STAYING RATIONAL DURING AN EMOTIONAL TIME

This past week I read a great article put forth by Davis Advisors. Although I will only share snippets from the article, the entire article is available at their website. The article shares wisdom from some of the greatest investors of the past century (Warren Buffett, Benjamin Graham, Peter Lynch...). It is a worthwhile, thought-provoking read.

Avoid Self-Destructive Investor Behavior.
Emotions tend to wreak havoc on investment returns (particularly in challenging times like these). Check out the following chart ...


It is mind boggling to see the impact that emotions (namely fear and greed) play in investor returns - market timing, abandoning one's investment plan, chasing the 'new' or 'hot' thing [at the wrong time] can truly cripple one's financial game plan.

Understand that Crises are Inevitable.
Stock investors throughout history have always encountered crises and uncertainty, yet the market has continued to grow over the long term.
-- 1970s - Stagflation, rising energy, market decline of 44% in 2 years.
-- 1980s - Black Monday (22% market decline in one day).
-- 1990s - Savings & loan crisis, Asian financial crises.
-- 2000s - Bursting of tech bubble, 9/11, credit/real estate crisis.

In spite of challenges, the market has shown itself to be resilient; the long-term stock market trend has always been positive. Keeping this in mind may keep you from overreacting emotionally to market events and uncertainty.

Be Patient.
Patience is one of the most common attributes among great investors. Investing shouldn't be viewed as a short-term prospect ... Between 1928 and 2007, stocks returned positive returns in 59 of 80 one year periods (74% of the time). When looking at longer periods of time (5 years - see chart below), stocks delivered positive returns 93% of the time (71 out of 76 five year periods). Historically, stocks have rewarded patient, long-term investors.


Disregard Short-Term Forecasts and Predictions.
During challenging times, the media often becomes a focal point of attention. There is nothing wrong with watching CNBC or other financial programs or prognosticators (I'm guilty too). What does history teach us? Don't waste your time and energy focusing on things that are unpredictable and uncontrollable (i.e., When is the market going to bottom?). Instead, focus attention on things you can control - your asset allocation, evaluating your tolerance for risk, etc. The chart below is a clear example of just how difficult forecasting the future is even for "the pros" (who got it wrong about 2 times out of 3 in this example).
The results tracked the average interest rate forecast from the Wall Street Journal Survey of Economists from December 1982 - June 2008 compared to what interest rates actually did ...


The past year has been difficult for ALL investors. Avoid compounding the problem by making emotional/irrational investment decisions.

FLEXIBLE SPENDING ACCOUNTS

All of us are aware of the commonly discussed financial tools available to improve one's financial standing - saving/spending plan, Roth IRAs (and other tax-advantaged investment accounts), insurance, etc. Another very powerful financial tool available to most (yet unused by many) is a Flexible Spending Account. A Flexible Spending Account (FSA) is a program (available through one's employer) that offers tax advantages and allows employees to pay for [eligible] out-of-pocket health care and dependent care expenses with pre-tax dollars. Using pre-tax dollars provides an immediate benefit on those expenses that equals the taxes you would otherwise have paid on that money. In plain english -- a no-brainer!

Each year, employers provide an "open" period where you can elect to participate in an FSA (as well as make modifications to your other cafeteria plan benefits). If you miss this window, a "qualifying life event" is needed to avoid waiting until next year to enroll. Birth, adoption, and change in marital status are examples of common qualifying events.

The amount you choose to contribute on an annual basis is withdrawn from your paycheck in equal installments each pay period. Most employer plans offer two different flexible spending accounts - one for qualified medical/dental expenses, and one for dependent care expenses. You can opt to participate in one without participating in the other; you cannot, however, move unused money from one type of FSA to another.

It is important to give some thought to determining how much money you plan to contribute, because if you don't use the money you will lose it! For example, if you have $100/month contributed to the FSA ($1200 for the year) and have $1,000 of submitted [allowable] expenses, you will lose the unused $200. You do have a 2 1/2 month 'extension' (until March 15) at the end of the calendar year to submit claims toward the prior calendar year, not just a 12-month window.

FSA for Health Care Expenses.
The FSA to cover medical expenses not covered by insurance is the most commonly utilized plan. As you incur medical expenses not covered by your insurance, you submit an invoice* with proof of payment to the plan administrator who will then issue payment. Any medical expense the IRS considers deductible (that is not reimbursed through your insurance) can be reimbursed through the FSA. Examples include co-pays, deductibles, braces, prescriptions, lasic surgery ... IRS Publication 502 provides an exhaustive list of allowable (and non allowable) medical and dental expenses. Your employer may edit this broad list, so make sure you check in advance to ensure your desired expenses will be covered. Unlike dependent care FSAs, there is no IRS cap on medical FSA contribution limits. The annual cap will vary by employer.

FSA for Dependent Care Expenses.
The dependent care FSA is federally capped at $5,000 per year. While married spouses can each elect to have this amount deducted from their paycheck and applied to expenses, at tax time all withdrawals in excess of $5,000 are taxed. While medical FSAs almost always favor the taxpayer, dependent care FSAs can be more complicated. They involve examining trade offs between pre-tax deductions and tax credits. Enhancements to child tax credits in recent years have made them more attractive than dependent care FSAs for many taxpayers.

*Many employer FSAs now provide debit cards which allow for an electronic transfer of pre-tax dollars from an employee account when paying for qualified expenses. Employees can use their medical and dependent care funds by using their card at the point of service. The traditional paper process is eliminated, as are worries of lost receipts or expenses you'd otherwise forget. A nice improvement.

ADDITIONAL RESOURCES.
- FSA Facts
- Health Savings Accounts & Medical Savings Accounts
- IRS Publication 969 (Tax-Favored Health Plans)
- Review this calculator to estimate your potential annual tax savings.

FREE TAX ASSISTANCE

IT IS TAX TIME…

Numerous resources are available to assist the majority of taxpayers with free tax preparation assistance as well as free electronic filing of tax forms. Trained community volunteers are now available through the VITA (Volunteer Income Tax Assistance) Program or the Tax Counseling for the Elderly Program. These free programs are a tremendous boon to consumers as they provide an avenue to avoid tax preparation fees as well as costly refund anticipation loans.

In addition to free assistance in preparing tax returns, most sites also provide free electronic tax filing (e-file). E-filing will enable you to receive your refund more quickly and also offers options for directly depositing the refund into checking, savings, IRAs, and other types of accounts.

Check dates and times of service availability in advance. Some services will not be offered 8-5 Monday through Friday as locations are staffed by volunteers. Many offices, however, will offer some evening and weekend hours.

VITA.
The VITA Program offers free tax help to low- to moderate-income (generally, $42,000 and below) people needing assistance in preparing their own tax returns. VITA sites are generally located at community centers, libraries, schools, and other convenient/accessible locations. To locate the nearest VITA site, call: 1-800-829-1040.

VITA FOR MILITARY PERSONNEL & FAMILIES.
The military also has a strong VITA Program. Marines, airmen, soldiers, sailors, guardsmen, and their families receive free tax preparation assistance at offices within their installations. These sites provide free tax information, tax preparation, and assistance to military members and their families. The primary distinction with this and other VITA sites is the ability to work with individuals that are trained and equipped to address military-specific tax issues.

TAX COUNSELING FOR THE ELDERLY.
The Tax Counseling for the Elderly (TCE) Program provides free tax help to people aged 60 and older. In conjunction with the IRS-sponsored TCE Program, AARP offers their Tax-Aide counseling program at more than 7,000 sites nationwide during the filing season (February 1 – April 15). Trained and certified AARP Tax-Aide volunteer counselors help people of low-to-middle income with special attention to those ages 60 and older. For more information on TCE call 1-800-829-1040. To locate the nearest AARP Tax-Aide site, call 1-888-227-7669 or visit the AARP Tax-Aide website.

Documents you will need to bring with you …
-- Proof of identification
-- Social Security cards for all parties
-- Birth dates for all parties
-- Wage and earning statements for all income (i.e., W-2s)
-- Interest and dividend statements (Forms 1099)
-- A copy of last year’s Federal and State tax returns (when possible)
-- Bank account and routing numbers (for direct deposit)
-- Day care info (amount paid, provider tax identifying number)

ADDITIONAL TAX RESOURCES.
-- Current Tax Info (deductions, exemptions, tax brackets, etc.)
-- Do I Have To File? (typically worthwhile even if you don’t “have to”)
-- Education Tax Benefits
-- Federal Tax Forms
-- Free File Online Tax Preparation Sites
-- State Tax Forms
-- Understanding Taxes (interactive IRS tutorial)

AFFINITY FRAUD

It seems that in the past few months an inordinate amount of financial scams have been uncovered. You’ve likely seen the media buzz surrounding the Bernie Madoff allegations of swindling $50 billion from investors. To me, there is a common thread that appears to be at the heart of many of these exposed financial ‘schemes.’ Many people expect greed and/or ignorance to be at the heart of a financial scam. Granted, these factors have their place. I’m not going to pretend that greed doesn’t play a role for an individual lured by someone like Nicholas Cosmo (recently arrested) and his promises of annual returns as high as 80%! I do believe that there is another lesson we can learn, however … the very real risks of affinity fraud.

The SEC defines affinity fraud as “investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, elderly, or professional groups.” These types of scams work by exploiting the trust and friendship shared by groups of people who share a common bond. No group is immune from being a target. The Wall Street Journal and ABC News (Different Worlds, One Scam) both have carried recent news stories about the phenomenon.


AVOIDING AFFINITY FRAUD.

As every investor has learned in the past year (if it wasn’t learned or realized prior), investing ALWAYS involves some degree of risk. The objective is to eliminate unnecessary risks by asking questions and gathering facts about any investment prior to purchasing it. The SEC (http://www.sec.gov/investor/pubs/affinity.htm) outlines a list of things ‘to do’ to minimize the risks of falling prey to these types of affinity scams …

CHECK OUT EVERYTHING. No matter how trustworthy the person seems who brings the investment opportunity to your attention. Never make an investment based solely upon the recommendation of a member of a group (i.e., professional organization, social, church, ethnicity) to which you belong. Investigate the investment opportunity thoroughly and check the truth of what you are told; the person telling you about the investment may also have been fooled into believing it is legitimate (when it is not).

AVOID THE PROMISE OF SPECTACULAR PROFITS/“GUARANTEED” RETURNS. Your parents were right when they told you that if ‘it seems too good to be true, it probably is.’ Be leery of any investment that is said to have no risks. The greater the potential return, the greater the risk of loss. Any promise of a quick profit with little or no risk is a classic warning sign.

OFFER IS NOT IN WRITING. You have good cause to be skeptical of any opportunity that is not in writing. Any opportunity you are told to be hush-hush about should also raise your suspicions.

TIME-SENSITIVE OFFERS. Be on the lookout for opportunities that are “once-in-a-lifetime” (particularly when the recommendation is based on “inside” information). Avoid situations where there is pressure to rush into buying before you have the chance to think avoid/investigate the opportunity. If the offer will “go away” tomorrow if you don’t buy in today, you should probably walk away.

E-MAIL/INTERNET TARGETING. More and more frequently, scams are being perpetrated over the Internet, targeting groups through e-mail spam. If your “can’t miss” investment comes via e-mail, forward it to the SEC enforcement team (enforcement@sec.gov) and delete it.


If you have been targeted [or victimized] by an affinity fraud scheme, contact:
- The SEC Complaint Center
- Your State’s Securities Administrator

FREE PLANNING ASSISTANCE

FREE FINANCIAL PLANNING ASSISTANCE
Kiplinger's Personal Finance & NAPFA
(FRIDAY, JANUARY 30)

For the eighth time, Kiplinger’s Personal Finance Magazine is working with the NAPFA (National Association of Personal Financial Advisors) Consumer Education Foundation to provide free, objective financial planning advice for consumers. The beginning of the New Year is a great time to get your financial checkup.

NAPFA (http://napfa.org) is the leading professional organization for fee-only financial advisors. Regardless of your current stage of life, this is a great opportunity to jumpstart your financial plan (follow through on your New Years resolution!) and address questions you may have about retirement savings, estate planning, taxes, insurance, college savings, etc. Last year, more than 12,000 people received assistance. Typically, fee only planners charge an hourly rate of $100 to $250.

Make sure you have relevant documents on hand to make the most of your time. If your question(s) are too complex to be addressed on the spot, you may be directed to the NAPFA site to find a planner in your area. A planner can aid you in making rational [rather than emotional] financial decisions. The services are available to anyone.

Where do you go to get the free assistance?
*CALL – 888-919-2345
*LIVE ONLINE DISCUSSION – http://www.kiplinger.com/links/jumpstart
*AVAILABILITY – 1/30/09 - (9:00am – 6:00pm EST)

DISPUTING CREDIT REPORTING ERRORS

Errors on a credit report are about as common as spots on a dalmatian. Information on your credit report (accurate or not) will impact your ability to obtain credit, insurance, and possibly your job. Unfortunately, many consumers are unaware of how to remedy these mistakes…

Begin by obtaining a current copy of your credit reports (Experian, Equifax, and TransUnion are the three primary credit reporting agencies). Make certain to avoid the gimmick “free credit report” websites (these places typically provide you with one report and then stick you with costly fees for a credit monitoring service of questionable value). Always use the government -sanctioned website to get your free reports: www.annualcreditreport.com. You are entitled to one free report per agency every 12 months.

Before going on, let’s be certain we are clear on some important points:
-- Errors are mistakes (inaccurate information) on your report, NOT merely negative information. You have a legal right to have wrong information corrected. If information is accurate and verifiable, it will remain on your report as part of your “credit history” for the allowable duration (typically 7 years; there are exceptions – inquiries, some instances of bankruptcy, tax liens, etc.). This information [if negative] will be removed after the expiration time window; if it has not been removed (and should have), it can be disputed and removed.

-- It is CRITICAL to understand that the vast majority of “credit repair” agencies are scams! Most will do nothing for you that you can’t do on your own (legally) at no cost. Companies seeking a fee prior to rendering any services are a good tip-off to the rip-off.

While there are multiple methods of initiating a dispute – mail, online, and phone – the most convenient and efficient means is online.

ONLINE DISPUTE PROCESS.
- Locate the “report number.” This can be referred to by different names. It is the number on the top center of your report. This number provides the reporting agency with a ‘snapshot’ of the report you are viewing.

- Dispute the errors directly to the agency whose report you are reviewing:
o Equifax (www.equifax.com/online-credit-dispute)
o Experian (www.experian.com/disputes)
o TransUnion (annualcreditreport.transunion.com/entry/disputeonline)

- Specify the information you believe is inaccurate (i.e., current account shown as delinquent, account shown that consumer never opened, information from someone else’s report …) and enter any additional information that further explains the problem. (You can submit multiple errors in the same dispute). Know that it is not your responsibility to prove they are wrong; it is their job to prove they are right.

After your dispute is submitted, the credit reporting agency will contact the provider of the data asking them to verify the information. They will typically have 30 days (can be up to 45) to verify the accuracy of the information in question. If the information is unable to be verified [or if they do not respond in this timeframe], it will be removed from your report. If they are able to verify the information, you will be notified of that and will want to contact the company directly to seek closure (the credit report will provide contact information to do so). If the dispute is initiated online, you will be notified (typically within 3-5 days of the outcome) by e-mail and you can immediately view the results. You will also receive an updated credit report that reflects all changes made. If requested, the credit reporting agency must send notices of any corrections to anyone who received your report in the past 6 months. You can also have a corrected copy of your report sent to anyone who received a copy during the past 2 years for employment purposes.

What if that does not resolve the problem?
If you disagree with the results of the investigation, you have the right to add a 100-word statement to your report that explains your side of the story. This consumer statement gives you an opportunity to explain why a negative item is listed on your report. Creditors and potential lenders may review this information and take it into consideration when making credit decisions. It will remain on your report until you request that it be removed. Some credit reporting agencies will provide assistance [if desired] in drafting your statement.

While it is in the best interests of the credit reporting agencies to ensure the information they maintain is accurate, mistakes/errors are common. Ultimately, it is YOUR RESPONSIBILITY to ensure that the information in your credit report is accurate!

ARCHIVED TIPS (2008)

With the beginning of a new year, it seems like an opportune time to review the financial tips from the past year... As I have done in the past, I have provided a topical/organized archive of tips. The hot links will allow you to easily review prior tips. You can also view archived tips (by date) on the blog site or at:
--> 2006 Tips
--> 2007 Tips


BUDGETING.
- Cures for a Lean Purse (05/2008)
- [Free] Online Financial Management Resources (11/2008)
- Save More Each Month (09/2008)

CREDIT/DEBIT CARDS.
- Closing Unused Credit Card Accounts (12/2008)
- Credit Card Update (12/2008)
- Credit Cardholders' Bill of Rights (10/2008)
- Debit Card Realities (06/2008)
- New Rules for Card Companies (12/2008)
- Proposed Credit Card Changes (05/2008)
- Schumer's Box (08/2008)
- The Best Credit Card Reward Programs (12/2008)

CREDIT MANAGEMENT.
- Credit-Based Insurance Scoring (11/2008)
- Credit/Security Freeze (09/2008)
- "Free Credit" Services (07/2008)

FINANCIAL EDUCATION.
- Cash Course (01/2008)
- Financial Illiteracy Persists (04/2008)

FINANCIAL PLANNING.
- 401(k) and Other Investment Fees (12/2008)
- Building Wealth (04/2008)
- Coping With Market Volatility (01/2008)
- Deal or No Deal (03/2008)
- Free Planning Assistance (01/2008)
- Index vs. Active Fund Investing (04/2008)
- Is Your Money Safe (09/2008)
- Market Anniversary... Increase in Cyberscams (10/2008)
- No More Free Lunch... (09/2008)
- Portfolio X-Ray (03/2008)
- Responding to a Turbulent Market (12/2008)
- [Still] The Best High Yield Savings Accounts (08/2008)

OTHER.
- Financial Pitfalls - Overconfidence (06/2008)
- Financial Resolutions (01/2008)
- Gift Cards (11/2008)
- "Opt Out" (07/2008)

STUDENT RESOURCES.
- July 1 -- Rate Change (06/2008)
- Project on Student Debt (07/2008)
- Rewarding Those Who Serve (09/2008)
- Student Loan Borrower Assistance (10/2008)
- Student Loan Comparison - Resources (02/2008)
- Student Loan Update (05/2008)

TAXES.
- Economic Stimulus Package (03/2008)
- Economic Stimulus - Payment Schedule (04/2008)
- Free Tax Assistance (01/2008)
- Rebate Snafu (07/2008)

RECHARACTERIZATION = IRA "DO-OVER"

I'm sure all of you have had moments (financial or otherwise) where you've wished you could have a "do-over"... Typically, you won't experience that sensation when you've done the right thing. This year could be an exception for you if you've converted/rolled over an IRA to a Roth IRA account...

For example: In 2008 suppose you converted a Traditional IRA (or other tax deferred retirement account) to a Roth IRA (typically considered a pretty savvy move); this enables you to pay taxes now and withdraw the funds later TAX FREE! Obviously, since the funds have yet to be taxed, this conversion will result in a taxable "event." You will be sent a tax 'bill' for the full amount being transferred; so even though the account is in all likelihood worth significantly less than what was transferred earlier in the year, the taxed amount will be on the sum being transfered. For someone in a 25% tax bracket, rolling $20,000, the taxes would equal $5,000. If they had instead waited until the end of the year when the account was only worth $12,000, the tax bill would instead have only been $3,000 ($2,000 or 40% less!). Fortunately, the IRS allows for a 'do-over' of the conversion so that you can in effect pay the smaller tax bill! The process, recharacterization, enables you to "put your money back" into a traditional IRA so that you won't need to report the original conversion to the IRS. You can then convert to a Roth IRA later on and pay taxes on the resulting smaller balance.

Be aware that an IRA that has been switched to a Roth earlier in the year and then switched back (to a Traditional IRA) can’t be reconverted to a Roth again this year. The 'reconversion' has to be delayed until at least January 1 or if later, 30 days after the IRA was switched back to the traditional.

* You have until October 15, 2009 to undo a 2008 Roth conversion. See IRS Publication 590, Individual Retirement Accounts (IRAs), for more information.

** As an aside ... If you have money in a Traditional IRA and want to convert it to a Roth IRA, you are unable to do so if your Adjusted Gross Income is greater than $100,000/year. This is especially frustrating if your income is greater than the Roth IRA Phaseout/Contribution Limits that leaves you unable to take advantage of one of the [The?] greatest retirement planning tools. 2010 will mark the removal of this Roth IRA Conversion Limit. In 2010, these income limits will become extinct, so that anyone, regardless of income, can convert from Traditional IRAs to Roth IRAs (you'll also be able to split the tax bill over two years).

You don't want to screw up your do-over ... it is wise to consult with a professional: the IRA custodian (where you have your account), a financial planner, a tax planner, or all of the above.

401(k) AND OTHER INVESTMENT FEES

Many considerations should be an active part of any investment decision - your investment objectives/goals, comfort level with risk, time horizon, management issues (i.e., fund manager, utilizing a financial planner, etc.), asset allocation, and investment fees/expenses to name a few. This week I want to focus specifically on fees and expenses. [While a 401(k) is the most common type of account, you will find that following principles related to managing fees and expenses will apply to other types of investment accounts as well].

While your investment contributions, rate of return, and time are the primary gauges of your account's future value; the fees and expenses paid by your plan can substantially 'shrink' that value. The Department of Labor provides the following example:

Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7 percent and fees and expenses reduce your average returns by 0.5 percent, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5 percent, however, your account balance will grow to only $163,000. The 1 percent difference in fees and expenses would reduce your account balance at retirement by 28 percent!

OVERVIEW OF PLAN FEES & EXPENSES...

ADMINISTRATIVE FEES. The costs of basic administrative services (i.e., accounting, plan record keeping, legal services, etc.) may be borne by different parties: covered by investment fees deducted from investment returns, paid by employer, or charged against the overall assets of the plan. The size of this fee is often correlated with the level of services provided (although note always the case) -- in addition to basic administrative services, some plans may also provide access to customer service reps, educational seminars, software, investment advice, electronic access to plan, online transactions, etc.

INVESTMENT FEES. The heftiest of investment fees are for managing the plan investments. Fees for investment management generally are assessed as a percentage of assets invested. You should always pay close attention to these fees. They will be reflected as an indirect charge against your account (they are deducted directly from your investment returns). Your net total return is your return after these fees have been deducted. Since these fees are not specifically identified on statements, they can go 'unfelt' by investors (out of sight out of mind).

'INDIVIDUAL' SERVICE FEES. Individual service fees are those that are charged separately to those who use particular features. Loan options and brokerage options (ability to purchase stock) are examples of particular features that would be assessed individual service fees.


FINDING INFORMATION ABOUT PLAN FEES:
- Financial sources - Wall Street Journal, Yahoo Finance, Morningstar...
- Plan prospectus (outline of fees associated with investment choices).
- The summary plan description (provided when you join the plan).
- Your account statement.
- Your plan's annual report.
- YOUR PLAN ADMINISTRATOR.

* Keep in mind that law merely requires that fees charged to a 401(k) plan be "reasonable" - there is no specific fee level that is set. If something seems 'unreasonable' to you, contact your plan administrator and let them know.

** By no means am I suggesting that cheaper is necessarily better... rather, fees are one relevant consideration in decision-making. Also, understand that higher cost by no means translates to consistently superior returns.

ADDITIONAL RESOURCES.
- A Look at 401(k) Plan Fees
- A Study of 401(k) Plan Fees and Expenses
- Managing Your 401(k): Fee Overview (FINRA)
- Mutual Fund Expense Analyzer

NEW RULES FOR CARD COMPANIES + CLOSING UNUSED ACCOUNTS

Last May I blogged about the proposed credit card changes by the Federal Reserve to crack down on unfair and deceptive card practices. Fortunately for consumers, the rules were passed last week. Unfortunately, the changes won't take effect for another year and a half (July 2010)! You can read my prior blog for a summary of the changes.


Today, I want to write about a growing phenomenon with card companies right now -- closing the cards of inactive accounts. Many people are wondering how this might impact their credit. How [or whether] your credit (score) will be impacted will largely depend upon your 'bigger' credit picture. Questions to ask ...

--> How many credit cards do you currently have? If you have several cards (I will call this more than 4), you have "enough" cards and closing one from that standpoint won't harm your credit. If you have 3 or fewer cards, closing one will lower your credit score. You may want to consider keeping the account open.

--> How long have you had the card? Age of other cards? If you have other [open] card accounts that you have had longer, closing a card with a shorter history will have a minimal impact; if the card being closed is the card you've had for the longest period of time, the impact will be larger as you will in effect be 'shrinking' the age of your credit history.

--> How much [if any] credit card debt do you have? If you pay your balance(s) in full each month, no problem. The higher the level of debt, however, the greater the impact (negatively) to your credit. Suppose you have $2,500 in CC debt and your total credit limits on your cards totals $10,000. Your debt to limit ratio is 25%. If the closed account had a credit limit of $5,000, your debt is obviously the same ($2,500) but your debt to credit limit ratio would now be 50% ($2500/$5000).

As a rule of thumb, if you have a high credit score with a strong mixture of credit, I wouldn't be overly concerned about the impact that a closed credit card account would have. If you want to keep your accounts open and active, the advice of consumer advocates [is said to work with most card companies]... Make at least one purchase every 6 months on the card - amount of purchase does not matter - and your card will be kept in an 'active' status.

THE BEST CREDIT CARD REWARD PROGRAMS

My inspiration for a tip this week came from an advertisement I saw for a new credit card offering some interesting reward incentives (see Fidelity card below) ... it got me thinking about credit card reward programs in general. The credit cards mentioned represent MY favorite reward card programs. Picking the "best" CC programs is sort of like picking the best cities in the country to live - there will always be room for differences of opinion [there are almost that many to choose from as well!].

The primary criteria I used to guide my decision-making process:
- No annual fee
- Permanent, not "introductory" rewards (i.e., 2X benefits for 6 months)
- Preference given to programs that credit the rewards regularly
- Straightforward program - uncomplicated (i.e., not tier-based, etc.)

BEFORE considering a reward-based credit card, you should be aware...
- Aware of your tendencies; it is easy to spend more when using plastic
- Cash back rewards tend to offer healthier benefits than points do
- CNN Money article on 'the risks of the rewards'
- Interest rates on reward cards tend to be higher than other cards
- Only worth considering if you pay your balance in full monthly
- Scrutinize carefully any offer that is 'up to' some % or amount
- Selection should meet your needs based upon projected card use
- Tools can help you analyze offers based on your spending habits
- Ultimately, ensure the benefits outweigh any associated costs
- USE ACCUMULATED REWARDS! 41% rarely/never use their rewards


- AMERICAN EXPRESS -
Depending on your circumstances, American Express has a couple of potentially strong reward cards. AmEx Clear offers a card with absolutely no fees (no annual fee, late fees, overlimit fees, cash advance fees, or balance transfer fees). I may question the value of a card if you commonly get hit with fees, but if you do and plan to continue using credit, this may be a smart solution. They also provide a free credit score annually. The AmEx Blue doesn't meet my simplicity rule (offers 5% back on some items after the first $6,500 spent each year; 1% on those purchases up to that point -- 1.5% and .5% respectively on "other" items). But, it can be a viable option for those that use their credit card to make most of their purchases.

- CAPITAL ONE NO HASSLES -
Capital One is perhaps the most polarizing credit card company on the planet. People with poor credit hate them; most with good credit love them. Here are some of the benefits I like [although not a "traditional" reward card, the rewards are definitely tangible]:
Competitive rates (I got 4.9% F a few years ago; 7.9% is advertised)
No transaction fees on international purchases
Cash advance rate = purchase rate
No fee to transfer balances

- CHASE FREEDOM -
This historically has been one of the more popular reward cards (definitely Chase's most popular card); in the past month and a half, they've updated the card. I wouldn't recommend the "new" card by any stretch; if you have the old card with the prior terms, you're ok to keep it.

- COSTCO TRUE EARNINGS -
3% benefit for gas purchases
3% benefit for restaurant purchases
2% benefit for travel purchases
1% benefit for everything else
No limits on rewards
* Need to be Costco member & the benefit is only credited annually

- DISCOVER OPEN ROAD -
5% benefit for gas purchases (any gas, not specific station)
5% benefit for auto maintenance purchases
5% benefit up to $100/billing period -- $1200/year
1% benefit on other purchases
* With a gas reward card, my preference is a card that provides the same maximum benefit regardless of where the gas is purchased. AAA (membership not required) offers a gas rewards card through Bank of America that provides a 5% benefit on all gas purchases as well.

- FIDELITY RETIREMENT AWARDS -
2% benefit ($50 Fidelity IRA investment for each $2500 in purchases)
2% benefit for 529 college saving plan option is also available
No limits on rewards
* Rewards can be rolled over to the next calendar year if your IRA contribution has been maxed out.

- MORTGAGE -
The card our household uses for most purchases is a Countrywide credit card (no longer available). It provides a 2% principal balance credit to our mortgage ($50 applied to our principal for every $2500 in purchases). I mention it to point out that new products are being created constantly that link cards to desirable rewards (i.e., the new Fidelity IRA card). I understand Wells Fargo has a similar mortgage-linked card (although the reward is smaller - 1%).

CREDIT CARD UPDATE ...

Many consumers have found an unexpected/unwanted surprise when opening their credit card statements this holiday season ... one of the most perplexing changes has been a general raising of interest rates (while other major rates have been dropping). The rationale? "A difficult market environment." Another common change (not as surprising) has been a reduction in credit limits; as you are likely aware, if you carry a balance this [lower credit limit] will negatively impact your credit score as the result will be a higher debt ratio (the proportion of your balance in relation to your credit limit). For many, these "surprises" have come even though no late payments have been made. According to Consumer Action, nearly half of banks now penalize cardholders for changes in their credit history with default rates up to 35%.

This is particularly troubling given that roughly a year and a half ago, Citi and others agreed to ditch this dispicable practice of hiking rates at any time for any reason when they told a Senate panel that they were going to give up that practice. Well, with these 'difficult times' they've changed their mind. Credit card holders are getting squeezed to make up for poor lending decisions made in housing, private student loans, and other areas. The Federal Reserve started pushing last May for new rules that would stop these types of practices as would the proposed Credit Cardholders Bill of Rights that I recently wrote about.

Although credit card companies can currently raise your rate for any reason, results of a recent Consumer Action survey outline the more common 'triggers' of interest rate increases (*the survey analyzed 146 cards from 47 different issuers):

- Credit score gets worse (90.48%)
- Paying mortgage, car loan or other creditor late (85.71%)
- Going over credit limit (57.14%)
- Bouncing a payment check (52.38%)
- Too much debt (42.86%)
- Too much available credit (33.33%)
- Getting a new credit card (33.33%)
- Inquiring about a car loan or mortgage (23.81%)

ADDITIONAL RESOURCES (Prior Financial Tip Blog Posts):
o Credit Card Balance Transfers
o Credit Card Selection
o Credit Card Trap Widens
o Credit Cardholders' Bill of Rights
o Debit Card Realities
o Negotiating a Lower Credit Card Rate
o Proposed Credit Card Changes
o Risk-Based Re-Pricing
o Schumer's Box
o Understanding Your Credit Card Statement

RESPONDING TO A TURBULENT MARKET

Last week, USA Today put forth an article on protecting yourself during this financial crisis. The question - what do you do now with your money? With so many people losing their head right now and reacting irrationally (shifting investments completely to bonds, ceasing 401(k) contributions, cashing out retirement accounts, etc.), keeping your head can be a challenge. Also, what you should be doing depends on a lot of "personal" factors (your time horizon, your tolerance for risk, your debt situation, etc.). The article outlined 'general' recommendations/ thoughts from some leading financial advisers based upon your age ...

IF YOU'RE IN YOUR 20s...
- Don't panic. You likely have less to lose (have often just begun investing and have a long time to recover from a downturn).
- As you invest, don't ignore your debt.

IF YOU'RE IN YOUR 30s...
- Prioritize retirement savings.
- Don't let fear squander your opportunity to take risk.
- Keep/build an emergency fund (but don't sell stocks to get there).
- Don't hastily temper the storm; make smooth transitions (i.e., make adjustments with new contributions without necessarily selling existing assets).

IF YOU'RE IN YOUR 40s...
- Take advantage of these prime earning years to contribute as much as possible into retirement savings; even if it means cutting back on spending.
- Resist the urge to stop contributing!
- Don't abandon the stock market; people currently stashing money in CDs and money market funds "are committing financial suicide." The 1.18% return on an average money market fund won't even keep up with inflation.
- Stay diversified.

IF YOU'RE IN YOUR 50s...
- Don't do anything rash.
- Keep saving.
- Don't overlook any potential ways to boost savings.
- Make sure you're not paying too much for your investments (i.e., fund 'loads' and expense ratios -- this is solid advice regardless of age, not sure why it is plugged in as specific advice for this age group).
- Keep in mind that you have longer than 15 years to make up losses even if you retire at age 65.

IF YOU'RE 60+...
- Toughest position given the shorter period of time to recover from losses.
- Adjust expectations.
- Consider putting off social security as long as possible; each year you put off the benefit between age 62 and 70 you increase your payment by 8%.
- Cut back on withdrawals if necessary.
- Work part time.
- Consider an immediate, fixed term annuity.
- Invest for comfort - make decisions you can sleep with at night.

While there are distinct differences in the advice provided to the different age groups, there is a definite theme ... keep your head (don't panic/ overreact), spend less, save more, diversify, stick to your financial game plan. Ironically, it sounds like the same advice you should be getting regardless of the economic climate ...

NOTE. USA Today article.

CREDIT-BASED INSURANCE SCORING

A bright financial future is predicated upon making good decisions today. It is well documented the significant role that credit plays in that financial future: lending decisions, rates/fees offered on those loans, employment, and insurance ... The belief is that your ability to manage credit can be used to predict future financial behavior. It has been known for quite some time that insurance companies have used credit history data to aid in predicting insurance risk. It has only been recently 'shared' how that information specifically is used to determine if you qualify for coverage, and at what rate ...

"Your insurance score is a snapshot of your insurance risk at a particular point in time. It is a number based on the information in your credit report that shows whether you’re more or less likely to have claims in the near future that will result in losses for the insurance company. As with all Fair Isaac scores, the higher your score, the less risk you represent." The insurance score that most companies use is created by Fair Isaac and is referred to by different names at the different credit reporting agencies — InScore at Equifax, the Experian/Fair Isaac Insurance Score at Experian, and the Fair Isaac Insurance Risk Score at TransUnion.

How is Your Insurance Score Created?
-- 40% - Previous Credit Performance
-- 30% - Current Level of Indebtedness
-- 15% - Length of Credit History
-- 10% - New Credit/ Pursuit of New Credit
-- 5% - Types of Credit Used

OTHER INSURANCE SCORING RESOURCES.
- Get the facts on credit-based insurance scoring.
- Improving your insurance score.
- Insurance scoring facts & fallacies.
- Obtain insurance underwriting history - free.
- Property and auto claims history - free CLUE Report.
- What is not in your insurance score?

[FREE] ONLINE FINANCIAL MANAGEMENT RESOURCES

As more and more people are living paycheck to paycheck (over 40% of households at last count!), more and more resources are surfacing to assist consumers with day-to-day money management. Many of these free resources are geared specifically to novice managers; below is only a sampling of the available resources with a few notes about each...

You'll note that the majority of these were not mentioned in my blog a year and a half ago on free budgeting tools. One of the underlying strengths of many of these new systems is their strong support networks - think of them as a Jenny Craig or Weight Watchers for your personal finances.

CLEAR CHECKBOOK.
- Account updating through many mobile services.
- Personalized reminders and alerts.
- Set spending limits.
- Scratch pad for notes, goals, price comparisons, etc.
- Simple editing features.

GEEZEO.
- Geezeo Blog.
- Numerous 'learning' resources.
- Product marketplace - compare various financial offers.
- Provides access/linking to investment accounts as well.
- Social network/financial support group.

I-EXPENSE ONLINE.
- Geared to detail-oriented individuals.
- One-click access to features.
- Test things with a guest account first.
- Tips section can be browsed for budgeting suggestions.
- Weekly progress chart.

MINT.
- Continually offering new and improved features.
- No bookkeeping required.
- Notifies you of account fees and finance charges.
- Provides solutions based upon personal spending patterns.
- Secure - uses same encryption banks use for data protection.

QUICKEN ONLINE.
- Connects to over 5,000 financial institutions.
- Live Community Forum.
- Sends reminders to a cell phone or e-mail (iPhone compatible).
- Transactions for accounts automatically download each night.
- View bills, spending details, account balances and transactions.

WESABE.
- Leverage smart decisions to an entire community.
- Personally targeted money tips.
- Share your money saving tips and goals with others.
- Some of the best user forums on the web.
- Translates "bankspeak" into friendly transaction descriptions.

YODLEE.
- Account sharing (w/ accountant, financial advisor, etc.).
- Connectivity to over 11,000 data sources.
- Consolidated view of all financial accounts.
- Expense, budgeting, and other analytical charts.
- Most comprehensive online solution.

GIFT CARDS

As the holidays approach, the topic of gift cards seems to always come up ... Despite the naysayers, people in general seem to love gift cards. Last year, gift cards were the second most popular gift to give (According to December 2007 issue of Consumer Reports Money Advisor); listed as the number one gift women wanted to receive (number three on the list for men). A Get Rich Slowly blog post outlines a growing concern of people and gift cards - what to do when stores go broke.

An AP article from earlier this year estimates that over $75 million in gift cards are at risk of becoming worthless pieces of plastic this year [from store and restaurant closings]. Kwame Kuadey, the author of GiftCardBlogger.com, a blog about gift cards, offers helpful suggestions if you find yourself in such a predicament:

- Get on the phone. Call the nearest store to find out if they are still accepting gift cards. Some, like Linens 'n Things, can continue to redeem gift cards by petitioning the bankruptcy court.

- If they are accepting, use immediately. They may not redeem for full value (i.e., Sharper Image customers that received 50% of value), but something is better than nothing. If they are not accepting gift cards, you can hope for:

- Competition. Do a google search to find out if competitors are running special promotions targeting gift card holders of the bankrupt company. For example, when Bennigans went out of business, Texas Roadhouse offered a promotion where holders of Bennigan's gift cards could exchange them for a free entree certificate that was good for any item on their menu. It is not an uncommon strategy to try to 'lure' new customers.

- Take them to court. Obviously you are low on the totem pole (essentially treated as an unsecured creditor) in the courts eyes. While odds are slim, it is your right [to take them to court].

- Go to the government. This would be a good strategy if the gift cards held are from local, small businesses. In this instance, contact your State Attorney General. Recently in St. Louis, a local spa (Spa 151) went out of business leaving several hundred gift card holders with worthless gift cards. More than 300 consumers filed complaints with the Attorney Generals office. The Missouri AG was able to get the former spa owners to pay over $100,000 to redeem the cards and certificates.

- The best offense. The last piece of advice offered is to be proactive. You don't need to be a financial analyst to know if a company is struggling. Store closings and layoffs are clear signs of a company that is having issues. The example he shared was Circuit City - a company that has shed thousands of employees, hundreds of stores, and has a stock price today of 26 cents.


ADDITIONAL GIFT CARD RESOURCES.
- Gift Card Buy Back
- Gift Card Tips & Tricks
- GiftCardBlogger.com
- Gift Certificates & Gift Cards
- Pros & Cons of Gift Cards
- SwapAGift.com

STUDENT LOAN BORROWER ASSISTANCE

The current instability in credit markets has touched just about every facet of our financial world; student lending is no exception. While some allowances have been made on the federal loan side, the private/alternative loan option just keeps getting uglier. I saw a notice from one of the biggest private loan providers yesterday with new rate info. The range? LIBOR + 4% to LIBOR + 12.75%! That obviously doesn't include their up front loan origination fees that would tack onto that (commonly 3-10%) ... Keep in mind that this "ugly" option isn't even available unless you have good credit [or a creditworthy co-signer].

This morning I came across a very comprehensive student loan web resource designed for borrowers, their families, and advocates - Student Loan Borrower Assistance. This 'project' is a program of the National Consumer Law Center, "focused on providing information about student loan rights and responsibilities for borrowers and advocates [as well as] ... to increase public understanding of student lending issues and to identify policy solutions to promote access to education, lessen student debt burdens and make loan repayment more manageable."

Student Loan Borrower Assistance provides information on ...

-- Answers pertaining to a wide range of frequently asked questions:
---> Collections
---> Default and delinquency
---> Loan cancellation
---> Repayment
---> Student loans and bankruptcy
---> Understanding student loans
---> Where to go for help

-- Links to student loan policy and legal issues

-- Solutions to student loan problems

CREDIT CARDHOLDERS' BILL OF RIGHTS

In May I blogged about potential credit card changes that were being discussed to crack down on unfair and deceptive industry practices. Representative Maloney of New York spearheaded the bill, H.R. 5244: Credit Cardholders' Bill of Rights Act of 2008, which would serve to amend the current Truth in Lending Act.

The bill passed the House (by nearly a 3 to 1 vote) on September 23rd. Govtrack.us - a website that tracks Congressional action - provides helpful details to track the progress/status of the bill (the full text of the bill is also provided).


Why is the bill being proposed?
Rep. Maloney: “Credit cards are an essential part of our economy, but for too long card issuers have been allowed to do whatever they want, any time, for any reason. A deal is a deal, but what sort of deal is it when one side gets to make all the decisions? This bill will get credit card practices back to basic principles of contractual fairness.”

"In 2007, credit card issuers imposed $18.1 billion in penalty fees on families carrying credit card balances—up more than 50% since 2003 and accounting for nearly half of the $40.7 billion in credit-card industry profits. While credit card companies will pull in more than $19 billion this year from late fees, over-limit charges, and other penalties, consumers nationwide are facing excessive credit card fees, sky-high interest rates, and unfair, incomprehensible agreements that credit card companies revise at will."


What issues would the proposed bill address?
- Bar creditors from changing agreement terms [open-ended accounts] until contract renewal (or for specific reasons laid out in contract).

- Eliminates universal default clause.

- Ends the credit card practice of applying consumer payments to lower interest debt first.

- Prohibits a creditor from furnishing information to a consumer reporting agency concerning a newly opened credit card account until the consumer has used or activated the credit card.

- Protects consumers from due date gimmicks by requiring credit card companies to mail bills 25 days (instead of 14) before the due date.

- Requires advance notice of rate increases on account. Authorizes a consumer who receives such notice to: (1) cancel the credit card without penalty or imposition of any fee; and (2) pay any outstanding balance that accrued before the effective date of the increase at the APR and in the repayment period in effect before notice was received.

- Requires each periodic account statement to provide specified information on obtaining the payoff balance.

- Restricts the frequency of over-the-limit fees.

MARKET ANNIVERSARY ... INCREASE IN CYBERSCAMS

Ironically, today (10/9/08) marks the one year anniversary of the Dow Jones Industrials and S&P 500 averages hitting their all time highs. My how things have changed - the housing market has unwound (to put it mildly) due to the high volume of "liar loans" (low or no documentation home loans) and zero down payment requirements (43% of home purchases were made with no down payment). The result of people purchasing homes they couldn't afford - a record number of foreclosures. Poor lending standards (here and abroad) have also led to a precipitous drop in financial company stock values (60% on average) and has impacted all other aspects of not only the U.S. but global markets. All of the major market averages are down about 40% from the high last year, and over 20% in just the last seven trading sessions alone! The result? Panic, fear, and a wide range of financially 'unhealthy' emotions and reactions. I was reading the other day that over 1 in 5 people over the age of 45 have now stopped contributing to their 401(k) plans. While it can be a challenge to maintain a long-term perspective in this type of economic environment, you most definitely need to keep your eyes open as people will try to prey on your vulnerable state ...

USA Today published an article today reminding consumers of cymberscams that are designed to exploit fears. "Cybercrooks are creating fake websites, spam, phishing attacks and malicious software code to take advantage of anxiety during the economic calamity ... A new spin on old tactics."

Most of the scams are centered on phishing (sending spam e-mails in an attempt to get you to go to a "fake" website to request personal information), focusing on recent bank failures, mergers and takeovers. Some easy targets right now are current and former customers of Chase and Washington Mutual (as Chase is currently navigating its acquisition of WaMu). For example, a current e-mail that appears to come from Chase asks customers to go to the "Chase" website (a fake site), and provide personal information (user ID, password, name, address, phone number, Chase credit card number, ...). Phishing attacks on Citigroup soared after it announced its intent to acquire Wachovia (since that has fallen through with a subsequent "better offer" from Wells Fargo, WF customers should be on the look out).

The article doesn't provide any "new" suggestions [as was mentioned, this is not a new problem]. Their suggestions:

1. Be Aware. Be suspicious of e-mail requesting personal info.
2. Don't Click. Don't click the link in the e-mail to visit the website.
3. Be Secure. Use secure websites (i.e., https:// and 'padlock' icon).
4. Don't Fill Out E-mail Forms. Never fill out forms within an e-mail.
5. Keep an Eye on Your Accounts. Monitor your account activity.

REWARDING THOSE WHO SERVE ...

It seems pointless to opine about the current Wall Street woes, bailout, and other issues that have yet to finish "unwinding" ... I'll definitely spend some time exploring these issues when a specific direction has been decided upon. I thought this week it would be nice to focus on something much more positive (not a lot of positive financial news out there) ...

On June 22, 1944, FDR signed into law what has since been heralded as one of the most significant pieces of legislation ever produced because of its far-reaching social, economic, and political impacts - the GI Bill. By the time the original GI Bill ended in 1956, nearly half of the 16 million World War II veterans had participated in an education or training program.

In 1984, Senator Montgomery revamped the bill which has since been known as the "Montgomery GI Bill" ensuring education programs for our newest generation of combat veterans. This year (2008), the GI Bill was updated once again. The new law gives veterans with active duty service on, or after, 9/11/2001, enhanced educational benefits that cover more educational expenses, provide a living allowance, money for books, and the ability to transfer unused educational benefits to a spouse or children.


Facts About Post- 9/11 GI Bill:
- Benefits take effect on August 1, 2009
- Benefit-eligible for up to 15 years (instead of 10)
- Provides a stipend of up to $1,000 for books and supplies
- Provides up to 100% of tuition costs
- Provides monthly housing stipend
- Transferable benefits (see additional links below for details)
- Unlike prior GI Bills, benefits extend to activated Guard & Reservists

Eligibility Requirements:
If you have served a total of at least 90 consecutive days on active duty in the Armed Forces since Sept. 11, 2001, you’re eligible. The actual benefits you receive under this program are determined by the amount of accumulated post 9/11 service provided. To be eligible for the full benefit, you must have three years of active duty service after 9/11 or have been discharged due to a service-connected disability.

Benefits Based Upon Service:
* 100% - 36 or more total months
* 100% - 30 or more consecutive days with disability-related discharge
* 90% - 30 total months
* 80% - 24 total months
* 70% - 18 total months
* 60% - 12 total months
* 50% - six total months
* 40% - 90 or more days

Additional Links:
- About GI Bill 2008
- Calculate Benefits
- GI Bill Fact Sheet
- GI Bill Home Page
- New GI Bill Overview