monitor your credit reports: Remember that you have the right to get all three of your credit reports — from Experian, TransUnion and Equifax — once a year for free. You can do so by ordering them at AnnualCreditReport.com. Order them individually at different points in the year. That means you’ll get an extended picture of how your credit picture looks because the three bureaus feed each other the latest information. You’ll also be able to clean up errors as you find them — errors can drag down a credit score – and you’ll also keep an eye on identity theft. Oh, and make sure you use the site above and avoid the businesses that use “free credit report” in their title or a singing pirate as their spokesperson. It’s easy. If they ask for your credit card number, don’t do business with them.

Make electronic payments: Electronic bill payment will allow you to save on postage while guaranteeing on-time payment, and the budgeting advice mentioned above will allow you to put a few more bucks toward getting that loan or credit card bill paid off. It’s important to always pay more than the minimum payment on your bill – otherwise your balance will barely move.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm.

Schedule a holiday budget and credit check: When the triumphant freshman returns home for the holidays, schedule some R&R, home cooking and the first reading ever of their fall budget figures and their first credit reports. Since credit reports can be ordered online, parents and student should sit down with each of the child’s three credit reports from Experian, TransUnion and Equifax and review them for activity and errors. Since everyone is entitled to one free report from each of the agencies each year, go to www.annualcreditreport.com for theirs.

Help them open their first IRA: If your 18-year-old child is earning wages by working part-time at school, at home during breaks or for your own company, have them open a Roth IRA in a growth fund. Make sure they understand this is essential to their future savings so they don’t cash it in. Ask your planner about this.

Discuss identity theft: Personal financial data left on laptop computers, cell phones and other electronic devices can be readily stolen on campus or in a dorm or roommate environment. Tell your son or daughter to keep all paper records in a safe place and introduce passwords to keep all their digital information safe.

Get them networking: Internships and jobs in their chosen field during summer breaks can give your student a head start on their career path. Encourage them to research these opportunities in their freshman year so they’ll be in the front of the line when it’s time to apply.

Handle mistakes carefully: Most kids will make money mistakes in college. If they overdraw a checking account or overdo it with their credit card, make the criticism constructive but firm and always come up with a corrective plan you’ll work on together.

This time of semi-independence can be a great learning time for your children, but it is only semi-independence. Help them through it and the lessons they learn will pay dividends for the rest of their lives.

Jim Heitman, CFP®, is a writer, speaker, Certified Financial Planning practitioner in Southern California, and the founder of Compass Financial Planning – a fee-only planning and money management firm.

Have you ordered your free credit reports yet? The three big credit reporting agencies (TransUnion, Experian, and Equifax) will provide you one free credit report every year. You can order the reports through www.annualcreditreport.com. Consider ordering one report now, then one from another company in four months, and the last company four months after that. That way you can check on your credit report regularly throughout the year for no cost. It is not as effective as a regular credit monitoring service, but it is much less expensive. Also, if you need to make a correction it gives enough time between checks to see those corrections made.

Credit is a tool, a bit like fire. It is really useful, but if it gets out of control it can really hurt you. In addition to checking your report for errors, use the reports to take a look at how you use credit. Are you really using it in a way that helps you? This is more than how you use credit cards. What are you paying interest on and for? Some things just about require borrowing, like a home purchase. Most things don’t, though. It can be hard to avoid borrowing for a big purchase like a car. At a minimum you should have a plan for getting out from that sort of debt as soon as you reasonably can.  An excellent tool for figuring how fast you can pay a debt off early is LoanSpread Loan Calculator.  With LoanSpread, you can enter your loan information (loan amount, number of payments, rate, etc.), select the payment in the grid, and click the Amortize button on the toolbar to see your loan’s amortization schedule.  What’s really useful about the Amortization Schedule in LoanSpread is you can add “prepayments” to the schedule (prepayments are additional payments or “overpayments” you make toward the principal of your loan – typically added to your normal loan payment).  Once you have added your prepayments you can scroll down through the schedule to see how much sooner your loan will be paid off.  For example, if you were to make prepayments (or “overpayments”) of $50 a month on the loan pictured here, the loan would be paid off six and a half months early at a savings of about $47,000.  Plug in different prepayments to see what kind of results you can get for various prepayment amounts at various points in the loan’s life.  You can download and try LoanSpread free by clicking here.

Paying interest for consumables like meals and vacations is just a flat bad idea (there may be exceptions to that rule, but they are exceptional exceptions).  Learn to use and respect credit and it will be a help. Abuse it and you will pay a higher price than just interest.  

Jim Heitman, CFP®, is a writer, speaker, and Certified Financial Planning practitioner in Southern California.

DebtDasher, Personal Debt Management Software, is a new, debt consolidation calculator available from http://www.debtdasher.com

DebtDasher™ is an integrated collection of financial calculators designed to help you understand and make sound decisions about managing your debt.

DebtDasher helps you determine your net worth, account for your loan and credit card debt, consider ways to reduce expenses and increase income and helps evaluate consolidation options and helps you compare consolidation loans. In addition, DebtDasher helps you create a monthly budget to guide your spending and helps you discover how a regular savings plan can grow over time.

DebtDasher, debt consolidation calculator for Windows®-based computers, is a comprehensive financial tool and includes the following integrated calculators:

• Net Worth Calculator
• Loan Debt Calculator
• Credit Card Debt Calculator
• Consider Consolidation Calculator
• Compare Consolidation Loans Calculator
• Pay Off Debt or Save Calculator
• Explore a Personal Savings Plan Calculator
• Create a Budget Calculator

Learn more at www.debtdasher.com

Try DebtDasher™ on Your Computer!

Download a fully-functional, evaluation version of DebtDasher and use it 10 times for free on your Windows 2000, XP, Vista or Windows 7 computer.

If you like DebtDasher after 10 uses, buy it for only $19.95. If DebtDasher doesn’t help you see your financial picture more clearly, then you’ve lost nothing by trying it. If you find DebtDasher to be a useful tool, buy it and receive free updates in the future as they are released.

DebtDasher is a trademark of Wheatworks Software, LLC.

While different departments of the U.S. Government are creating programs and funneling money to lenders for refinancing efforts, some homebuyers are discovering jingle mail may be their only sane option. Federal relief may arrive too many quarters in the future to help.

Jingle mail is an envelop with a note and house keys that are mailed to a lender when a homebuyer can no longer meet his or her mortgage payment requirements.

Here are several news articles about the practice:

• MSNBC.com: Some homeowners see giving up as best option
• CBSNews.com: “Jingle mail:” The Awful Sound Of “Voluntary” Foreclosure
• NYTimes.com: Cruel Jokes, and No One Is Laughing
• Boston.com: Jingle mail

A search for “‘upside down’ mortgage” on Google returns 687,000 results. “housing crisis” returns 2,270,000 results.

In fact, housing news is so focused on the real estate bubble, that it’s difficult to find information about managing a mortgage loan responsibly. You’ll read more about home buyers walking away from their home than about paying off a mortgage early.

But suppose you didn’t buy more home than you can afford. Suppose, you’re like many homeowners and you can comfortably make your mortgage payments. Suppose, you even want to pay your mortgage off early.

How do you crunch the numbers? Use Real Estate Calculator Suite, a Windows-based collection of real estate and financial calculators designed to make financial math easy.

Making additional payments towards the principal of a loan is a great way to reduce the total amount of interest you will pay over the term of the loan. The Prepayment Calculator shows you the effects of making these prepayments (paying additional amounts to more quickly reduce the principal of your mortgage).

Here’s a quick example:

Amount Borrowed: $100,000
Interest Rate: 8.75%
Term in Months: 360
Annual Property Taxes: $1,200
Annual Insurance: $1,200
Annual PMI Payments: $600
Total Monthly PITI Payment: $1,036.70
Total Interest Over Term: $183,212.97
Total Interest and Principal: $283,212.97

Using the Prepayment Calculator to calculate the savings of adding an additional $100.00 to your monthly payment, you’ll find that you’ll shorten the term of your loan from 360 months to 238 months (save 10 years) and save a total of $72,330.29!

And you’ll save the time and money by simply adding an additional $100 to each monthly payment!

Here’s a screenshot of the Prepayment Calculator:

Learn more and download a free trial version at Wheatworks.com

This week I received a direct mail card from a national cash advance company. Everyone in my neighborhood, maybe even in my town, received it. It was addressed to “Current Resident”. (You may have received one, too.)

The mailer has two side-by-side photos. The first is of a black child in a doctor’s office. The doctor is checking the child’s throat with a tongue depressor. The text above this photo reads, “Needs a prescription.”

The photo beside it is a shot taken in a pharmacy. The pharmacist stands with his arms crossed in front of shelves filled with medications. The text above this second photo reads, “Not covered by your insurance.”

On the reverse side of the mailer is an invitation to “come in today and you can get up to $350 on the spot.” This flyer is from national cash advance chain which has a new office in my town.

The chain is owned by Advance America Cash Advance (AEA on the NYSE), a public corporation. It’s a large, international company. The investor relations information on the Advance America website reports “payday cash advances are small-denomination, unsecured advances that are typically due on the customers next payday.”

So how does a public corporation make money mailing payday loan junk mail?

The parent company, Advance America Cash Advance, offers a “How Much Is a Cash Advance?” calculator on their web site that makes it pretty clear. Simply choose your state, choose a loan amount from the drop down list, and you have your eyes opened.

In Louisiana, the online calculator indicates if someone borrows $100 and pays the $20 Fee (Assuming a 14-day term) the APR is 521.43%.

Who borrows at 521% APR? People who are desperate.

And the mailer I received appeals to desperation. People will do things for their children they wouldn’t do for themselves … like buy medications at 521.43% APR.

Some borrowers walk into a bank or credit union to borrow money and they have no clue. Those are the people who pay much more for the money they borrow than may be necessary.

Others scratch on the back of a napkin to play with loan numbers. Some create spreadsheets and crunch the numbers. These are those who understand spreadsheets. Depending on the spreadsheets they create, they have access to more information than the napkin scribblers have and a lot more information than those who borrow money without forethought.

Borrowing money costs money, so it’s important to be prepared to borrow money. A wise borrower considers everything before he or she talks to a lender.

Borrowing money is the opposite of saving. It is not a neutral act. Borrowing has significant consequences and carries risk. Here’s how wise borrowers do it.

1. Wise Borrowers Save Money.

Wise borrowers save money when they can and rarely carry enough debt to cause them stress. Because they know life holds so many financial dangers, (especially in the current economic environment) wise borrowers work to set aside a stash of money for emergencies. They are careful not to get caught without the ability to take care of the necessities for themselves and their family.

2. Wise Borrowers Protect Their Cash Flow.

Cash flow is the blood flow of your financial life. Without the flow of cash, your financial situation can quickly take a bad turn. Wise borrowers are disciplined enough to keep cash flowing throughout the month. What does this mean in simple terms? It means you constantly monitor you income and expenses to ensure you continuously have more income than expenses so that you have cash available before an expense arises. Don’t borrow so much the monthly payment does not fit nicely in your monthly budget.

3. Wise Borrowers Pay Cash When They Can.

It feels good to actually own an item you buy. If you can save $100 a month for five months to buy a new chair, do it. You’ll sit better knowing it’s actually yours. And you’ll walk out of the store knowing you saved money (no interest payments). And refuse to buy consumables on credit. If you don’t pay off your credit card each month and keep a running balance, the happy meal you get in the drive through will cost you big bucks before it’s paid off.

Now, if after considering 1, 2 and 3, you still wish to borrow money, do it with an understanding of the relationship of the interest rate to the total cost of your loan.

The easiest way I know to compare loans and financial options is to use LoanSpread Loan Comparison Calculator.

Anyone can compare 135 loans at once with LoanSpread by entering three loan variables and clicking a mouse. It’s literally that easy!

After using LoanSpread Loan Comparison Calculator to help you see the big picture of borrowing money, use it to drill down into the details of any of the 135 loans it displays to see the nitty-gritty. It will show you the real cost of a particular loan.

The beauty of LoanSpread is that after comparing loans and choosing one that makes sense for your budget, you can quickly create an amortization schedule and modify it to fit your situation. If you want to see the effects of adding an additional amount to a payment, you can do it quickly by entering the amount and clicking a mouse.

LoanSpread lets you switch between monthly and annual amortization schedules with a single mouse click. In fact, everything about LoanSpread is designed to make it easy to create and modify amortization schedules.

I invite you to download a fully functional evaluation version of LoanSpread. Explore it and try it out with your own financial question.

Then, if someone asks “how do you know so much about what different loans cost?”, you’ll answer, “I use LoanSpread!”

LoanSpread Loan Comparison Calculator

LoanSpread (http://www.loanspread.com) is a Windows-based, loan comparison calculator which compares 135 loans, displays the nitty-gritty details of any that you wish, and creates amortization schedules for those you wish to amortize. Download LoanSpread and see how it makes financial math easy!

The Next Meltdown: Credit-Card Debt describes an additional source of stress to our already mired economy. Rising (credit card interest) rates are accelerating credit-card defaults and soured debt could further undermine the financial system, is an appropriate subtitle for Jessica Silver-Greenberg’s article in BusinessWeek.

I like to say, “every pendulum swings”. Lately, the financial markets are offering a perfect example of the pendulum in action. Next up for a fall down seems to be the credit card companies and it appears it will be the result of their own greed.

Takeaway from the article:

“As credit-card companies raise rates, more consumers fall behind on their payments, which then hurts the issuers. Says Innovest’s Larkin: “We are going to see the banks massively hit.”